Navigating Nexus: Multistate Business Operations Face a Wide Variety of State Taxes
EXECUTIVE SUMMARY * Because state business taxes differ in type and standards, multistate enterprises need to assess their nexus with respect to each state in which they do business. If they belatedly discover nexus exists, they also need to know about amnesty and voluntary disclosure programs available in most states. * Businesses generally have nexus for sales and use taxes when they have a physical presence in a state. Owning or leasing real or personal property in a state can establish physical presence, but less obvious nexus-creating activities can include providing services and making deliveries other than by mail or common carrier. * Nexus for state income taxes generally requires that income be derived from sources within a state or via activities in the state beyond soliciting orders for sales of tangible personal property that is shipped from outside the state. However, a number of states levy franchise taxes for the privilege of doing business in those states and variants of gross-receipts taxes, for which nexus is similar to that for sales taxes. Also, some states have asserted "economic nexus" based on an economic connection to the state independent of any physical presence. * Activities of an agent or affiliate can create nexus. New York and an increasing number of states have asserted nexus where state residents act as affiliates of an online retailer by posting on their own websites hyperlinks to the retailer's site. * In a voluntary disclosure agreement, a business comes forward and agrees to submit delinquent returns and tax payments, in exchange for the state taxing authority's limiting the "lookback" period and waiving penalties. * Penalties also are commonly abated, and sometimes inter est, in tax amnesty programs, which are offered only periodically, are typically available for a limited time, and generally do not limit the lookback period. ********** [ILLUSTRATION OMITTED] Nexus can be a hidden danger for a company with a multistate presence. Certain activities might cause nexus for sales and use tax, income tax, franchise tax or other business taxes. One key to successfully navigating these widely varying provisions is for tax professionals to review the statutes and rulings of each state in which a business client might be considered as doing business. The connection might not be obvious, particularly for sales and use tax. And some states levy types of taxes that might not be familiar to business owners and managers, such as those on gross receipts or business activity. Another, less well-known key is familiarity with states' provisions for voluntary disclosure and amnesty. Businesses might need a CPA experienced in negotiating with the state or states in question to use these tax controversy resolution tools, especially if they didn't think they had nexus for an earlier period but belatedly determine that they did. NEXUS AND TYPES OF TAX Sales tax. Federal law requires a state to have "substantial nexus" to a seller to require that seller to collect sales and use tax. The definition of "substantial nexus" has always been a subject of contentious debate between states and businesses. Generally, however, it means having a physical presence in the state, whether by salesperson, contractor, location or a number of different events (see Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967)). Owning or leasing tangible personal property or real property in the state is usually considered to establish sales-and-use-tax nexus. Depending on the state, some other common activities that can result in nexus are listed in the sidebar, "Nexus Study Overview and Checklist." Income, franchise and other business taxes. Having nexus for sales tax purposes does not necessarily mean a taxpayer will have nexus for income tax purposes, as a higher level of business activity may be required. …