A Business Owners Guide to Economic Nexus

As a business owner, I’m sure you see the importance of building a business. You want to grow, be productive and make money so that you can provide for your family and live comfortably. So why do state governments try so hard to take away some of your income?

The answer is called economic nexus.

Economic nexus and taxation
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This guide is going to go over everything you need to know about economic nexus.

What is economic nexus?

Economic Nexus is when a business has enough activity in a state that they are forced to pay taxes to that state. The activities required to establish nexus are sometimes very small or non-existent, but most of the time it’s simply having employees or property in the state.

There are 3 rules you need to know about nexus:

  1. If your business is in a state for even one hour.
  2. If you have employees in a state where none live.
  3. If you own property in a state.

The consequences of having nexus are that the company will be taxed by the state because they now have an activity within the state. However, this can sometimes lead to double taxation as a company that has nexus in a state may also sell goods or services to that state.

Why does it matter for business owners?

Nexus is important for business owners because it means you are responsible for paying state taxes in the state where your business has interactions. A company can have nexus with a state even if all they do with that state is make phone calls or text messages, which means you could be taxed by states that you never visit.

Since most businesses are national or international, leading to many state interactions, you can see how it could be costly for company owners to pay taxes in every single state.

How do you know if you have nexus?

If you have nexus then you will be taxed in that state. However, it isn’t always obvious when you have nexus with a state. Though many companies are aware that they need to pay sales tax when selling goods in states where they have nexus, some businesses are not aware of their economic nexus status until after they receive a bill from the state.

Nexus is different for every state, so you’ll have to find out what the requirements are in your state. The best way to do this is by contacting the appropriate government agency. For example, if you’re located in California then contact the Board of Equalization or if you’re in Colorado then contact the Department of Revenue.

Tax accountant doing taxes

What are the consequences of having nexus in a state?

The primary consequence of having nexus is double taxation, but there are other things to consider as well. For starters, if your business has employees in a state, then you’ll have to file a non-resident tax return with that state.

If you’re planning on selling goods in a state where your company has nexus, you will also have to collect sales tax from customers and pass it along to that state. Not keeping track of this could result in fines or the need for back taxes.

Can your employees be taxed by another state?

Yes. If you have nexus in a state, then your business can be taxed by that state even if none of your employees live there or spend any time there. This means that, for example, California could force you to pay taxes when all you were doing was hiring someone from New Jersey.

There are also some things you can do to avoid this situation. If your company is international or national in scope, then it might be best for you to hire workers who live in states where your company doesn’t have nexus. There are laws in most states that make companies take a proactive approach to hiring employees from other states, but many of these rules can be avoided through planning.

If you make any transactions in a state where your employees live, then you can avoid taxes on those workers by taking proactive measures such as making the payment directly to the worker rather than paying them in-person. The best way to do this is to set up direct deposit for that employee and have all payments made electronically. This is true whether the employee lives in that state or not.

Are there any exceptions to this rule that might apply to me as a business owner?

There are exemptions for some owners, but they may depend on what kind of work you do and where your company has nexus. For example, if your company only works with an in-state company and your only connection to the other state is hiring workers, then you might not owe taxes in that state.

However, if your company’s work affects interstate commerce or you have clients from another state, then it’s likely that nexus applies to you even if on a more limited basis. In some cases it may be possible for small businesses to avoid nexus with certain states, but your business is unlikely to qualify for these exemptions in most cases.

Tax preparation meeting


If you’re working on a large scale and not already in compliance with sales tax laws, then you should consult with an accountant or lawyer who is well versed in this subject. A good tax professional can help make sure that your business is complying with all state and federal tax laws.