Complying with State Tax Requirements for Non-Residents, i.e. Nexus

Nexus is the way in which a connection can be established between the state and the taxpayer.  If a nexus exists, the taxpayer may be liable to the state for taxes, regardless if the taxpayer is a non-resident or only works within the state for part of the year.  You would think that the clearest nexus standard is “physical presence”, i.e. work performed within the state.  But treatment varies –

According to the Mobile Workforce Briefing Book by the Council on State Taxation (09.09.2009) –

  • In 25 states, nonresident employees are subject to Withholding Tax on first day they enter the state; vs.
  • In 16 states, nonresident employees are subject to Withholding Tax after reaching a threshold which varies among the 16 states involved.

In the age of the World Wide Web, Consultants can market their services and generate revenue from customers in a state without maintaining a physical presence.  In response, some states are developing the concept of “economic nexus.”

Based on a random review of state tax laws, I found the following citation interesting –

Source income “…Attributable to compensation for services performed in Connecticut or income from a business, trade, profession, or occupation carried on in Connecticut, including income derived directly or indirectly by athletes, entertainers, or  performing artists from closed-circuit and cable television transmissions of irregularly scheduled events if the transmissions are received or exhibited within Connecticut;”

For a Consultant that transacts business in multiple states, a compliance nightmare exists which is burdensome and expensive to manage, i.e. a non-value added expense associated with an administration burden.  Disparate laws established by states are causing nexus confusion –

  • Standards are inconsistent for employees, i.e. personal income tax filings;
  • Standards are inconsistent for employers, i.e. withholding tax administration; and,
  • Penalties for non-compliance may result.

Help may be coming with the passage of H.R. 1864 – “Mobile Workforce State Income Tax Simplification Act of 2011 – Prohibits the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than: (1) the state of the employee’s residence, and (2) the state within which the employee is present and performing employment duties for more than 30 days during the calendar year.”  (http://thomas.loc.gov/cgi-bin/bdquery/z?d112:HR01864:@@@D&summ2=1&)

However, until this bill becomes law, best practices are few – maintain records of when you performed work for customers, in which state, for how long; and retain all receipts.  When you prepare your personal state taxes, check if tax code thresholds exist, i.e. wage/income, days within state, reciprocal agreements.

What is your experience?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2012 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

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