“Nexus” will this connection come back to haunt you?

These days the word “nexus” can be confusing if you are familiar with Samsung Phones.  The topic of this article has nothing to do with cellular phones but everything about being connected wirelessly to things that are costly, very costly.

“A nexus in general means a connection. The term nexus is used in tax law to describe a situation in which a business has a “nexus” or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount and degree of business activity that must be present before a state can tax an entity’s income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect/remit taxes in that state.”    www.About.com

Let me start by tell a story about a client of mine who I informed they had a nexus problem recently.  This particular client has sales in most states but offices exclusively in Washington.  The company has sold products  via the internet and through other channels for years, but no one has ever sat down the owners and explained the cost of nexus.  This foreign word has now caused the CEO sleepless nights, strained relationships with professional tax advisors, internal staff and questions why this topic has not surfaced previously.

The fact that some merchandise is warehoused in other states and that some employees recently moved out of state as well as having  3rd party sales representatives in other states has now caused a flood of emotion as the reality of nexus has become clear.

The client didn’t know that these factors of inventory, employees and sales reps created a nexus relationship with various states.  When the computation on sales tax that was not charged and is now considered due by these states the total was over $1.5M.  That is a tax liability that the states deem the responsibility of the company despite the fact that the consumers should have been charged this tax.  Too bad, now the tax is the sole responsibility of the client as they had the responsibility to collect these taxes and the state does not concern itself with if the taxes were actually collected.  They just want “their tax revenue!”

This client had used the same CPA firm for more than a decade and despite preparing all their tax returns, audits, reviews and compilation work on their financial statement, the firm never considered this liability.  This CPA firm actually sent auditors to observe the inventory count in a remote state.   When confronted with this issue, they admitted that their tax prep checklist had a box about doing business in other states, their tax return engagement letter agreed to prepare all federal, state and local tax returns.  They failed their client and now realize how costly this may be.

The income tax exposure is mounting to tens of thousands of dollars per year.  This pales in comparison to the sales tax.  The client is now seeking wise counsel on how to mitigate future exposure and get into compliance for the exposure it cannot ignore.

Although a Samsung Galaxy Nexus may be able to connect you to anyone in any state, the other kind of nexus may connect you in ways that cost you millions!  Beware and make sure your tax advisors are doing what they have agreed to do and inform them of ALL out of state activity.

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