Nexus—The Unseen Cause of State Tax Headaches

January 11, 2018

Recently, one of our medical practice clients received a notice from the Minnesota Department of Revenue notifying them of the requirement to file corporation tax return. But their medical practice is located in Washington D.C.—how could this happen? Was Minnesota dazed and confused?

Actually, no—activity at a conference in Minneapolis triggered the notice. It’s a question of state nexus—and it can sneak up on even the most tax-savvy medical practices. “Nexus” relates to a connection that a business makes to a particular state or location and can trigger state income tax, sales tax, or other tax liability. Some general ways that nexus is established are:

  • If the business has a physical location in the state
  • If business services are performed in the state
  • If the business has property (owned or rented) in the state

There are also some not-so-obvious ways state tax nexus can occur:

  • Speaking engagements: Where the “product”—your speech—is received
  • Trade Show product sales: Where the purchaser receives the product—includes temporary locations
  • Remote employees
    • A single telecommuter working from home within a state’s borders may trigger income tax nexus for out-of-state employers—this is true even if the out-of-state employer made no sales in the state and even if the employee telecommuted only part-time
    • Telecommuters now create income tax nexus in a majority of states, sometimes even when performing non-market activities (such as medical coding, billing or insurance claim processing)
  • Hospital visits: Where the service is rendered
  • Business entity type: Corporation vs. Pass-Through Entity; state rules are changing—the roll out of market-based apportionment may apply to C-Corporation but not pass through entity (S-Corp, LLC or Partnership)

As federal funding declines, state agencies across the U.S. continue to intensify tax collections, a trend that will not be changing in the near future. Remote employment and virtual care environment trends continue to grow through expansion of internet accessibility. Medical practitioners need to be aware of these state nexus traps and make service and practice decisions with state taxes in mind.

If you have questions about state tax nexus, or would like to discuss your particular situation, contact your Aronson tax advisor at 301.231.6200. Our tax specialists provide valuable guidance in all aspects of federal and state tax matters.