Crossing State Lines - Beware of Economic Nexus – The New Standard?
As clients continue to cross state borders and state deficits soar, nexus and what establishes nexus, has become a hot topic. For many years, certain out of state activities were protected by Public Law 86-272. PL 86-272, as described below, provides companies income tax protection for their solicitation activities.
PUBLIC LAW 86-272
Jurisdiction to tax is not present where a state is prohibited from imposing its tax because the
Corporation’s activities do not exceed the standard of mere solicitation of sales established by
Public Law 86-272. Public Law 86-272 provides in pertinent part:
No state, or political subdivision thereof, shall have power to impose a net income
tax on the income derived within such state by any person from intrastate commerce if
the only business activities within such state by or on behalf of such a person during the
taxable year are either, or both, of the following...
1. The solicitation of orders by such person, or his representative, in such State for sales
of tangible personal property, which orders are sent outside the State for approval or
rejection, and, if approved, are filled by shipment or delivery from a point outside of the
2. The solicitation of orders by such a person, or his representative, in such State in the name of or for the benefit of a prospective customer of such a person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph.
As states try to find ways to decrease their deficits and balance their budgets, new standards are being developed to circumvent this protection. Enter the economic presence standard. Economic presence nexus focuses on out of state companies who profit from a state’s commerce but does not have the physical presence necessary to establish income nexus. For example, Ohio’s Commercial Activities Tax taxes a company’s gross receipts derived in the state. Michigan also incorporates an economic nexus standard for establishing tax liability. The Michigan Business Tax is applicable if an entity derives $350,000 in receipts from the state.
The Multistate Tax Commission has adopted the following economics standards -
Substantial nexus is established if any of the following thresholds is exceeded during the tax period:
(a) a dollar amount of $50,000 of property; or
(b) a dollar amount of $50,000 of payroll; or
(c) a dollar amount of $500,000 of sales; or
(d) twenty-five percent of total property, total payroll or total sales.
Other states are establishing taxes such as net worth taxes to avoid the protection of PL 86-272. Therefore, a company could have an employee in another state whose activities are limited to solicitation and not be subject to income tax liability. If the state has a franchise tax, these activities may expose the company to the franchise tax.
The multi-state compliance area has become increasingly complicated and requires an ongoing awareness of changes in state tax law and applicable case law. Court cases have had significant influence on the way practitioners have interpreted state tax law and advised their clients. As this area grows, I predict there will become a tremendous need for dedicated state and local tax law professionals. The ever changing tax law at the federal and state levels keeps accountants, especially tax accountants, in high demand. Indirectly, the state tax courts and politicians are providing job security, thank you!
Ann Callari, CPA, MST is a Senior Tax Manager at the NJ Regional Firm, Rotenberg Meril Solomon et al in Saddle Brook, NJ. Ann founded and heads the firm’s tax department. She specializes in corporate and partnership taxationas well as multi-state compliance issues. Ann has always worked in public accounting and enjoys the tremendous challenge of staying abreast of the ever-changing tax laws. She feels public accounting keeps you sharp and on your toes. Ann is a working mother who continually juggles the demands of the children she adores and the career that she is passionate about. She looks forward to sharing her tax knowledge and professional experiences with her fellow bean counters and encourages a healthy exchange of ideas and commentary.