What is a Nexus Study?
A nexus study is an essential assessment for businesses to determine their tax obligations in different jurisdictions. In the context of sales tax, it helps identify whether a business has a sufficient connection, or "nexus," to a state that would require it to collect and remit sales taxes.
Nexus can be established through various factors, including physical presence, employee activities, property ownership, and economic presence. For instance, a company may have nexus due to having a brick-and-mortar store, a warehouse, or even employees in the state. Additionally, some states consider economic nexus, which arises from the level of sales or transactions within the state, even without a physical presence.
Conducting a nexus study involves a comprehensive analysis of all relevant activities and operations to ascertain where the business might be liable for sales tax. This study is vital for compliance with state laws and helps mitigate the risk of penalties during a sales tax audit. Businesses can also utilize the findings to make informed decisions on expansion strategies or adjustments in pricing.
In summary, a nexus study is a critical tool for any business that engages in selling goods or services across state lines, ensuring that they remain compliant with fluctuating tax obligations and mitigate potential financial risks.