What you need to know about American state tax nexus
By Frank Casciaro and Holly Haber
It’s no secret that since the financial market meltdown of 2008, state governments have been looking to increase revenues by stepping up efforts to find non-compliant domestic and foreign taxpayers through state tax nexus requirements. If a company is deemed to have nexus in a given state, it is required to file tax returns and pay taxes in that state.
The problem: most of these taxpayers are not aware of this. This is particularly true for trucking companies that drive through several states to pick up and drop off their shipments. Here’s what you need to know about state nexus and what you can do to be compliant to avoid paying costly penalties and even being denied entry into a state.
What is Nexus?
Loosely defined; nexus is a connection. From a state-tax perspective, nexus refers to the type and frequency of connections an out-of-state company has in a state. Every state has different rules and requirements as to what creates a connection within the state. Some states are more aggressive than others and could involve something as simple as having their listing in a local telephone book or having a business meeting in that state.
For Canadian trucking companies, simply driving through a state to get to a final destination may create state nexus. If you’ve been filing fuel tax reports, then you’re already on the radar of what have come to be known as “nexus squads.”
When it comes to trucking companies, most states are looking not at where sales are made but rather revenue miles, or where their miles are driven in order to create revenue. For example, if you drive through New York to deliver a shipment to Virginia, a portion of that revenue will be allocated to New York based on the number of miles driven through New York to make that delivery. Again, whether or not your revenue miles are considered depends on the state. For example, most states provide a “minimum highway use” threshold that must be met before nexus is established and two-thirds of states deem nexus is created by trucks passing through on a “regular basis,” however, most states do not define “regular basis.”
How Do I Determine My Nexus?
The Multi State Tax Commission (MTC), which is the state tax agency that administers tax laws applicable to multistate businesses, provides guidelines regarding the minimum level of activity that would create state nexus:
• Owning or renting any real or personal property in the state;
• Making any pickups or deliveries within the state;
• Traveling more than 25,000 miles per year in the state, provided the miles do not exceed three percent of the total miles driven;
• Having more than 12 trips per year into the specific state.
Using your fuel tax reports, you can use the above guidelines to determine which states you might have nexus in.
What You Risk by Not Being in Compliance
Failure to file state tax returns can result in delay of goods, seizure of cargo and equipment, and penalties and interest based on the balance owing, which can also vary from state to state. In a few states, when nexus is established, it may create Use Tax obligations for the use of trucks making deliveries in the state.
Bottom line: You should understand the nexus requirements in each of the states you travel through and do business in, so that you can avoid the consequences of non-compliance. For companies that may have unknowingly had state tax exposure in the past, there may be amnesty programs that may alleviate charges and interest. Speak with a tax advisor about what the next step should be for your company.