Nexus: To File or Not to File?
This time of year, or any time of year, a company analyzes what activities it has across the country and in different states. Did the activity change from last year? If so, what activity is the company engaging in, in that particular state? Is it enough to give the company "nexus" or a taxable connection to the state?
Different Types Of Nexus
The answer to that question is not as easy as you might think. The technically correct answer, these days, is that just about any activity in a state gives you nexus. There are different types of nexus, such as: due process clause nexus, commerce clause nexus, substantial nexus, economic nexus, etc.
The other question might be, is your activity protected by P.L. 86-272? To be protected by P.L. 86-272, the tax has to be an "income tax" or a "tax on income." That isn't always a clear cut answer either. After that, you have to be selling tangible personal property, and your only activity in the state can be solicitation of sales where the acceptance of the sale is done out of state. Lastly, the product should be mailed common carrier, not using your own trucks. Sounds easy?
Now, if your activity isn't protected under P.L. 86-272, is your activity de minimis? Meaning, is your activity in the state not substantial enough to create nexus? Again, these days, everything seems to be substantial enough as states are looking for revenue from out-of-state companies.
Technical vs. Practical?
Okay, so that is the technically correct answer. But what do companies do on a practical level? What level of activity does a company say, okay, we will file a return?
What if the apportionment factor is less than 1%? Is that the threshold that determines filing in state on a practical level? That probably isn't the sole factor, other factors might be the amount of tax at stake, the number of years of activity in the state, the future predicted activity in the state, etc. and the list goes on.
What I am trying to say, is that determining if you have nexus or not is a difficult answer. The next question that follows is, "should we file?" Now, I know state tax department of revenues don't like that question, but in any occupation there is the technically correct answer and the practical answer. Sometimes it just depends on what day of the week it is that determines the answer to the question.
Proactive vs. Reactive = Voluntary DisclosurePlease note: I am in no way condoning the "practical approach" I have stated above. It's just throughout my career I have experienced companies that play the "wait and see" game when their activity in a state is minimal. On the other hand, companies can choose to be proactive and start filing; or when they have had a presence in a state for a number of years and haven't filed, they may choose to file a "voluntary disclosure."
A voluntary disclosure allows a company to come forward to a state, file a few back year returns, and obtain some penalty and/or interest relief in the process. Usually the taxpayer and the state agree to only require four back years' worth of tax returns in exchange for future compliance.
Remember, a voluntary disclosure is only able to be utilized if the state has not already contacted you. If the state contacts you first, technically, the state can make the taxpayer file returns for all back years since the company started activity in the state. However, usually the state requires six or seven years of back tax returns. But unlike a voluntary disclosure, there is no relief for interest and penalties.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.