Jan 19th 2011
In a recent Iowa Policy Letter (10240041) dated December 16, 2010, the Iowa Department of Revenue made some interesting statements regarding nexus. Before I describe those statements, remember a "policy letter" is an informal opinion of the author and is only applicable to the factual situation referenced and to the statutes in existence at the time of issuance. Because of this, the Department could, in the future, take a position contrary to that stated in the letter. Any oral or written advice or opinion rendered to members of the public by Department personnel that is not pursuant to a Petition for Declaratory Order under 701 IAC 7.56 is not binding upon the Department. Facts The taxpayer, an LLC, is a registered agent service which provides services to clients in all fifty states. Services include providing a physical address to clients where a process server could deliver a lawsuit on the client's behalf. The LLC subcontracts with a local law firm, and this law firm scans documents if necessary. All property and employees of the LLC are located in Idaho. The LLC is registered with the Iowa Secretary of State's office. Department's Opinion The Department contends that physical presence is not required to establish corporation income tax nexus. A number of courts have determined that physical presence is not required for corporation income tax. See Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E. 2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993); Kmart Properties Inc. v Taxation & Revenue Department of New Mexico, 131 P. 3d 27 (N.M. Ct. App. 2001), rev'd on other issues, 131 P. 3d 22 (N.M. 2005);Secretary, Department of Revenue v. Gap (Apparel), Inc., 886 So. 2d 459 (La.Ct.App. 2004) , A & F Trademark v. Tolson, 605 S. E. 2d 187 (N.C.App. 2004), cert denied 126 S.Ct. 353 (2005); Lanco, Inc. v. Director, Division of Taxation, 879 A. 2d 1234 (N.J.Super.A.D. 2005), aff'd, 908 A.2d 176 (N.J. 2006) (per curiam), cert denied 127 S. Ct. 2974 (June 18, 2007), and Geoffrey Inc. v. Oklahoma Tax Commission, 132 P. 3d 632 (Okla. Ct. Civ. App. 2005), cert denied (Mar. 20, 2006), as corrected (Apr. 12, 2006); and FIA Card Services, Inc. v. Tax Comm'r, 640 S.E.2d 226 (W. Va. 2006), cert. denied, 127 S. Ct. 2997 (June 18, 2007). As noted above, the United States Supreme Court declined to review several of these state court decisions, which results in the Department's contention that physical presence is not required for corporation income tax. It should be noted that Iowa Code § 422.33 was amended in 1995 to state that corporations having income from intangible property located or having a situs in Iowa are required to file Iowa corporation income tax returns. Finally, the FIA Card Services case stated that a corporation's intentional exploitation of a state's market was sufficient to create nexus consistent with the Commerce Clause of the United States Constitution. In addition, Iowa Administrative Rule 701 IAC 54.6 states the following related to the sourcing of income from services: 701—54.6(422) Apportionment of income derived from business other than the manufacture or sale of tangible personal property. Income derived from business other than the manufacture or sale of tangible personal property shall be attributed to Iowa in the proportion which the Iowa gross receipts bear to the total gross receipts. Gross receipts are includable in the numerator of the apportionment factor in the proportion which the recipient of the service receives benefit of the service in this state. Therefore, the Department contends that the LLC is subject to Iowa income tax since physical presence is not required to assert nexus for Iowa, and the LLC is exploiting the Iowa market. In addition, any receipts received where the benefit of the service is received in Iowa would be considered an Iowa receipt. So What? Well, as I stated earlier, this opinion or "policy letter" is not binding on the Iowa DOR. However, it does provide insight into how the Iowa DOR may make nexus determinations in regards to other taxpayers. In other words, physical presence appears to NOT be required. Simply an "exploitation of the Iowa market" is required. It is advisable that companies review their activities in Iowa to determine if any action is necessary to minimize tax exposure.