How Interstate Trucking Can Awaken Tax Nexusby
Being a Star Wars fan and with The Last Jedi coming out, I thought of a unique way to explain nexus created by your clients who use their own company’s trucks and realized this could be more challenging than avoiding a Jedi mind trick.
Much like the force, nexus is all around us and can be difficult to grasp. Those that deal with the financial side of a business and those in the accounting area are familiar with the basics of nexus.
A business that has inventory, fixed assets, rents an office, warehouse or some other type of property and/or has employees working in a state, nexus could be created. Others are aware that even if none of these factors exist, just meeting a certain threshold of sales/revenue in a state could create nexus.
If nexus is created, the business probably has a filing requirement. Then there are the exceptions to these rules otherwise known as Public Law 86-272 which provides an extremely limited get out of jail free card. Even when a business does qualify for this exception, some states still require the company to file a business tax return and pay the minimum tax.
Now let’s focus on a company that believes it is operating only in their home state. The company owned trucks go through many states to deliver goods to their ultimate destinations.
Based on nexus standards this business would only need to file a business tax return in the home state, right? Be careful, because as Admiral Ackbar said in Return of the Jedi, “It’s a trap!” Delivering to a state, picking up goods in a state and/or merely passing through a state may create nexus.
Nexus is created in more than half of all states if company owned trucks are used to deliver or pickup goods. These are: AL, AZ, AR, CA, CO, DE, DC, FL, GA, HI, KY, LA, MD, MI, MN, MS, MO, MT, NE, NH, NJ, NY, NC, ND, OK, PA, RI, TX and WV.
The following states create nexus if company owned trucks are merely passing through the state without delivering or picking up goods: AL, AZ, CO, FL, ID, IL, IN, IA, LA, MD, MA, MI, MO, MT, NM, ND, OK, OR, UT and VA.
Most of these states base the nexus on the number of times a year the truck drives through that state. For example, a truck would need to pass through IL more than 6 times per year to create nexus in IL.
So the question becomes, what are the odds that the company is going to get caught. As Han Solo said in Return of the Jedi, “Never tell me the odds.”
There are multiple ways for a state to discover truck presence including when a truck stops at a weigh station. That is when the truck driver might say “I have a bad feeling about this” which is a line said in every Star Wars movie.
The state will check its records to see if the company of that truck had registered to do business in that state and if the company is not registered or filing a tax return, the state could send a questionnaire that tries to determine if nexus has been created, even though in most cases the state already has reason to believe the business has nexus in that state.
So now a company may determine that they have filing requirements in more than the home state. The company can continue to roll the dice and hope to not get caught.
But just like Darth Vader tried to hunt down all remaining Jedi to eliminate them, states will continue to crack down on trucks entering their states and have all companies be in compliance with the nexus standards of that state. And, states are being more aggressive in looking for opportunities to increase revenue.
If it is determined that the company is going to file a business tax return in another state(s), the company should register to do business in the state. In addition, most states now apportion income based on sales but this may not apply when dealing with trucking related companies.
The following states require a company that uses its own trucks to use a special apportionment formula for revenue which is usually based on mileage driven: AL, AK, AR, CA, CO, CT, FL, GA, ID, IL, IN, IA, KS, KY, LA, MD, MA, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, PA, SC, TN, UT, WV and WI.
May the force be with you (and your clients).
The original article appeared on the Mazars Ledger blog site.
Ralph is Senior Tax Manager at Mazars USA LLP. His specialities include tax planning, individual income taxation, trusts, partnership taxation, corporate taxation, day traders, nonprofit, state and local taxation, foreign, tax audit defense, high net worth individuals, accounting & bookkeeping services, formation/acquisition/disposition of...