State Income Tax Nexus

Nexus is generally defined as the required amount of contact between your business and the state that is necessary to impose a tax on your organization. Nexus is defined by state statute, case law and state regulation. Nexus varies from state to state and varies by tax types (i.e. sales tax versus income tax versus franchise tax) making nexus a very complex but very important area in the multi-state tax arena.

The Due Process Clause: Found in the 14th amendment of the U.S. Constitution,  requires at least a minimal connection between a state and a transaction, property, or party that the state seeks to tax.

The Commerce Clause: The commerce clause limits states from levying a tax if it interferes with interstate commerce while granting certain powers to congress.

Quill v. United States: In Quill, the US Supreme court ruled that a physical presence in the state (employees or property) is required before a USE TAX could be assessed by the state, but implied that the physical presence test might no apply to other types of tax. Because of this implication some states argued the income tax can be assessed even without a physical presence.

Nexus through an Intangible Presence (Geoffrey Inc. v. South Carolina): Geoffrey Inc. holds the trademark for Toys “R” Us. Geoffrey licenses the rights to use the trademark and trade name of Geoffrey the Giraffe to the franchised retail stores. Under the license agreement Geoffrey receives a 1% royalty on net sales by the retail stores. Geoffrey Inc. does not have any physical presence in North Carolina, however, the state supreme court of South Carolina  ruled there was a substantial presence within the state, although intangible, and that Geoffrey had purposefully directed its business activities at South Carolina’s market and ultimately taxed that royalty within the state. Several other cases in other State’s have also flat out rejected the physical presence requirement set out under Quill since it was directed only at use taxes. For example, New Jersey issued a Technical Advisory Memorandum in January 2011 stating that taxpayers performing services and domiciled outside of the state that solicit business within the state or derive receipts from sources within the state are liable for the New Jersey Corporate Business Tax.

Multi State Tax Compact (MTC) Nexus Standard: Under the MTC substantial nexus exists when either property, payroll or sales within the state exceed certain thresholds. Currently the thresholds are $50,000 of property, $50,000 of payroll, $500,000 of sales or 25% of total property, payroll or sales.

Public Law 86-272: In General, PL 86-272 protects the solicitation of orders for the sale of tangible personal property. Therefore, orders must be approved out of state and filled for delivery from a point outside the state.  The term solicitation must also be defined. Wisconsin Dept. of Revenue v. William Wrigley, Jr., lays out some activities that are protected and not protected under PL 86-272. Protected activities include recruiting, training, and evaluating your sales team, setting up display racks, holding sales meetings at places not owned by your company (hotels are a safe bet), storing promotional materials and general advertising. Unprotected activities include replacing stale products, stocking display racks through the use of agency stock checks, collecting funds, maintaining an office on the company’s behalf, picking up damaged product and providing non-sales representatives and technical assistance to customers.

To be continued……

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