STATE TAX
State Tax Nexus: Frequently Awkward Questions Mark Hugh, CPA
In the last two years, 43 states have expanded their rules regarding tax “nexus”, whether a business has to collect and/or pay state taxes to a state. The requirement for compliance has exploded with now smaller businesses having multiple tax connections to multiple jurisdictions, even with very limited activity and very limited contact. If you have not reviewed your filing obligations within the last two years, it is important to review them immediately. As a guide we present the following FAQ: Frequently Awkward Questions.
What is nexus?
What is economic nexus?
A “sufficient link” or “tie” with the power of a jurisdiction to tax. Nexus is created by transitory activities such as visits to a state, as well as permanent activities such as having an employee or inventory in a state, or recently, merely a certain amount of transactions or sales made in a state.
Affirmed by the U.S. Supreme Court in Wayfair et. All v. South Dakota (2018), a seller with no physical presence in a state is required to collect or pay taxes to a state if sales or transactions sourced to a state are over certain annual thresholds.
Is this a sales tax thing or an income tax thing? Nexus is an every "thing". These rules apply to all taxes, and taxing authorities may use different standards internally for different types of taxes.
South Dakota required sellers with no physical presence to collect and remit sales tax if annual South Dakota sales exceeded $100,000 or 200 or more annual South Dakota transactions.
“Physical presence” or “economic nexus” and states are free to pick and choose one or all. Many states have chosen both.
This has created an explosion of new nexus standards: since 2018, 43 of the 45 states that impose sales taxes have adopted economic nexus standards, many similar to South Dakota’s.
What is physical presence?
Are there any federal protections?
“Physical presence” is generally property or employees/independent contractors within a state on even a transitory basis, or in-state activities to establish or maintain a market.
One very old federal law still applies to state income taxes. The Federal Interstate Income Act of 1959, known as P.L. 86-272, provides a safe harbor for taxes based upon net income. It provides a state income tax safe harbor for: soliciting orders; for sales of tangible personal property; with the orders sent outside a state for acceptance; and filled by shipment or delivered from outside a state.
What are common nexus standards?
In Scripto Inc v. Carson (1960), the U.S. Supreme Court held that third parties create nexus and whether salespeople were employees or not was “without constitutional significance”. It noted “to permit such formal ‘contractual shifts’ to make a constitutional difference would open the gates to a stampede of tax avoidance”.
What are examples of physical presence? Illustrations: © iStock/ojogabonitoo
Property in a state on a permanent or temporary basis; an employee in a state on a permanent or temporary basis; soliciting sales in a state by an employee or by using an agent; or installing, assembling, or repairing goods in a state.
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The Washington CPA Fall 2020
www.wscpa.org
