DOES YOUR BUSINESS HAVE
A business that sells to customers in
many states may be exposed to a variety of multistate tax
issues. “Nexus” is a concept that is increasingly becoming a
hot-button issue for companies with a multistate presence.
As many states grapple with budget
deficits, nexus is gaining momentum as a means by which a
state or other jurisdiction may claim that a particular
activity of a company is subject to tax. Activities of a
company in a given state where the business has a presence
may be considered sufficient — from the taxing state’s
perspective — to cause a strong enough connection to impose
any one or more of a number of taxes.
Businesses operating in a variety of
states should consult with their tax professional as to
whether taxes or other levies may be triggered in each state
in which it operates. Not every state has each of the
following taxes. For instance, many states do not impose an
income tax and a franchise tax.
Sales and Use Tax. Generally, under federal law, a state
must have “substantial nexus” to a seller in order to
require the collection of sales and use taxes imposed on
buyers upon the sale of goods or merchandise in its state.
Over the years, “substantial nexus” has been defined
generally as a company’s having a
physical presence in the state, as determined by one or more of a
number of factors, including the presence of a salesperson
or a contractor or a location within the state.
You should determine
whether any of your business’ activities creates substantial
nexus with each state in which it does business. In your
Consider the activities that
you are engaged in that may rise to the level of nexus;
Determine which states
consider the activities a sufficient connection; and
Prepare for the possible
exposure to uncollected tax by conducting an analysis
regarding those states where substantial nexus exists.
An added complication to
the nexus concept is that, even if your out-of-state
business activities do not result in exposure to one type of
tax, it does not necessarily mean that those activities
aren’t sufficient for the state to impose other taxes.
Income Tax. Generally, a higher level of business
activity than what constitutes nexus for sales tax must be
present in a given state for it to also impose an income
tax. As a general rule, if an out-of-state business engages
in any of the following activities, it is generally
considered to have sufficient state income-tax nexus:
- Derives income from sources within the
- Owns or leases property in the state;
- Employs personnel who engage in
activities that go beyond those protected under federal
interstate commerce laws.
Merely selling into a state
should not be enough to cause nexus for income-tax purposes.
Under federal law, a state may not impose a tax on
out-of-state taxpayers based on or measured by
net income where
the only activity connecting it to the state is the
solicitation of orders for sales of
property — as long as such orders are approved and
shipped from outside the state trying to impose the tax.
Generally, tangible personal property is an asset that can
be touch or moved. Examples include furniture, jewelry,
clothing, artwork, or household goods.
As a result, businesses
must be vigilant against the potential exposure to income
tax as it relates to a business’ solicitation for the sale
of intangible property (such as goodwill, trade secrets, patents,
trademarks, or copyrights), real estate, or services.
Franchise Tax. A business’ protection under federal law
against the imposition of a given state’s income tax does
not necessarily insulate it from franchise tax. Franchise
tax is typically imposed based on non-income factors, such
as net worth or apportioned capital. Generally, franchise
tax is exacted on a business entity for the
privilege of doing
business in the state. If a business has substantial nexus
for sales- and use-tax purposes, it may well have exposure
to a state’s franchise tax.
Gross Receipts or Other Business Taxes. The concept of
basing tax on non-income factors is a growing trend. Many
states have passed laws that base the imposition of such a
tax on measuring gross
receipts generated from the seller from:
The sale of products or
services within the state;
The value of a business’
transactions within the state; or
Some other modified base.
gross-receipts taxes imposed on sellers are separate from
sales and use tax imposed on buyers — even though the same
sales receipts give rise to both tax liabilities.
A Review Is Needed
Many states have expanded their tax
reach by imposing a variety of taxes based both on income
and non-income factors. Business taxpayers should carefully
consider their potential exposure to any one or more of the
taxes discussed in this article in each state in which it
does business. Need assistance determining your multistate
tax obligations? Let us help.