Tax Alert: Navigating State Tax Nexus
2/14/2012
Given current budget issues, many states are expanding their definition of what constitutes a taxable presence (e.g., “nexus”), which is creating significant risks for businesses operating in multiple jurisdictions. The threshold issue for these entities is to identify the states in which the entity must file tax returns and pay tax.
The basic rule is relatively simple: An entity is generally subject to tax in the state in which it is incorporated or “doing business.” The term “doing business,” however, is becoming extremely difficult to define. Historically, the presence of an office, property, employees, or other agents who are physically present in a jurisdiction would typically trigger tax “nexus.” Over the past few years, states have significantly expanded their definition of doing business to include an “economic” presence in addition to a physical presence.
While the location of property in a state where a warehouse is located, for example, might seem intuitive, other nexus-creating activities often include storing of raw material inventory and/or sales samples, and the in-state presence of company representatives/employees, including procurement, supply chain management, or sales representatives. In addition, the presence of digital goods, licensed software (intangible property), or even sales with no other physical presence is, in some jurisdictions, creating a taxable presence.
A nexus determination is not always a simple task, as each state has its own rules and administrative guidance that require a fact-sensitive analysis of an entity’s in-state activity. Aside from the varying interpretations throughout the states of what constitutes nexus, states are now expanding their reach and requiring tax returns based on economic (no physical presence), agency or affiliate, or a minimum gross receipts threshold. Indeed, the playing field is not level and with the budgetary issues most states are facing, we anticipate states will continue to enact, and enforce, aggressive nexus positions until there is a clear bright-line test of what constitutes a taxable presence.
If your company operates in multiple states, it should periodically review its state tax profile to ensure it is filing tax returns in all the required jurisdictions. Our State and Local Tax (“SALT”) professionals can work with you to review your operations and determine whether and where taxable nexus has been established. In addition, we may be able to provide guidance on how to structure your multistate activities to manage overall state tax nexus risks.
For more information, please contact Corey L. Rosenthal, JD, a J.H. Cohn director and member of the Firm’s SALT Practice, at crosenthal@jhcohn.com or 646-625-5729, or Patrick J. Duffany, CPA, JD, partner and director of the Firm’s SALT Practice, at pduffany@jhcohn.com or 860-368-3607.
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