Multi-state nexus for small businesses in DC, Virginia and Maryland

Nexus is the connection that lets a state require a business to file and pay its taxes. It is tested separately for income tax, sales tax and payroll withholding, so a business can have one without the others.

Physical presence still creates nexus: an office, inventory, or an employee working in the state, including a remote employee working from home.

Federal law, known as P.L. 86-272, stops a state from imposing a net income tax when the business’s only activity there is soliciting orders for sales of tangible personal property, with orders approved and filled from outside the state. It does not cover services. A consulting, IT or professional services firm with an employee working in Maryland, for example, should expect Maryland income tax filings.

Pass-through entities with nexus usually file a state partnership or S corporation return, and owners may owe tax there as nonresidents. DC also taxes many unincorporated businesses directly. See DC business franchise taxes.

After the U.S. Supreme Court’s South Dakota v. Wayfair decision, states can require remote sellers to collect sales tax based on sales volume alone. DC, Virginia and Maryland each have a dollar test and a transaction test, measured over the current or previous calendar year. Each is worded a little differently; see the table below.

Virginia requires a dealer to register within 30 days after establishing economic nexus. Some services are not subject to sales tax in these jurisdictions, so the first question is whether what you sell is taxable.

• Maryland exempts wages of DC and Virginia residents (and Pennsylvania and West Virginia residents) who did not maintain a place of abode in Maryland for 183 days or more.
• Virginia has reciprocity with DC, Maryland, Kentucky, Pennsylvania and West Virginia, with conditions.
• DC nonresidents file Form D-4A with the employer to show DC tax should not be withheld.

Employees who live or work outside these three jurisdictions follow different rules. We review each employee’s home and work locations when they are hired or move.

Virginia, Maryland and DC each offer a voluntary disclosure program for businesses that have not filed. A business generally qualifies only if the state has not already contacted it about the tax.

• Virginia: a typical agreement uses a three-year lookback, with tax and interest paid and some or all late penalties waived.
• Maryland: penalties are waived when tax and interest are paid through the program; the total tax for the lookback period must be $500 or more.
• DC: the lookback is generally three years or back to when nexus began, whichever is later, and OTR does not assess penalties on the disclosed periods.

In each program, a representative can make the first contact while the business stays anonymous. We prepare the nexus review, negotiate the agreement and file the returns. Our fees are transparent and fair, quoted upfront, in writing.