It is a small business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets by crossing state lines.

But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability while in other cases it can produce tax savings.

Do you have “nexus?”

Essentially, “nexus” means a business presence in a given state that is substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus depends on that state’s chosen criteria. Triggers can vary by state, but common criteria can include:

A minimal amount of business activity in a given state may not create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably would not be taxed in that state. If you ask a salesperson to travel to another state to establish relationships or gauge interest – as long as he or she does not close any sales, and you have no other activity in the state, you likely will not have nexus.

Strategic moves

If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.

Keep in mind that the results of a nexus study may not be negative. For example, you may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state.

The complexity of state tax laws offers both risk and opportunity. Contact your CPA business advisor to learn more.