Skip to content

Income Tax Nexus

By Veronica Rodriguez

Maneuvering through the intricate pathways of income tax regulations can be daunting, especially when it comes to understanding the concept of “nexus.” Nexus refers to the connection between a particular taxing authority (i.e., state, local) and a business. 

What is Income Tax Nexus

The criteria for establishing business income tax nexus vary by state, with each jurisdiction having its own standards. While each state is unique, there are some common requirements. The primary criteria are a physical presence in the state including employees, inventory, property, etc. To know the criteria for your state’s income tax nexus, you should refer to your state website.

Establishing Nexus: The Criteria

When operating a business that spans multiple states, it is crucial to identify where your business has nexus. This helps ensure compliance with state tax laws. 

Establishing nexus generally falls into a few broad categories, some of the primary factors are:

  1. Physical Presence – office, warehouse, store, or employees
  2. Economic Presence – sales revenue or transaction, or both
  3. Affiliate Nexus – a subsidiary or an affiliate of another entity within a state
  4. Click-Through Nexus – agreements with in-state third party sellers or referral agents

A business must file income tax returns in a state when it has established income tax nexus within the state. The specific timing and requirements for filing can vary depending on the state’s tax laws and type of nexus established.

Public Law 86-272

Public Law 86-272, established in 1959, plays an important role in shaping state taxation of businesses in the United States. This federal law restricts states from imposing income taxes on businesses if their only in-state activity is soliciting orders for tangible personal property. These orders must be sent outside the state for approval or rejection and fulfilled by shipment or delivery from a location outside the state. This law safeguards businesses that are engaged in interstate commerce from complying with income tax laws across multiple states. This protection allows businesses to focus on growth and expansion without the added worry of varied state tax obligations.

Income tax nexus is a critical concept for all businesses operating across state lines. Understanding the criteria that establish nexus and its implications for businesses can ensure compliance with state tax laws and help to make informed strategic decisions regarding expansion and operations in new states. 

This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions regarding the income tax nexus, please do not hesitate to contact us at Lear & Pannepacker.