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Nexus and Jurisdiction: I Owe Taxes Where? . November 15, 2011 Sarah Denton, Tax Supervisor . In General. Nexus – extent of contact a person, item of income, or transaction has with a state

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nexus and jurisdiction i owe taxes where

Nexus and Jurisdiction: I Owe Taxes Where?

November 15, 2011

Sarah Denton, Tax Supervisor

in general
In General

Nexus – extent of contact a person, item of income, or transaction has with a state

Jurisdiction – the right of states to tax a company and impose indirect tax burdens (collection of use tax or file information returns)

Different taxes have a different threshold standards for establishing nexus

  • Due Process Clause
    • Minimal connection requirement
  • Commerce Clause
    • State can’t regulate interstate commerce
  • P.L. 86-272
    • Income tax protection only
    • Protects solicitation activities
  • Significant Case Law
    • Income Tax
      • Wisconsin Department of Revenue v. William Wrigley Jr. Co. 505 US 214 (1992)
      • Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (1993)
    • Sales Tax
      • Quill Corp v. North Dakota,504 US 278 (1992)
      • National Bellas Hess v. Department of Revenue, 386 US 753 (1967)
current sale tax nexus standard
Current Sale Tax Nexus Standard

Quill Case is still the authority used for sales and use tax

Physical presence is required before taxpayer has to collect sales tax as long as it exceeds a “slightest presence”

Physical presence – office, warehouse, employees or agents

current income tax nexus standard
Current Income Tax Nexus Standard

No clear guidance as with Quill – P.L. 86-272 protects solicitation of orders for tangible personal property

Some state require physical presence others have adopted “economic nexus standard”

Need to do state by state analysis to ensure compliance

nexus other taxes
Nexus – Other Taxes
  • Franchise Tax:
    • no protection under P.L. 86-272
    • generally subject if nexus present for sales tax
  • Gross Receipts/Margin Tax:
    • Michigan, Texas, Ohio
    • no protection under P.L. 86-272
    • Minimal activity can establish nexus
agency or alter ego nexus
Agency or Alter Ego Nexus
  • Activities of the following can create nexus
    • Independent contractor
    • Sales rep
    • Related entity
    • Owner or director
  • Scripto Inc. v. Carson, 362 US 207 (1960)
    • Function not label rules determination
    • Unimportant if agent has several principals
affiliate or attribution nexus
Affiliate or Attribution Nexus
  • MTC Nexus Program Bulletin 95-1
    • Local service provider for out-of-state seller can cause nexus
  • MTC Affiliate Nexus Proposal – nexus if:
    • Out-of-state vendor is related to in-state vendor with physical locations
    • use identical or substantially similar name, tradename, trademark, etc. to develop sales
    • Borders Online, LLC v. State Bd of Equal., Cal. Ct. App. 1st District, No. A105488, 5/31/05
affiliate nexus
Affiliate Nexus
  • Following states have provisions where nexus exists if out-of-state retailer uses same trademark or uses same name (or both) as in-state entity
    • Arkansas
    • Illinois
    • New York
    • Oklahoma
    • South Dakota
    • Texas
economic nexus
Economic Nexus
  • Taxpayer exploits a state market through advertising or other activities and derives income from such activities
  • Idea has grown out of intangible property cases
    • Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (1993)
    • KFC Corporation v. Iowa Department of Revenue (No. 09-1032, 2010)
economic nexus1
Economic Nexus
  • How do you determine a threshold?
    • Quantify – MTC factor presence standard
    • Description –
      • Connecticut definition of substantial economic presence
        • a purposeful direction of business toward this state, examined in light of the frequency, quantity and systematic nature of a company's economic contacts with this state, without regard to physical presence, and to the extent permitted by the Constitution of the United States 
economic nexus2
Economic Nexus
  • Single Sales Factor Formula
    • Many states adopting for income tax
    • Shifts burden to out-of-state retailers
    • No dilution of factors for sellers falling under economic nexus
multistate tax commission mtc
Multistate Tax Commission (MTC)
  • Functions to promote uniformity across states and simplify multistate tax laws
    • 1990 National Nexus Program
    • 2002 Adopts factor presence nexus standard
      • $50,000 of property,
      • $50,000 of payroll,
      • $500,000 of sales, or
      • 25% of total for any one factor
    • 2004 Affiliate Nexus Proposal
multistate tax commission mtc1
Multistate Tax Commission (MTC)
  • States adoption of factor presence standard
        • Business Activity Taxes:
          • Ohio – July 1, 2005 – first state to adopt
          • Oklahoma – January 1, 2010
          • Washington – June 1, 2010 – B&O tax - $250,000 threshold for sales
          • Michigan – not conforming to MTC but nexus for MBT is gross receipts exceed $350,000
        • Income Taxes:
          • Connecticut –Jan 1, 2010
          • Colorado –April 30, 2010
          • California –January 1, 2011
streamlined sales and use tax agreement
Streamlined Sales and Use Tax Agreement
  • Created in 1999 – response to changing market
  • Purpose – to simplify sales and use tax collection and administration
    • Uniform tax definitions
    • Uniform exemption procedures
    • Rate simplification
    • Uniform sourcing (where the sale is taxable)
    • State level administration of all sales tax
streamlined sales and use tax agreement1
Streamlined Sales and Use Tax Agreement
  • 24 of 45 states with a sales tax have adopted SSUTA
    • Full member states - in compliance with the SSUTA through its laws, rules, regulations, and policies
      • 21 states – including GA (2011), NC (2005)
    • Associate member states - in compliance with the SSUTA except laws haven’t gone into effect but will within 12 months
      • Tennessee
internet tax freedom act
Internet Tax Freedom Act
  • Signed into law in 1998 under Clinton
  • Prohibits state and local taxation of internet access
    • Bit taxes, bandwidth taxes, e-mail taxes
  • Prohibits multiple or discriminatory taxes on electronic commerce
    • Does not protect from sales tax on internet sales
click through nexus
Click-Through Nexus
  • Nexus is established if an on-line retailer enters into an agreement with a resident to refer customer’s to the on-line retailer’s website for a commission
  • 2008 - New York Amazon Law – Sec. 1101(b)(8)(vi)
amazon case
Amazon Case
  • v. NYS (NY State Sup. Crt. 877 N.Y.S. 2d 842
    • Commerce Clause Challenge – court rules constitutional since required agreement with in-state rep
    • Due Process Challenge – rational connection exists through the contract
    • Equal Protection Clause – statue applied to all vendors with similar contracts
click through nexus laws
Click-Through Nexus Laws
  • Eight states have click-through nexus laws
    • Arkansas
    • California
    • Connecticut
    • Illinois
    • New York
    • North Carolina
    • Rhode Island
    • Vermont
click through nexus laws1
Click-Through Nexus Laws
  • Bills have been introduced in the following states:
    • Massachusetts
    • Michigan
    • Pennsylvania
    • Tennessee
  • Amazon’s response to laws has been to cancel relationships with in-state residents
  • California – reprieve for 1 year and start collecting 2013
amazon recent developments
Amazon – Recent Developments

Amazon has completely reversed position

Amazon will now offer to handle sales tax collection for merchants who sell through their site for a fee of 2.9% of the taxes collected

Amazon plans to roll out this optional service to vendors February 1, 2012

other issues
Other Issues
  • Digital products – treatment varies by state
    • Books
    • Music
    • Movies
  • Cloud computing
    • Tangible property or service
voluntary disclosure agreements
Voluntary Disclosure Agreements
  • Agreement with state to submit delinquent returns and tax payments in exchange for benefits and protections from state
  • Agreements vary from state to state but some common benefits include:
    • Limited lookback period
    • Waiving of penalties
what s ahead
What’s Ahead?
  • H.R. 1439 Business Activity Tax Simplification Act of 2011
    • Sales and income tax filing with physical presence
    • Extend P.L. 86-272 to services and intangibles
    • Physical presence test of 15 days or more in a state for income and sales tax
    • House Judiciary Committee voted favorably in July 2011
what s ahead1
What’s Ahead?
  • Main Street Fairness Act
    • Allows states to collect sales and use tax from on-line retailer if they have signed on to the Streamlined Sales and Use Tax Agreement
  • Marketplace Equity Act
    • States would have authority to require on-line sellers to collect sales tax
    • Provides flexibility in how states conform to the law