Understanding the concept of nexus and its implications for tax compliance in an increasingly remote work environment
As businesses increasingly adopt remote work policies and expand their presence across state lines, they may inadvertently establish nexus without realizing it. Nexus, the legal term for a connection between a company and a taxing jurisdiction, can significantly impact tax obligations and compliance requirements for businesses with remote teams. In this article, we will explore the concept of nexus, identify various scenarios that can trigger it, and provide guidance on educating clients about staying compliant in a remote work landscape.
Nexus is a legal term referring to the level of connection between a company and a taxing jurisdiction, such as a state or local government. When a business establishes nexus in a particular jurisdiction, it becomes subject to certain tax obligations, such as sales tax, income tax, and other tax-related compliance requirements. Nexus rules vary by state and can be triggered by various factors, including physical presence, economic activity, and remote employee locations.
Common Nexus-Triggering Scenarios
While a permanent work-from-home policy or expansion into new states are some common situations that can establish nexus, there are other scenarios to consider, such as:
- Remote employees: Employing remote workers in different states can create nexus, subjecting the business to tax obligations in those states.
- Sales representatives: Having sales representatives working in a state, even temporarily, may establish nexus.
- Inventory storage: Storing inventory in a warehouse or fulfillment center in another state can trigger nexus.
- Economic activity: Exceeding a specific threshold of sales, transactions, or revenue in a state may establish an economic nexus.
- Third-party service providers: Using third-party service providers, such as contractors or agents, to perform activities on behalf of the company in a state can create nexus.
Educating Clients on Compliance Tasks
To help clients stay compliant with nexus rules and maintain good standing with remote teams, consider the following steps:
- Identify nexus triggers: Work with clients to identify potential nexus triggers, such as remote employee locations, sales activities, and inventory storage.
- Monitor thresholds: Help clients track their economic activities across states and monitor thresholds for establishing economic nexus.
- Register for tax accounts: Assist clients in registering for tax accounts in states where they have established nexus.
- Stay informed on tax rates and rules: Keep up to date on state-specific tax rates and rules to provide accurate guidance to clients.
- Manage tax filing and payment: Support clients in filing and paying taxes as required by each jurisdiction in which they have nexus.
- Maintain accurate records: Advise clients on maintaining accurate records of their activities, including sales, employee locations, and inventory storage, to ensure compliance with nexus rules.
- Regularly review nexus status: Encourage clients to periodically review their nexus status and adjust their compliance efforts as needed.
As remote work becomes increasingly common, businesses must stay vigilant about nexus and its implications for tax compliance. By understanding the concept of nexus and the various scenarios that can trigger it, tax professionals can educate their clients on essential compliance tasks and help them maintain good standing across jurisdictions. With the right guidance and a proactive approach, companies with remote teams can successfully navigate the complexities of nexus and ensure they meet their tax obligations.Have questions? Ask a CPA today
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