What is Nexus?
As your business grows and expands to provide goods or services to other states outside of your home state, you could potentially trigger tax filing requirements in these other states. The necessary contact between a taxpayer and a state before the state has jurisdiction to tax the taxpayer is referred to as “nexus.”
Since online sales and remote employees have become more commonplace, most states have moved away from “physical presence” when determining if a business has state sales or income tax nexus. Owning property (i.e., an office, warehouse, or inventory) or having employees or agents in a particular state will trigger physical presence nexus.
The “physical presence” standard has been largely replaced by the “economic presence” standard. The economic presence nexus is triggered when the out-of-state business exceeds a certain threshold for economic activity in the state, regardless of whether physical presence is met.
Each state has different nexus standards and thresholds to determine if a business’s income is taxable in the state. In this article, we will be looking at what creates nexus in Washington, DC (DC), Maryland (MD), and Virginia (VA), commonly referred to together as the DMV.
Washington, DC uses either economic presence or physical presence to determine nexus (although physical nexus is not required in determining nexus). Nexus for sales tax is determined by a gross receipts and sales transaction threshold. If a business exceeds $100,000 in DC gross sales or 200 DC transactions, then they are required to register and collect sales tax in DC.
Although there is no specific threshold for gross revenue for nexus regarding income tax, it is simply stated that if a business has income from DC sources, they are required to file an income tax return. Apportionment for income tax compares DC gross revenue to total gross revenue generated for the taxable year. Payroll and property in DC are not factored in determining a business’s income tax in DC.
Maryland also uses either economic presence or physical presence. Maryland also has similar thresholds for determining nexus for sales tax. Businesses must register and collect sales tax if they exceed $100,000 in MD sales or 200 MD transactions for either the previous or current calendar year.
Maryland uses a single sales factor apportionment computation comparing MD sales to total sales for income tax nexus to be determined. There is no state threshold to meet to file a Maryland income tax return, so if your business has MD sales, please consult your tax advisor to see if reporting requirements are necessary.
Virginia uses an economic presence to determine nexus. Like DC and Maryland, Virginia requires businesses to register and collect sales tax if the business exceeds $100,000 in VA sales or 200 VA transactions.
For income tax purposes, Virginia uses a multi-factor apportionment computation comparing Virginia sales, payroll, and property to total sales, payroll, and property to determine income tax liability. Virginia states that if at least one of these factors is positive, then the business has economic nexus in Virginia, and filing requirements could be required.
An engineering firm is located in Maryland. The firm’s only property is an office located in Maryland, and all of the firm’s employees work physically at this office. Most of the firm’s clients are located in Maryland as well, but this year they gained a couple new clients located in Washington, DC. Although the engineering firm is physically located in Maryland and all of its employees live and work in Maryland, they will have economic nexus in Washington, DC, because of the new DC revenue generated this year.
All states have different thresholds and methods to determine nexus. Businesses located in the DMV should pay very close attention to state nexus. Because DC, Maryland, and Virginia are located so close together, it will be very common for these businesses to have employees, sales, and property in all three places. If you believe your business has triggered nexus outside of your home state, please contact your tax advisor to better determine if any additional tax filing requirements are met.