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Nexus in the Sharing Economy

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Certain trends can start in one sector and move through multiple industries.  The sharing economy is similarly expanding the capabilities of businesses, by providing space on an as-needed basis.  While these services can offer ways for businesses to grow, they can also introduce complexity and risks to these businesses which they may be unprepared for.  One such issue is nexus creation.

Nexus is the minimal contact that a business has with a state which allows that state to subject the business to tax.  You can find additional information on nexus in our newsletter article: Business Owner’s Manual – State Tax Edition Part 2. Two recent trends in the sharing economy can create nexus issues for businesses.  However, there may be ways to plan for this risk and ensure the costs don’t outweigh the benefits.

Warehouse Space on Demand

Businesses selling products through Amazon’s fulfillment services already take advantage of outsourced warehouse space (which can create nexus issues – read our newsletter article: Selling Through Amazon? Know Your State Nexus Risk, for more on FBA.  New companies in the warehouse-on-demand space, like Flexe, may also create similar issues.  Flexe allows companies to procure short-term warehouse space for inventory in multiple states.  Having inventory in a state will typically create state nexus for sales or income taxes.

Office Space on Demand

Several companies offer short-term work space or office space rentals.  Liquidspace, Peerspace, and Regus are a few companies in this area, but others exist as well.  Businesses may find this useful for remote or traveling employees or to set up a temporary location for a project.  Paying rent in a state or having an office location can create nexus for sales or income taxes.

Planning Considerations

When deciding where to locate offices, employees or inventory, be aware this may create state tax nexus.  Locating these activities in states where the company is already filing will help to minimize additional tax and compliance costs.  Additionally, for inventory clients, consider locating inventory in states without a sales or use tax to reduce compliance burdens.

If you have questions regarding state tax nexus, please contact Berntson Porter’s State and Local Tax expert, Rachel Roberson at 425-454-7990.