Starting a business can be an exciting and rewarding endeavour, but it can also come with its challenges, one of which is finding the right state to set up shop. For many entrepreneurs, having a physical storefront or office may not be necessary, especially in today’s digital age where most transactions occur online.
If you’re wondering whether your business can operate without a physical presence, you’ve come to the right place. In this article, we’ll explore which states allow businesses to forgo a brick-and-mortar establishment and how you can take advantage of these opportunities.
“Small retail businesses are struggling through no fault of their own. We need to level the playing field.” -Jack Kingston
While each state has its own rules and regulations regarding business formation, some have more flexible guidelines that cater to virtual businesses. By understanding what each state offers, you can make an informed decision on where to incorporate your business and avoid costly mistakes down the line.
From tax incentives to ease of incorporation, there are a variety of factors to consider when choosing a state for your business. Whether you’re looking to create a startup or expand an existing operation, knowing which states welcome non-physical businesses can give you a competitive edge.
If you’re ready to take the next step towards launching your company, keep reading to discover which states offer the best environment for businesses without a physical presence.
Understanding Physical Presence Nexus
What is Physical Presence Nexus?
Physical Presence Nexus refers to the legal requirement for businesses to have a physical presence or office in a particular state before they can be subject to that state’s sales and use taxes. In other words, it means that if your business has a store, warehouse, employees, or any other physical connection with customers or suppliers in a specific state, you will need to collect and remit sales tax on orders shipped to customers located there.
Why is Physical Presence Nexus Important?
Business owners need to understand what constitutes “nexus” because failing to establish nexus could result in fines, back taxes, penalties, and even the loss of their license to do business in certain states. Furthermore, if your business is found guilty of not having established nexus, the IRS may audit your books to see where else you might owe taxes, which could lead to additional fines and headaches for you.
How Does Physical Presence Nexus Affect Your Business?
If your business operates exclusively online and has no physical presence in any state, you are typically exempt from paying sales tax in those states where you do not have nexus. However, many states impose economic nexus thresholds and legislation requiring remote sellers to pay sales tax based on sales criteria alone irrespective of physical presence. This change occured from June 21, 2018 when the supreme court ruled Quill’s physical presence rule as outdated.
The threshold varies depending on the state and ranges from just $10,000 in some states like Tennessee all the way up to $500,000 in others such as Hawaii and Illinois. It should also be noted that while economic nexus laws only apply to sales tax at present, similar income tax changes are developing around intellectual property rights such as patents and trademarks etc.
What is the Future of Physical Presence Nexus?
The future looks digital for sales tax and it seems increasingly likely that businesses will need to face more auditing checks through geolocation data in order to assess the level of nexus they have with each US state. This means that remote sellers who previously did not have a physical presence in states could end up collecting over 50% of their total annual sales tax from these transactions come 2022 under the marketplace facilitator legislation leading to significant compliance costs.
“The eCommerce industry has seen a major shift towards ecommerce during the past year due to Covid-19, and while there are still some challenges around managing cross-border VAT, economic threshold limits, online marketplaces data becoming more transparent about taxes being collected on behalf of sellers will ultimately drive faster digital adoption,” -Markus Weber
As the digital economy evolves at lightning speed, businesses are experiencing new legal complexities regarding which states require them to charge sales tax, and how much they must charge. Therefore, any business operating or selling goods remotely across multiple US states without understanding and complying with this ruling puts themselves at risk of an audit.
States with No Physical Presence Requirement
If you are an online business owner, it is essential to know the states that allow a business without physical presence. Before 2018, businesses had to establish a physical presence in a state before they could be required to collect sales tax from customers located in that state. However, the landmark decision of South Dakota v. Wayfair changed this, allowing states to require businesses that meet certain thresholds to collect and remit sales taxes even for sales made outside their borders.
What are the States with No Physical Presence Requirement?
The following states do not have a physical presence requirement:
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- West Virginia
How Do These States Define Economic Nexus?
Each state has its own rules for what constitutes economic nexus. Some states only require businesses to collect and remit sales tax if they have made a certain amount of sales or have a certain number of transactions within the state; others also factor in things like clicks or website visits.
For example, California’s threshold is $500,000 in sales into the state in the current or previous calendar year. Arizona requires out-of-state sellers who have either more than $200,000 in annual gross receipts from purchases delivered to locations within the state or conduct more than 200 separate transactions for delivery into the state to register with the State Department of Revenue and begin collecting and remitting transaction privilege tax on their taxable sales into the state. Connecticut requires businesses that exceed $100,000 in sales or make 200 or more separate transactions in the state over the last twelve months to collect and remit taxes.
What are the Tax Implications for Businesses Operating in These States?
Businesses operating in states without physical presence requirements may need to adjust their sales tax practices accordingly. They will first need to determine whether they meet the threshold for economic nexus in each state where they sell products or services.
If they do, they must then register with that state’s taxing authority and begin collecting and remitting sales tax on all taxable sales that ship to addresses within the state. Keeping track of different regulations can be confusing and time-consuming. It may be beneficial to utilize automated software that calculates your total economic nexus and generates accounting reports specific to each state’s regulations. Businesses must also keep detailed records of all sales, including what they are selling, where it is going and for how much. It may be worthwhile to consult with a tax advisor familiar with the laws in states without physical presence requirements.
What are the Risks of Operating in These States?
The risks of operating in states without physical presence requirements range from missed opportunities to audit exposure. Failure to collect and remit the correct amount of sales tax can lead to interest and penalties down the line as well as costly audits by state taxing authorities. The speed at which some jurisdictions change their policies means that businesses must stay on top of industry changes; updates made during the coronavirus pandemic have proven policy changes happen rapidly.
“Given that most of us comply with sales tax obligation voluntarily, one question worth asking is whether every business owner understands the consequences of non-compliance.” -Avery E Tax
Online business owners need to stay abreast of current legislation related to economic nexus. Only then will they avoid expensive penalties, fines, or worse — an interruption in business.
States with Economic Nexus Laws
What are the States with Economic Nexus Laws?
In recent years, more and more states have enacted economic nexus laws, which allow them to collect sales tax from businesses that sell goods or services into their state without having a physical presence there. As of 2021, there are currently over 40 states that have implemented some form of economic nexus law. Some of the most notable states include:
- New York
How Do These States Define Economic Nexus?
Each state has its own definition of what constitutes economic nexus, but generally it refers to a business having a certain level of sales or transactions within the state. For example, in Texas, a business is considered to have economic nexus if it had more than $500,000 in gross receipts from sales in Texas during the preceding calendar year.
Similarly, in California, a business is subject to economic nexus if it has either $500,000 or more in sales or performs more than 200 separate transactions into California within the current or previous calendar year.
What are the Tax Implications for Businesses Operating in These States?
The main tax implication for businesses operating in states with economic nexus laws is that they may be required to collect and remit sales tax on all taxable sales made within those states. This includes collecting and remitting state-level sales tax as well as any local sales taxes that may apply, such as county or city sales taxes.
Businesses may also be required to register for a state sales tax permit in order to collect and remit the appropriate taxes. Failure to comply with these laws can result in penalties and fines, so it is important for businesses to understand their obligations and stay up-to-date on any changes to the law.
What are the Risks of Operating in These States?
For businesses that sell goods or services into multiple states, complying with economic nexus laws can be complex and time-consuming. Failing to comply with these laws can result in significant financial and legal consequences, including fines, penalties, and litigation.
In addition, some states may require businesses to provide information about their sales and transactions within the state, which could expose them to potential audits and other regulatory scrutiny. This can further complicate compliance efforts and increase the risk of noncompliance.
“While it may seem daunting, compliance with economic nexus laws is critical for businesses operating in multiple states. Taking steps to understand and meet your obligations under these laws can help you avoid costly penalties and protect your business.” -Jared Dolan, Tax Attorney
If you operate a business that sells goods or services into multiple states, it is important to familiarize yourself with the various economic nexus laws that apply. By staying up-to-date on these laws and taking steps to comply with them, you can avoid the risks and legal implications associated with noncompliance.
How to Determine if Your Business Has Economic Nexus
To understand economic nexus, it is essential first to define what physical presence means. Physical presence refers to the situation where a company has an actual location or an employee in a State. In contrast, economic nexus implies that your business meets certain criteria of doing business with that state without physically being present there.
Economic nexus puts businesses responsible for tracking their activities and knowing how their operations impact states’ tax liabilities. It’s therefore necessary to stay informed about which states require economic Nexus so that you can determine if your business needs to file for taxes or not.
What Factors Determine Economic Nexus?
The Supreme Court provided guidelines on economic nexus in South Dakota v. Wayfair Inc in 2018. The court ruled in support of broadening sales tax collection by confusing permitting authorities to begin levying taxes on out-of-state sellers whose monetarily-business engage transactions exceed specific limits. Here are some factors that determine whether a business has economic nexus:
- Sales Volume: Many States have minimum sale regulations that trigger financial responsibility when crossed.
- Transactions Count: Some States use transaction volume criteria as triggers for defining economic nexus, even though it often comes hand-in-hand with volume-based tests.
- Specific Transactions: These details vary from State-to-State, but generally items like digital downloading (videos, pictures, etc.), services performed across state lines, royalties derived from licenses, tangibles leased or rented.
How Can Your Business Determine Economic Nexus?
Auditing one’s inventory management platform, ensuring an end-to-end alignment between website user interfaces and stores selling platforms may only be reasonable automotive solutions to digitizing inventory management. The following are the primary approaches and tools businesses can use to determine their economic nexus:
- Tax Software: Many tax software programs, such as TaxJar or Avalara, offer Nexus-checking options that can flag potential new exposures.
- Audit: An internal audit of a firm’s financial records provides useful insights into its business activities across states that already legally asserted these taxes requirements on online purchases.
- Certified Professional Accounting Services (CPAs): CPAs provide an excellent alternative when internal auditing resources are not available through optimizing existing CPA relationships by requesting them to conduct regular dual reviews on financials for possible “flagged” transactions, sales volume exceeding minimum registered thresholds.
- State Websites: Essentially identical among specific state regulatory websites is clarification outlining what each State regards as taxable fulfillment activity criteria for determining Nexus in their respective State legislture’s view — one must be attentive to any changes!
What are the Consequences of Failing to Determine Economic Nexus?
Failing to recognize whether your business has established economic nexus with the state may put you at significant risk of fines, penalties, interest, and back taxes. Besides, these consequences usually come with additional repercussions, including harm to the brand, bankruptcy, discomfort, and frustration derived from experiencing long durations between audits outside quarters – lead time to generate additional income streams doubling effort spent on performing top-level cognition routinely.
“The cost of non-compliance far outweighs the investment needed to ensure compliance.” – Jonathan Barsade, Founder and CEO EXCELERATE
To avoid these consequences, businesses should review the guidelines offered for their particular states and track their operations accordingly.
How Often Should You Reevaluate Your Business’s Economic Nexus Status?
Once applied, an annual assessment with occurring updates likely will help avoid any state tax compliance mandates and ensure the business’s continued success. Besides regulatory changes around the economic nexus requirements — meaning their revenues increase or decrease every quarter— businesses must review their operations continually.
“To stay compliant with states’ rules and achieve peace of mind, we recommend ongoing assessments to catch any sales tax liabilities in a relaxed, non-pressured setting.” -Brosters Wisepops over E-commerce Entrepreneurs
It is advisable to work closely together with reputable legal professionals to re-evaluate your business’ policies and progression periodically internally towards both audit, commercialization timelines concerning financials whether it pertains to FASB accounting legislation for large-scale M&A project funds under management day-to-day bookkeeping!
Not having physical presence in a State by no means exempts you from its economic Nexus laws. Hence, understanding these conditions becomes crucial to comply if obligated so that your business can minimize risk, avoid penalties, and remain profitable.
Benefits and Risks of Operating Without Physical Presence
With the rise of e-commerce, more businesses are operating without a physical presence. While this can offer many benefits, it also comes with risks that need to be considered. In this article, we will explore the benefits and risks of operating without physical presence, how states view such businesses, and ways to mitigate these risks.
What are the Benefits of Operating Without Physical Presence?
- Lower costs: By not having a physical store or office, businesses eliminate expenses related to rent, utilities, and insurance.
- Bigger customer reach: E-commerce allows businesses to access customers from all over the world, increasing their market size and potential sales.
- Easier scalability: Without worrying about physical limitations, businesses can easily scale up their operations as needed.
- Faster and more convenient for customers: With online shopping, customers can shop at any time from anywhere, making it more accessible and convenient than physical stores.
What are the Risks of Operating Without Physical Presence?
- No traditional storefront: Some customers may prefer doing business with companies they can physically see and visit. Not having a storefront could make these customers less likely to trust your business.
- Lack of physical interaction: As much as technology has made communication easier, there’s still something missing when you don’t have face-to-face interactions with clients.
- Legal issues: Businesses operating without physical presence might run into legal complications. Specifically, if a company does not keep its presence separate between owners/managers versus the company, they risk losing their personal assets in a lawsuit brought against their business or some other liability issue.
- Difficulties with regulation: Most states require businesses operating within their borders to register and comply with various rules, including taxation. Not having a physical presence can make it difficult for companies to understand what rules apply to them.
How Do States View Businesses Operating Without Physical Presence?
The Supreme Court ruling on South Dakota v. Wayfair changed the rules for sales tax collection by online retailers that do not have a physical presence in the state in which customers live.
Before this decision, known as the “physical presence” rule, a state could only require a business to collect sales taxes if it had a physical presence (e.g., office or warehouse) in that state.
This means that states are now able to force out-of-state sellers to collect sales tax from buyers, even if they don’t have a physical presence in the buyer’s state. The only way for these companies to avoid collecting sales tax is by conducting their business entirely outside the United States.
How Can Your Business Mitigate the Risks of Operating Without Physical Presence?
- Establish a strong online brand: Invest in your e-commerce site, social media platforms, and other digital marketing initiatives to build trust with potential customers.
- Ensure legal compliance: Consult an attorney to ensure your business isn’t violating regulations such as those around data privacy and protection.
- Create customer-focused strategies: As much as possible, simulate traditional face-to-face interactions through prompt communication and reliable fulfillment practices (especially regarding returns or exchanges).
- Consider hiring an accountant: They can provide valuable financial advice regarding taxes, bookkeeping, and other legal requirements that apply to your business model.
“In the modern cyber era, it is not just brick and mortar buildings which create nexus with a state.” –U.S. Supreme Court Justice Anthony Kennedy
Operating without physical presence presents a unique set of challenges for businesses. However, if done right, e-commerce can be a lucrative venture for entrepreneurs looking to expand their reach and lower costs.
Expert Tips for Operating a Business Without Physical Presence
In recent years, it has become increasingly common for businesses to operate without a physical presence. This can help cut costs and increase flexibility for business owners, but it also raises several important questions about compliance with state tax laws and avoiding potential legal pitfalls.
What are the Best Practices for Operating Without Physical Presence?
The best practices for operating a business without physical presence depend on what your specific business entails. However, there are some general tips that all businesses operating online or remotely should keep in mind.
- Create a secure and reliable internet connection to ensure smooth communication and data transfer.
- Ensure that you have proper cybersecurity measures in place to protect sensitive information from potential breaches.
- Develop a system for tracking and documenting all financial transactions, receipts, and invoices. In many cases, electronic records are sufficient and more efficient than paper records.
- Have clear policies and procedures for handling customer disputes and complaints. Make sure customers know how to contact you and what the process is for resolving any issues they may encounter.
How Can Your Business Stay Compliant with State Tax Laws?
While operating remotely or online presents a lot of benefits to businesses, it does come with challenges when it comes to complying with state tax laws. Since sales tax regulations vary across states, it’s essential to do your research and understand which states require you to remit sales tax payments.
One way to stay compliant with state tax laws is to use software applications designed specifically to track and calculate sales taxes. These tools will help make sure that you correctly collect and remit taxes in each state where you have nexus (a significant connection).
“No company is too small in the digital age to escape state sales tax obligations.” – Richard C. Auxier, Urban-Brookings Tax Policy Center
What are the Common Pitfalls to Avoid When Operating Without Physical Presence?
One common pitfall that businesses may encounter when operating without physical presence is failing to comply with state tax laws. Many states have enacted economic nexus thresholds, which means you must collect and remit sales taxes if your business meets certain criteria.
Another potential pitfall is not properly registering your business with each state where you have a significant connection (nexus), such as employees or property. Failing to register could result in penalties and legal consequences down the line.
“Not being registered anywhere and then getting caught might inspire audits of past years’ transactions resulting in additional unanticipated liability.” – George Isaacson, Brann & Isaacson Law Firm
How Can Your Business Stay Ahead of Changing State Tax Laws?
State tax laws and regulations can change rapidly, especially when it comes to online and remote businesses. Staying aware of these changes is essential for avoiding penalties and ensuring compliance. Some steps you can take include:
- Subscribe to newsletters from state revenue departments to stay informed on updates and changes.
- Attend webinars or training sessions offered by state revenue departments on specific topics related to sales taxation for remote sellers.
- Work with knowledgeable tax professionals who can advise your business on regulatory changes and ensure its compliance with all relevant statutes and regulations.
Being proactive about staying abreast of changing state tax laws can help your business avoid costly penalties and maintain a positive relationship with both customers and taxing authorities.
“Compliance with sales tax collection requirements is constantly changing and evolving. Having a consultant as part of your process provides expert guidance” – Tom Rogers, PwC
Frequently Asked Questions
Which states don’t require physical presence for business registration?
There are many states that do not require physical presence for business registration, including Delaware, Nevada, and Wyoming. These states have favorable tax laws and business-friendly regulations, making them popular choices for entrepreneurs and small business owners. However, it is important to note that each state has its own requirements and regulations, so it is important to research and consult with a professional before registering your business in a particular state.
What are the requirements for registering a business without physical presence in a state?
The requirements for registering a business without physical presence in a state vary from state to state. Generally, you will need to file articles of incorporation or organization, pay a filing fee, appoint a registered agent, and obtain any necessary licenses and permits. You may also need to provide a business address, even if you do not have a physical presence in the state. It is important to research the specific requirements of the state you are considering registering in before beginning the registration process.
Do all states have the same tax laws for businesses without physical presence?
No, each state has its own tax laws for businesses without physical presence. Some states have no corporate income tax, while others have lower tax rates or exemptions for certain types of businesses. It is important to research the tax laws of the state you are considering registering in and consult with a tax professional to determine the most advantageous state for your business.
Can a business without physical presence still qualify for state incentives and grants?
Yes, a business without physical presence may still be eligible for state incentives and grants, depending on the state and the type of business. Some states offer incentives for businesses that create jobs or invest in certain industries, regardless of their physical presence in the state. It is important to research the incentives available in the state you are considering registering in and consult with a professional to determine eligibility.
What are the advantages of registering a business without physical presence in a state?
There are several advantages to registering a business without physical presence in a state, including lower taxes, reduced regulatory burdens, and increased flexibility. By registering in a state with favorable tax laws and business regulations, you can save money and focus on growing your business. Additionally, registering without physical presence allows you to operate your business from anywhere, giving you more freedom and flexibility.
How can a business determine which state is best for registering without physical presence?
The best state for registering a business without physical presence depends on a variety of factors, including tax laws, business regulations, and industry-specific incentives. It is important to research and compare the requirements and regulations of different states, consult with a professional, and consider the needs and goals of your specific business. By carefully evaluating your options, you can choose the state that offers the most advantages for your business.