stomers all over the world, your servers are hosted in Virginia, your bank account is in Nevada, you have an Independent Contractor selling your services in Washington and you operate out of your home in California: Do you need to file an Authority to Do Business in any one or more of these states?
It is easy to understand why small business owners are confused about where and when they must "register" their companies with a state (outside of their state of formation) and in what form. State agencies make this issue extremely confusing as there is usually no black & white standard describing when and where a small biz owner must obtain a foreign authority to operate a business in that state.
I will attempt to explain what most state laws say on this issue and how to avoid some of the pitfalls of establishing what is called, ?nexus? in a state you might not want to. Additionally, I will attempt to help you determine when and where you must register your company if you are operating, in any form, in a state other than your formation state.
WHY STATES DO THIS?
Many states have said that the requirement to obtain authority to do business exists to protect domestic organizations (those corporations & LLCs formed in that state) from unfair competition and to place domestic and foreign organizations (those formed in another state or country) on an equal footing. In fact, it is a way that states can ensure that they receive taxes from companies doing business there.
Domestic companies, they say, are required to collect taxes and pay taxes to that state. The argument is that foreign companies, who have lower costs because they are not forced to collect taxes, have an unfair competitive advantage. Additionally, if these foreign companies don?t collect taxes on sales, then wise consumers will be more inclined to purchase from the foreign company at an overall lower price.
WHAT IS NEXUS?
The law is clear; a state cannot impose a tax on an out-of-state business unless that business has a ?substantial nexus? within the taxing state. But what exactly is substantial ?nexus??
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