“Nexus” is a Latin term that means connection and is key to understanding state and local tax obligations for businesses. A state can impose tax if a business has a sufficient connection, or nexus, with that state. While each state defines nexus differently, physical presence, such as employees, contractors, inventory, or property located within the state, typically establishes nexus.
Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, nexus rules have expanded to include economic nexus. Today, every state with a Sales and Use Tax requires businesses to comply with sales tax requirements if their sales in the state exceed certain thresholds, typically $100,000 annually. Some states also have a volume threshold of 200 annual transactions, but many states are now phasing out the volume thresholds and relying solely on sales thresholds. For business taxes like corporate income or franchise tax, states create economic nexus is created in a state where a company does business, even without a physical presence. Given the variability and ongoing changes in nexus determinations, it is imperative for businesses to stay informed about the specific requirements in each state to ensure compliance.
Even before generating profits, establishing nexus in a state can trigger tax filing and payment obligations for pharmaceutical and life science companies. A handful of states impose taxes that are not based on income or profitability. For example, Washington’s Business & Occupation (B&O) tax and Ohio’s Commercial Activity Tax (CAT) are both gross receipts taxes, meaning they apply to total business receipts rather than net income. Several states impose franchise taxes on net worth, capital, or a minimum fee, which can apply once a company registers or does business in the state.
Pharmaceutical and life science companies can establish nexus through a range of activities, including employing staff, engaging contractors, maintaining offices, and licensing trademarks or patents to in-state parties. Using third-party clinical research organizations (CROs), storing inventory in third-party warehouses, and employee travel for business purposes can also trigger nexus. Because of the wide range of activities and the multistate nature of the industry, it is important for life science companies to monitor both physical presence and economic nexus considerations from an early stage.
Pharmaceutical and life science companies should carefully assess their activities and nexus footprint in each state, as tax obligations can arise from non-income-based regimes even in the absence of revenue. Many states let companies carry net operating losses forward to offset future profits, but only if they file the corresponding tax returns. Some states also offer research tax credits or incentives to attract R&D, making it important to assess your state tax footprint early.
In addition to tax nexus, pharmaceutical and life science companies must also be aware of industry-specific regulatory requirements. State Boards of Pharmacy oversee the registration and regulation of pharmacies, pharmacists, and related activities within each state. Companies must register to operate a pharmacy, dispense or distribute prescription drugs, and employ pharmacy staff. Drug manufacturers, retailers, wholesalers, and importers/exporters also need the appropriate licenses from the State Boards of Pharmacy.
Obtaining registration with a State Board of Pharmacy may also establish tax nexus within that state. By registering with a state agency, a pharmaceutical or life sciences company demonstrates a deliberate presence and engagement in the state’s market, which is a key factor in creating nexus for state tax purposes.
Beyond pharmacy regulation, there are also broader business compliance obligations. The Secretary of State (or equivalent agency) is the chief administrative officer responsible for maintaining official business records and overseeing the registration of companies operating within the state. Businesses must register with the Secretary of State when they form in a state or start activities like opening an office or hiring employees. Such registrations can also create nexus for state tax purposes.
In summary, understanding and managing nexus is essential for pharmaceutical and life science companies, particularly given their complex operations across multiple states and extended pre-revenue phases. Compliance with state tax obligations, registration requirements with State Boards of Pharmacy, and Secretary of State filings are critical to maintaining good standing and avoiding penalties. Early and ongoing assessment of nexus and related regulatory obligations enables companies to navigate the evolving tax landscape effectively and position themselves for long-term success.
For further information or assistance with any questions you may have, please contact your WG advisor.
