Nexus is a word that seems to be thrown around a lot lately. But what is it exactly. The definition may be as confusing as the word itself. NEXUS = a connection or link associating two or more people or things. That means that the networking group you attend is a nexus because it links two or more people. The high school or college you attended is also a nexus connecting you to every person who ever attended or will attend that school even if you never met them.

But what does that have to do with business? The answer is: everything.

The fact is the government is broke, federal, state, cities and counties. All of them – broke. The need for money has caused this word Nexus to become a catch all phrase because the government intends to catch everything they can with it.

The federal income tax, and most state income tax, is based on total income. If you are a U.S. citizen, then you are taxed on all income even if it is derived from a source outside the United States. If you have stock in a company from Japan, or you inherit rental income located in Canada, the income is all taxable here in the U.S. You may also be subject to tax in the country of origin too. You can normally (depending on the treaties between countries), take a tax credit for what you paid to another country. But it is still taxable income here at home. Even if you are not a U.S. citizen, but claim this as your residence, you can be taxed on income from outside the United States.

Most states work the same way. If you claim your home state as Colorado, but have income from a source in Arizona, you must claim all your income on your Colorado return. Again you can take a credit for taxes paid to AZ. but CO. will tax all of it.

Income tax nexus is fairly straight forward. Sales tax nexus on the other hand, can shut your business down. Sales tax is actually the backbone of most states income by generating the most revenue for the states. Sales tax nexus is a little different. In general, it depends on the location of you and your customer to create a link. If you and your client both live in Colorado then the link would be Colorado and you would need to collect and remit Colorado sales tax. But what if you are in Colorado and your client is in Kansas, there would appear to be no link, right? Not so fast, Buddy. Some states are claiming that if your website is located on a server in their state then both of you have a link to that state via the website. So if you are in Colorado, your client is in Kansas, and your website in California, then you would need to collect and remit sales tax for California! This situation is hypothetical, but it has happened with other states.

This link can be created by things other than your website. Independent contractors, sales reps, employees, processing plants, shipping facilities have all been used by different states to create a link. Once that link is found, you can start receiving notices from states you have never even been to, asking for sales tax payments. I have even seen notices that were a result of information presented on a website or on social media that indicated a link may be there even if none exists. The bottom line is that you have rights as a business; that includes the right to do business and have income. Don’t automatically assume the state you are receiving the notice from is correct, but be prepared if they are. Take the time to find out if you have nexus with another state and why. And don’t forget all the cities, counties and other taxing authorities out there – they want a piece of your pie too!