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The state-by-state case law on nexus is changing rapidly.

John Weaver, CPA

A Campus as Big as the Globe

2013-02-13

Imagine the quintessential college campus as expanding rings: a grassy commons encircled by red brick dorms, surrounded by streets of tidy Victorians owned by the college and occupied by professors who walk to class. Now add another ring for your online students and their online professors. Then expand the circle for your faculty on sabbatical and your admissions officers who spend much of their time out of state. You’re no longer looking at a college town; you’re seeing a universe that spreads out as far as every employee can go.

Keep track of your out-of-state employees

Does your college or university offer distance learning? Does your admission officer recruit out-of-state students? When your faculty members and other employees are no longer all local, neither are you. In general, tax-exempt organizations are subject to the same state jurisdiction rules as any other business organization. Just because your institution is exempt from paying federal and state income tax does not mean that you are exempt from registering in a state, withholding taxes from employees, filing annual reports, and paying annual fees.

Identify nexus

If your institution hires an employee who teaches from home in another state or who travels for work out of state, you may be required to register and file annual reports with that state. You also need to adhere to rules regarding withholding state income tax and paying unemployment tax. These employment taxes vary state by state, and some states levy taxes other than income taxes that could make a tax-exempt organization potentially subject to tax in that other state.

It all depends on the individual state; in general, when you hire an out-of-state employee, you create what is called “nexus,” in which you establish a physical connection with another state that causes you to be subject to that state’s jurisdiction. The recent big nexus cases, like the Amazon.com sales tax agreements, concerned online retail sales, but the argument that your out-of-state employees create your exposure to nexus issues remains the same. The state-by-state case law on nexus is changing rapidly, but the trend represents increasing exposure to nexus, coupled with heightened enforcement by the states.

Know your exposure

When your institution has any of the following types of employees, consult your tax advisors about possible registration, reporting, and tax implications in the relevant states:

  • Faculty and visiting scholars who reside in a state other than where they teach
  • Faculty on sabbatical out of state
  • Admissions officers, recruiters, sports coaches, and other multi-state workers

Many states have exemptions for not-for-profits, but not all (e.g., Massachusetts has no exemptions). Even if you are exempt (e.g., a college), you still need to file the registration form.

Do your due diligence

Tax-exempt organizations are monitored by each state’s attorney general or secretary of state, and getting accurate information about state filing requirements can be a challenge. As more colleges and universities engage in distance education over the next few years, we hope the rules—and enforcement—will become more obvious.