Key Takeaways
- Understand nexus types: Nexus can be triggered by physical presence, economic activity, affiliate relationships, or remote workers, even without a physical office in New York.
- Track sales and thresholds: If your business exceeds $500,000 in gross sales and 100 transactions into NY in four quarters, you’re required to register and collect sales tax.
- Franchise tax exposure: Earning over $1 million from NY customers means you must file corporate franchise tax, even from out of state.
- Use market-based sourcing: New York taxes service revenue based on customer location, so services delivered to NY residents count toward nexus, regardless of where you’re based.
- Act early to avoid penalties: Leverage NY’s Voluntary Disclosure Program to mitigate back taxes and penalties if you’ve triggered nexus but haven’t filed.
As states become more aggressive in expanding tax enforcement, New York stands out for its expansive interpretation of nexus. In fact, many out-of-state businesses don’t realize they may owe sales tax, corporate franchise tax, or both.
That’s where we come in. In this blog, we hope to help you determine if your business has nexus, and if so, what that means for compliance.
What Is Nexus, and Why Does It Matter?
In simple terms, nexus is the legal connection between your business and a state, which gives the state constitutional authority to tax your company. States can only make you register, collect, remit, or file taxes on sales, income, or other business activity if nexus exists.
But there are different kinds of nexus.
- Physical nexus occurs when your business has a tangible presence in a state. This could be in the form of offices, warehouses, employees, contractors, inventory, or even attending a trade show in the state. Even using third-party logistics providers or independent agents that work on your behalf can create physical nexus.
- Economic nexus is triggered by your economic activity in a state, and not your physical location. It is established when you exceed state-specific sales volume or transaction count thresholds. But it’s important to note that these thresholds can vary by state, and so what counts in one might not trigger nexus in another.
- Affiliate nexus is created when you have online or offline ties to in-state affiliates, subsidiaries, or referral partners who help you to generate sales in that state. This applies regardless of whether you have a physical presence there. These thresholds can be very low, or in states like Pennsylvania, can even be triggered for zero revenue.
Why nexus matters
An important consideration of New York state tax nexus is to do with sales tax. It means that your business to register, collect, and remit sales tax on taxable transactions in the state. Nexus is also an important consideration for income or franchise tax. Once you have nexus in a state, you’re required to file income tax or franchise tax returns there.
Ignoring nexus can lead to fines, back taxes, interest, and enforcement actions. Also, there’s often little or no statute of limitations for state tax assessments. As such, even past years can be re-examined. And with the increased presence of remote workers, many states are increasing the number of audits around revenue-based nexus.
New York State Tax Nexus
New York state has dual pathways to nexus. You can trigger it for sales tax through economic thresholds. You can also trigger franchise tax nexus via revenue thresholds or credit‑card activity. This means that compared to many other states, New York’s interpretation of nexus is pretty broad.
For instance, if you’re an out‑of‑state seller, you must register and collect New York sales tax if you exceed $500,000 in gross receipts and more than 100 separate sales in the state. This is certainly an aggressive standard, as it means both thresholds need to be met within the lookback period, whereas some other states only require one.
Even if your business has no physical presence in New York, it can still trigger nexus. For instance, this happens if you meet both thresholds by “regularly or systematically soliciting business” via the internet.
And then there’s New York’s corporate franchise tax. The state imposes this on corporations (S corps, foreign corporations, and LLCs classified as corporations) that derive $1 million or more in receipts from New York. It also applies if you issue 1,000 or more credit cards to customers, or have contracts with 1,000+ merchant contracts. These rules apply at the state level and in the Metropolitan Commuter Transportation District (MCTD), including New York City.
What this means for out‑of‑state businesses
If you’re an out‑of‑state business, consider:
- Sales tax compliance: Track your gross receipts and transaction counts over rolling four-quarter windows. Once both thresholds are met, you have 30 days to register for a Certificate of Authority, then must begin collecting sales tax within 20 days.
- Corporate franchise tax compliance: If your receipts from New York exceed $1 million, or you meet the credit‑card or merchant contract thresholds, you must file under Article 9‑A and may owe tax.
- Local surcharges: Sales inside the MCTD also trigger additional MTA surcharge and possibly NYC business corporation tax. This has its own $1 million receipts threshold, although it’s adjusted annually.
- Marketplace facilitator rules: Marketplace facilitators (like Amazon, Etsy, or eBay) must also collect and remit New York sales tax on all facilitated sales into NY. This must occur regardless of the seller’s nexus status. So you’ll need to track gross NY receipts toward economic‑nexus thresholds and register when nexus is triggered. This must be done, even if the marketplaces actually collect the tax.
- Remote workers/contractors: A single remote employee or contractor working in New York can establish physical nexus. This means you’ll need to register for these tax obligations. It applies for any remote payroll or services performed within the state.
- Sourcing rules: New York uses market-based sourcing. In other words, revenue is attributed to the state where the benefit is received. This is usually determined using billing address or delivery location. As such, receipts from NY-based customers are sourced to the state, and count towards your nexus thresholds.
What Happens If You Have Nexus and Don’t File?
There are many risks associated with not filing New York state tax when you have nexus. For starters, there’s interest on any unpaid tax from the date the payment was due. And interest on these penalties compounds daily, so the longer you don’t pay, the more you owe.
Also remember that New York can assess back taxes for all past periods. In fact, civil assessments may go back indefinitely in certain circumstances.
The state offers a Voluntary Disclosure and Compliance Program. Here, civil penalties might be waived, and you might even avoid criminal charges. However, there’s a limit to how long these look-back periods can last. Generally, standard relief limits liability to the past three full years of unfiled periods. To qualify for the program, you can’t already be under audit or criminal investigation, and you can’t have received a tax bill for those periods.
How to Stay Compliant
To ensure compliance, conduct regular reviews of gross receipts and number of transactions into New York to work out when you’re nearing or breaching thresholds. Also make sure your teams maintain good employment records, and track relationships with affiliate marketers or agents in the state.
And of course, it’s always best to work with a tax expert experienced in SALT (state and local tax). That way, you can ensure you’re meeting all requirements, and filing properly and on time. Fusion CPA can help you. If you need assistance with New York state tax, schedule a Discovery Call with one of our team today!
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This blog does not provide legal, accounting, tax, or other professional advice. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.