Understanding your sales and franchise tax nexus can sometimes be confusing

August 11, 2010

The term “nexus” means connection between two items in a series. Taxing authorities use the term to describe the connection between your activities in two or more jurisdictions and your obligations to collect and remit sales tax as well as pay state income or franchise tax.

If you do business in multiple states your business may have a sales and income or franchise tax nexus that you need to understand.

 

United States

There are several kinds of nexus’ to understand.

If you have headquarters in Texas and have offices or employees in another state and make sales in that state your company has a nexus. You are expected to collect sales tax for all taxable revenue and pay state income or franchise tax in the distant state.

Conversely, if your business is headquartered in another state, say Georgia, and you have an office in Austin, you are expected to pay franchise taxes in Texas for revenue generated in the state. You also have to collect and remit applicable sales tax to the Texas Comptroller of Public Accounts for any sales you make inside of Texas that are taxable.

It is important to register as a foreign corporation or entity in any state you have offices or personnel. In Texas, the Secretary of State’s office handles foreign corporation registration. In other states the agency is often called the Department of Corporations.

Before you begin selling goods or services in a state where you are expected to pay sales or other taxes, it is important to obtain a sales tax permit. Harsh penalties can be levied against companies that violate state sales tax laws.

If your business is an online business, you are generally required to collect sales tax and pay franchise or income tax on revenues from sales that occur in the state that you are headquartered. If you are a Texas business that has an online store, you are expected to collect sales tax and report revenues for franchise tax on products or services that occur inside Texas. If you ship products outside the state to a customer in a state where you have no sales representative or office, you normally aren’t required to collect and remit sales tax to either state.

Keep in mind that nearly all states will send tax auditors to your place of business regardless of your location if they believe you have violated their rights to properly collect sales tax. Many large states have sales tax auditors located in other states where there is enough business to warrant.

In Texas the Comptroller of Public Accounts is responsible for collecting sales and franchise tax. The Comptroller’s office has good customer service personnel who are available to answer sales and franchise tax questions. Instead of guessing, you should consult with the Comptroller’s office for information about franchise and sales tax.

Additional resources about tax nexus are available from the American Institute of Certified Public Accountants.

AICPA article on sales tax nexus in general

American Institute of CPA journal (AICPA) article on nexus in transactions that involve drop shipment.

Topics: Management, Blog Posts, Accounting & Finance

Sam Thacker

Business Finance Solutions

Sam Thacker is a partner in Austin Texas-based Business Finance Solutions. He has spent the last 16 years in the banking and finance industry as a commercial lending officer, banking consultant and advocate for small business financing. He has originated over $400 million in loans to hundreds of businesses in many industries. Sam has been on the financing end of numerous businesses over his banking career. Sam is a nationally respected working capital finance professional and writer. In addition to helping small companies obtain working capital financing using a variety of assets, Sam writes a widely read finance column which appears three times a week in many traditional and online news outlets throughout the United States. He writes about the challenges of small business finance, accounting, and best business practices. He has been praised by readers for his ability to explain a complicated financial concept in easy to understand terms. Sam also writes a once a month business column for the Austin Business Journal . Sam regularly teaches classes at Texas State University’s Small Business Development Center (SBDC) on financing small businesses, financing government contracts, and other topics of interest to small businesses.
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