Sounds strange, but it’s just a way of saying you have created a connection with a State. Those business connections can create taxable issues and those connections are easier to create than you may think. In a recent study, 95% of companies underestimated their nexus footprint.
Where is the connection missed most often? Independent contractors or services and/or trade shows located in a different State than the company. With States needing more revenue, companies need to become more aware of where they conduct business. These issues can affect sales and use tax reporting, local tax issues, income tax reporting and financial statements to name a few. As an additional incentive to know if this would affect a business, there is no statute of limitations because a return has never been filed.
Nexus can be from property, work force, third party activities, and economic. Property can be owning, leasing, and maintaining tangible property. This can extend to inventory of raw materials or even the ownership of goods sent to another State to be repaired. In many cases any presence of a work force will create sales and use tax nexus for a business but not necessarily income tax issues. Third party activities are also known as “agency nexus”. States are becoming more aggressive in their approach to determine nexus and utilizing an affiliate to give another entity nexus. Economic nexus is income tax nexus without a physical presence. The states have cast a much wider net by moving the standard of nexus to economic principles catching companies that purposefully direct their business into the State.
The reason commerce crossing a State line has become so difficult to determine is because each State has its own statutes and case law. This means that just because a sale is not defined at taxable in one State may not apply to a different State. One way these effects can be less taxing is if the activity is considered de minimis. That would be activities, when taken together, establish only a trivial connection with the taxing State (which is also determined by each State).
If there is any question if this affects a business, a nexus study should be pursued.