Making Sense of Multistate Tax Compliance

As businesses expand their operations across state lines, managing tax obligations becomes increasingly complex. For U.S. businesses, understanding what is a nexus study is critical to staying compliant and avoiding costly penalties. Nexus—a concept that determines when your business owes taxes to a particular state—can be triggered by various factors, from physical presence to e-commerce sales thresholds.

This article breaks down the purpose of a nexus study, how it works, and why it’s an essential tool for businesses operating in multiple states.

What Is Nexus?

In tax terms, “nexus” is the connection between your business and a state that creates a legal obligation to collect and remit taxes. This connection can be triggered by a range of activities, including:

  • Physical Presence: Operating an office, warehouse, or storefront, or having employees or inventory in a state.
  • Economic Presence: Surpassing revenue or transaction thresholds set by state laws, even if you don’t have a physical location there.
  • Representative Activities: Using contractors, agents, or affiliates to conduct business on your behalf.

These triggers vary by state, which is why understanding where you have nexus—and how it affects your business—is critical.

What Is a Nexus Study?

A nexus study is an in-depth review of your business’s activities to determine where you’ve established tax obligations. It examines everything from physical locations to remote employee presence, e-commerce sales, and vendor relationships. Think of it as a map that helps you identify where your business may owe taxes.

For example, if you’re asking, “What is a nexus study and why do I need it?”, consider this: Without one, you could unintentionally overlook your obligations, leading to back taxes, penalties, or even an audit. A comprehensive nexus study eliminates those risks and ensures your business is fully compliant.

Why Your Business Needs a Nexus Study

  1. Navigate Changing Tax Laws
    State tax laws evolve frequently, especially as e-commerce continues to grow. A nexus study helps you keep up with these changes, ensuring compliance with state-specific rules and regulations.
  2. Avoid Costly Penalties
    Tax authorities don’t offer leniency for unintentional mistakes. If you don’t address nexus obligations, you risk penalties, interest, and retroactive tax assessments. A nexus study provides clarity, giving you peace of mind.
  3. Support Business Growth
    As your business enters new states or markets, tax compliance can become a moving target. A nexus study helps you anticipate obligations before you expand, allowing you to budget and plan effectively.
  4. Identify Savings Opportunities
    Beyond compliance, a nexus study can reveal potential tax credits, exemptions, and incentives available in specific states. Leveraging these opportunities can improve your bottom line while staying compliant.

How a Nexus Study Works

Here’s how you can approach a nexus study to protect your business:

  1. Evaluate Business Activities
    Start by examining every aspect of your operations. Do you ship products to customers in other states? Do you have remote employees or contractors? These factors can trigger nexus.
  2. Understand State Thresholds
    Every state has different nexus laws, especially regarding economic nexus. For example, many states require businesses to register and collect sales tax if they exceed $100,000 in revenue or 200 transactions annually (if the type of merchandise/service sold is subject to sales tax). Knowing these thresholds is essential.
  3. Partner With Experts
    A CPA with experience in multi-state taxation can guide you through the process. They’ll review your operations, identify nexus triggers, and recommend a tailored compliance strategy.
  4. Document and Review
    Keep meticulous records of your nexus study findings. These records serve as evidence in case of an audit and provide a baseline for future compliance efforts.

Consequences of Ignoring Nexus Obligations

Failing to address nexus isn’t just a compliance issue—it’s a financial risk. States can impose retroactive tax liabilities, interest, and penalties, all of which can disrupt your cash flow and harm your reputation. Worse, once an audit begins, it often uncovers additional liabilities you didn’t anticipate.

By proactively conducting a nexus study, you can avoid these challenges and focus on growing your business.

Explaining what is a nexus study and how it helps businesses navigate state tax laws and avoid penalties.
Explaining what is a nexus study and how it helps businesses navigate state tax laws and avoid penalties.

How TMP Can Help

Navigating multi-state tax compliance doesn’t have to be overwhelming. At TMP, our team of seasoned CPAs specializes in nexus studies and multi-state taxation. We take the time to understand your business, identify nexus triggers, and develop a strategy tailored to your needs. Whether you’re expanding into new markets or managing existing obligations, we’re here to help.

Contact us today to schedule a consultation and learn how a nexus study can safeguard your business while unlocking new opportunities.