The State Tax Dragnet
June 19, 2013 12:32 PM
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Bloomberg BNA recently conducted its annual Survey of State Tax Departments, and the results show the many ways that states apply their definition of nexus –- the amount and type of activity a taxpayer has to engage in to be subject to a jurisdiction’s taxes –- to include activities you and your clients may not be aware of.
States are struggling to preserve an eroding tax base in a changing economy. It’s a trend that your clients should guard against.
(They should also bear in mind that different nexus standards apply to income tax and sales tax. For corporate income tax nearly every state determines nexus based on “economic presence,” which can include a wide range of business activities. For sales tax, states are required to determine nexus based on “physical presence.”)
To start, states are roping business taxpayers in with Internet-based activities, which may take a business across state lines without them even knowing it.
Just having data on a server leased in one of these states for a short period of time can create income tax nexus – though only 12 states and the District of Columbia said nexus would arise from using the services of a Web-hosting provider with a Web server in their jurisdiction.
Having telecommuting employees in a state – even if they don’t make sales there – can also create income tax nexus.
Most of those who say telecommuting employees create nexus also don’t care if the employee is only part-time.
If a company negotiates a loan with a bank in one of the states marked above, it may well create income tax nexus.
In addition to 15 states saying that having a general partnership interest would create sales tax nexus, 11 states said it might also be created by a limited partnership interest or a non-managing LLC interest.
In most of those states where foreclosing on property creates income tax nexus, they don’t care whether you foreclose on a single property, or more than one.
Making sales through an 800-number creates income tax nexus in these eight states – while having a local phone number that’s forwarded elsewhere ups that total to 11 states, and just having a local listing can create nexus in 13 jurisdictions.
Unlike the federal government’s treatment of non-U.S. businesses, most states don’t require a “permanent establishment” (like an office, construction site, etc.) to create income tax nexus. Almost half, though, extend Pub. L No. 86-272 protection to them, which prohibits income-based taxes against businesses that sell tangible personal property but whose sole activity in the state is to solicit orders.
