A nexus exposure assessment systematically evaluates where your business has created tax and registration obligations across states. Rather than waiting for audit notices or state questionnaires, proactive assessments identify compliance gaps, quantify historical liability, and enable strategic remediation before enforcement actions occur.
This guide covers when to conduct assessments, what a comprehensive review examines, how to respond to state nexus questionnaires, and remediation options, including voluntary disclosure agreements.
A nexus exposure assessment is a cross-functional evaluation that determines where your business has established sufficient connection to states to trigger tax registration, collection, remittance, and filing obligations.
The assessment isn't a single checklist; it combines legal analysis, data interrogation, and business process review to identify both current exposure and historical liability.
A comprehensive assessment covers multiple tax types, including:
It also covers Secretary of State foreign registration requirements. Each operates under different nexus standards, so a business might owe one type of tax without owing others. The goal is twofold: identify current exposure and implement forward-looking controls that prevent incremental risk.
Timing matters significantly for nexus assessments. Conducting one proactively provides options that disappear once a state initiates contact.
Buyers always conduct sales tax due diligence, and sellers can strengthen their negotiating position by proactively resolving exposure before the deal is on the table. Acquired entities may carry historical exposure, different taxability profiles, or registrations that have lapsed.
A targeted nexus diligence review before closing identifies required post-closing registrations, potential successor liability, and opportunities to resolve historical issues via voluntary disclosure.
Entering new states, launching new product lines, or changing fulfillment arrangements all create nexus implications. Assessing exposure before operations begin allows you to register proactively rather than accumulate liability.
Remote workforce expansion, third-party fulfillment arrangements, new affiliate relationships, or SaaS product launches can create nexus in states where you previously had none. A reassessment after major operational shifts ensures compliance keeps pace with business evolution.
Monitoring sales volume against state economic nexus thresholds lets you register before you cross them, rather than scrambling afterward. Setting alerts at 75% to 90% of threshold amounts provides adequate planning time.
Annual nexus reviews ensure ongoing compliance as business activities evolve and state laws change. Economic nexus thresholds, tax rates, and enforcement priorities shift regularly, and periodic assessments catch changes before they create exposure.
A thorough assessment examines multiple categories of business activity that can create state obligations.
Document all property (owned or leased real estate, equipment, inventory), personnel (employees, contractors, sales representatives), and activities (trade shows, temporary projects, customer visits) in each state. Include third-party arrangements, such as fulfillment centers where your inventory is stored.
Compile sales data by state, separating direct sales from marketplace-facilitated transactions. Most states set thresholds at $100,000 in sales or 200 transactions, though some states (Alabama at $250,000, California at $500,000) have higher limits.
Track both current-year and lookback-period sales against each state's specific thresholds.
Identify relationships with in-state affiliates, brand partners, referral agencies, or sales agents that may trigger affiliate nexus.
Review marketplace facilitator arrangements to determine whether platforms are collecting tax on your behalf and whether those sales count toward your own threshold calculations.
Map where remote employees work, including temporary arrangements. A single employee working from home can establish nexus. Review digital product offerings against state taxability rules, as SaaS, digital downloads, and streaming services are subject to inconsistent treatment across jurisdictions.
For states with nexus, calculate the estimated tax due for prior periods. This quantification informs decisions about voluntary disclosure, prospective registration, or risk acceptance.
Include penalties and interest in the calculation to understand total potential exposure.
States use nexus questionnaires to identify businesses with potential filing obligations. You may receive one after voluntarily registering for certain taxes, when data sharing reveals your business activity, or when third-party reports (like information returns) suggest state-source income.
Questionnaires require careful handling. You must answer truthfully, but your responses establish the state's record of your activities.
States like New Jersey explicitly state that if you have an independent representative working in the state on your behalf, or inventory in an Amazon warehouse, you're required to register and file returns.
Important nuance: In several states, receiving a nexus questionnaire does not automatically disqualify you from participating in a voluntary disclosure agreement. The disqualifying factor is typically direct contact regarding a liability or audit notice, not informational questionnaires.
However, completing a questionnaire does create a paper trail that can affect future negotiations, so consult with a tax advisor before responding.
When an assessment reveals historical exposure, several remediation paths exist, each with different cost-benefit profiles.
VDAs are contracts between taxpayers and state tax authorities that resolve past tax liabilities in exchange for favorable terms. Benefits typically include:
The Multistate Tax Commission (MTC) operates a Multistate Voluntary Disclosure Program that coordinates VDAs across participating states through a single application.
Applications include estimated tax due, a description of business activities, and the point at which nexus was established. The MTC treats applicant identity as confidential until a VDA is signed.
Eligibility hinges on voluntary disclosure. If the state has already contacted you regarding the specific tax liability (through an audit notice, an enforcement letter, or similar), VDA participation is typically unavailable.
Receiving a general nexus questionnaire may not disqualify you in some states, but receiving an audit notice definitively does.
For minimal exposure or states with limited enforcement history, registering prospectively and beginning collection going forward may be appropriate.
This approach accepts the risk of potential assessment for prior periods but avoids the administrative burden of formal disclosure. It's most appropriate when historical liability is small relative to VDA transaction costs.
Discern provides registered agent services across all 51 jurisdictions, automated compliance tracking, and foreign registration management that coordinates your obligations from a single dashboard.
When nexus assessments reveal new registration requirements, we ensure you're compliant before enforcement begins. Book a demo to see how Discern simplifies multi-state compliance
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