In efforts to increase revenue and to tax out-of-state businesses, many states send out tax nexus questionnaires. A tax nexus questionnaire is a set (usually multiple pages) of detailed questions about your activities in the state. The responses to these questions are used to determine if your business has nexus in the state.
Nexus is a minimum connection a business has with a state in order to impose tax. Once it's determined you have nexus, you usually have a state filing requirement. Some examples of questions that are asked are:
- How are sales made into the state?
- Did your company or affiliate actively solicit sales into the state?
- Amount of gross receipts from sales of tangible property during the last five years?
- How are deliveries made into the state?
- Do you own, lease, use, occupy, or maintain an office or other establishment in the state which is significantly associated with your ability to establish or maintain a market in the state?
Why Were You Sent a State Tax Nexus Questionnaire?
Usually these questionnaires are sent to businesses that are not filing or paying tax in the state and/or businesses the state suspects may have a filing requirement. In some instances a business could have payroll in the state and be filing payroll taxes. This triggers the state department of revenue to question whether that same business would also have an income or sales tax filing requirement. However, other times the states send these questionnaires to back up a filing position. For example, Missouri sends out a nexus questionnaire to businesses that claim Public Law 86-272 to make sure their activities in the state support this filing position.
If you receive a state nexus questionnaire, do not ignore it, but be very cautious how you answer the questions. Always answer truthfully but carefully. The questions are worded in such a way that may be confusing and often use terms that may not be clear or could be easily misunderstood or misinterpreted. Some of the questions may not be clearly answered with a yes or no response. In some cases, the wrong person at the business receives this and fills it out quickly without having a full understanding of what they are responding to.
Once the state receives a completed and signed questionnaire, it is hard to change the answers provided, even if the questions were misunderstood or the responses are not a clear picture of your business activities in the state.
What Happens After You Send In Your State Tax Nexus Questionnaire?
After the state receives your completed nexus questionnaire, they will usually either ask for additional information or determine if you have a filing requirement and owe tax, based on the answers provided. Answering these questions incorrectly or misunderstanding the question can lead to tax assessments and filings that might not really be required. And once submitted, it might be hard to contradict the responses given. On the contrary, sometimes your activities do create nexus in a state and you will need to begin filing returns and may have past exposure.
If you receive a state nexus questionnaire, always consult your tax advisor. Or if you need assistance, contact a member of the Freed Maxick SALT team. We can help you navigate through the questions to ensure they are answered properly.View full article