Nexus is the term that describes the amount and degree of business activity that must be present before a state can tax an entity’s income.
In bank layman’s terms, nexus is the risk that a bank will have to pay taxes in a state, regardless of whether they have a facility in that state. This situation can – and does – impact financial institutions of all sizes.
Banks face nexus risk for a variety of reasons, including having a traditional physical presence in a state, whether via an office, property or employees. Beyond the physical factors, nexus also can occur due to unseen factors. Known as economic nexus, these are factors that establish tax liability by an out-of-state company based on factors aside from a physical in-state presence.