Litigation Skill Combined With 35 Years Of Business Experience

How physical nexus has evolved with remote work?

On Behalf of | Sep 28, 2023 | Business Law

Nexus, or business nexus, is vital in tax and business rules. It decides if a business has a strong link to a specific state or area. There are three types of nexuses:

  • Physical nexus: Traditionally, this means having a physical presence in a state, such as a physical office, warehouse or employees, established nexus.
  • Economic nexus: Some states have implemented economic nexus laws, which consider factors like the volume of sales or transactions within the state. Even if a business lacks a physical presence, it may still have economic nexus if it meets certain sales or revenue thresholds.
  • Affiliate nexus: A business with affiliates or subsidiaries in a state can create a nexus, even if the business itself does not have a physical presence.

Depending on the significance of a business’ nexus, they may need to be subject to that state’s tax and regulatory laws.

Blurring the lines of physical presence

Nexus rules vary from state to state and can change over time due to legislative or judicial decisions. But one thing they have in common is how remote work has blurred the lines of physical presence.

Before 2020, most employees toiled in brick-and-mortar offices. However, with the rise of remote work, a significant shift occurred. This shift means that businesses can more easily stumble into the realm of physical nexus. They might do this by hiring remote employees in states where they do not have a physical office, and this could have unexpected tax implications.

Physical presence of online businesses

Physical presence is not just about offices. Just one remote employee can create it. Other factors may also trigger it, such as:

  • Owning or leasing an office
  • Keeping a mailing address
  • Storing inventory
  • Affiliating with other business

Note that even temporary activities like attending a trade show or conducting multiple in-person sales meetings can also create a physical presence.

States’ pursuit of taxes

States are becoming more diligent in collecting sales and use taxes from online businesses. While tracking economic nexus is vital, businesses must not underestimate the power of physical nexus.

It is entirely possible to trigger physical nexus in states without reaching economic thresholds. This can result in unanticipated tax responsibilities, affecting a business’s financial health. Staying vigilant on both fronts is essential for long-term success.