NEXUS

Definition

In the financial context, the term “nexus” refers to a connection or link between things, specifically the relationship between a corporation’s activities and its tax obligations. It’s used primarily to determine if an entity has sufficient connection with a region to obligate tax payment. Essentially, a tax nexus dictates the tax obligations that a business may have in various jurisdictions.

Phonetic

The phonetic spelling of the word “NEXUS” is: /ˈnɛksəs/

Key Takeaways

1. NEXUS is a joint program conducted by Canada and the United States that was established to facilitate faster border crossing for pre-approved, low-risk travelers.
2. Members of the NEXUS program can avoid long waits at border entry points via reserved lanes for NEXUS card holders at northern border crossings, airports, and at marine reporting locations.
3. NEXUS membership also allows you to expedite your travel through security at participating airports, and can be used as identification when traveling domestically in Canada and the United States.

Importance

Nexus in business or finance refers to the significant connections or networks that exist between entities or jurisdictions. This term is especially important in the context of taxation and business law. For instance, a business is required to pay taxes in the jurisdiction where it has a tax nexus, or a significant presence or business connection, such as having a physical location, employees, or significant sales. Tax agencies use the concept of nexus to determine if a business is required to remit sales, income, or other taxes and how much tax it needs to pay, which directly impacts a business’s tax liabilities and overall financial planning. By understanding nexus, businesses can effectively plan their operations and financial strategies to ensure compliance and optimize their tax obligations.

Explanation

Nexus, in the realm of finance and business, primarily refers to the connection or link between the activities of a business and the jurisdiction in which it operates. It constitutes a legal clause through which jurisdictions can assert tax obligations on businesses. The purpose of the nexus concept is to establish the legal right of a state to impose corporate income or sales tax on a business, particularly when the business isn’t physically based within that jurisdiction, but has some form of established presence or connection.The nexus is used for determining whether a business has sufficient connection with a state or jurisdiction, thereby making it responsible for tax obligations. For instance, the presence of a warehouse, salesperson, or even economic activity such as online sales can create a nexus. The U.S. Supreme Court case South Dakota v. Wayfair in 2018 extended the nexus concept to include economic presence, where states can require sellers with no physical presence in the state to collect and remit sales taxes. Thus, nexus plays a crucial role in the tax landscape of the digital economy and eCommerce businesses in particular.

Examples

“Nexus” in the context of business and finance often refers to a connection or link between activities and/or entities, typically concerning tax jurisdictions or business transactions.1. E-commerce companies and sales tax: One prominent example involves online retailers like Amazon. Certain states in the U.S. require that if a company has a “nexus,” or a substantial presence (like a warehouse or office), in their jurisdiction, then it must collect sales tax from customers in that jurisdiction. So, if Amazon has a warehouse (physical nexus) in New York, it is required to collect sales tax from all customers who live in New York.2. Multinational corporations and income tax: If a U.S. company has international operations, it might create a “nexus” in foreign countries where it conducts substantial business, such as through a branch office or a subsidiary. This nexus may trigger income tax requirements in these foreign jurisdictions. For instance, if Apple operates in Ireland through its subsidiaries, Irish tax law may deem this a “nexus” and apply specific tax obligations.3. Gig economy and tax nexus: Another example is businesses engaging contract workers (like Uber with its drivers or Airbnb with its hosts) from many different locations. Depending on the extent of business activities in a state, these companies might establish a tax nexus and therefore have to comply with various state tax laws. This typically applies to businesses who have independent contractors, property (like rental apartments in Airbnb’s case), or affiliates in these states.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Tax Nexus
• Physical Presence
• Business Connection
• Commercial Activities
• Sales Tax Nexus

Sources for More Information

• Investopedia
• Tax Foundation
• Avalara
• The Balance Small Business