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What creates a filing responsibility for an out-of-state company with sales to a particular state?

A filing responsibility is created when a company has “nexus” with a state.

In state and local taxation, “nexus” refers to the minimum contacts, activities, or presence a taxpayer must have with a state before that state can subject the taxpayer to tax or require the taxpayer to collect and remit sales & use taxes.

The activities that establish nexus vary by state and by type of tax. In addition, the Interstate Commerce and Due Process clauses of the U.S. Constitution create limits on a state’s power to subject a company to taxation. In particular, the court decision in Quill v. North Dakota (112 S Ct 1904, 1992) created some less-than-clear rules for determining whether an out-of-state company has a filing responsibility.

Therefore, it is often difficult for a company to know exactly what taxes it is liable for without carefully analyzing its activities in the various states.

For example, many companies are under the mistaken impression that they need not collect sales tax or file income tax returns if they do not have an office or other permanent physical location in a particular state. Actually, any of a number of activities that are conducted within a state can establish nexus for the purposes of both sales tax and income tax.

Therefore, it is essential that someone who has experience with the various states’ laws and different types of taxes carefully analyze all current and anticipated corporate activities. Only then can appropriate filing responsibilities be determined.

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