The State Tax Dragnet

Bloomberg BNA’s annual state tax survey shows how the states grab business taxpayers

Bloomberg BNA recently conducted its annual Survey of State Tax Departments, and the results show the many ways that states apply their definition of nexus –- the amount and type of activity a taxpayer has to engage in to be subject to a jurisdiction’s taxes –- to include activities you and your clients may not be aware of.

States are struggling to preserve an eroding tax base in a changing economy. It’s a trend that your clients should guard against.

(They should also bear in mind that different nexus standards apply to income tax and sales tax. For corporate income tax nearly every state determines nexus based on “economic presence,” which can include a wide range of business activities. For sales tax, states are required to determine nexus based on “physical presence.”)

To start, states are roping business taxpayers in with Internet-based activities, which may take a business across state lines without them even knowing it.

Just having data on a server leased in one of these states for a short period of time can create income tax nexus – though only 12 states and the District of Columbia said nexus would arise from using the services of a Web-hosting provider with a Web server in their jurisdiction.

Having telecommuting employees in a state – even if they don’t make sales there – can also create income tax nexus.

Most of those who say telecommuting employees create nexus also don’t care if the employee is only part-time.

If a company negotiates a loan with a bank in one of the states marked above, it may well create income tax nexus.

In addition to 15 states saying that having a general partnership interest would create sales tax nexus, 11 states said it might also be created by a limited partnership interest or a non-managing LLC interest.

In most of those states where foreclosing on property creates income tax nexus, they don’t care whether you foreclose on a single property, or more than one.

Making sales through an 800-number creates income tax nexus in these eight states – while having a local phone number that’s forwarded elsewhere ups that total to 11 states, and just having a local listing can create nexus in 13 jurisdictions.

Unlike the federal government’s treatment of non-U.S. businesses, most states don’t require a “permanent establishment” (like an office, construction site, etc.) to create income tax nexus. Almost half, though, extend Pub. L No. 86-272 protection to them, which prohibits income-based taxes against businesses that sell tangible personal property but whose sole activity in the state is to solicit orders.



Year-End Tax Tips

Steps to take before the New Year for a better tax return in 2017

View the slideshow >>


2017 in Numbers

Your peers' plans for the next year in accounting

View the slideshow >>


Meet the 2016 Best Midsized and Large Firms to Work For

An inside look at some of the best midsized and large workplaces in accounting

View the slideshow >>


Meet the 2016 Best Small Firms to Work For

An inside look at some of the best small workplaces in accounting

View the slideshow >>


10 Year-End Tax-Planning Tips for Individuals

Grant Thornton has released a collection of Year-End Tax Guides for 2016. Here are 10 of the most important 2016 tax-planning considerations for individuals.

View the slideshow >>


10 Ways to Lose a Client

BKR International shares the quickest ways to shrink your business.

View the slideshow >>


The 2016 MP Elite

The fifth edition of our annual report highlights eight outstanding accounting firm leaders.

View the slideshow >>


CPAs Giving Back

Illinois CPA Society holds its 7th annual CPA Day of Service

View the slideshow >>


10 Habits That Threaten Your Firm’s Data Security

EFilecabinet CEO Benoy Tamang shares the bad practices that are endangering your firm’s and your clients’ critical information

View the slideshow >>


7 Things You Need to Know About Private Tax Collectors

H&R Block’s Jim Buttonow shares critical facts about the upcoming IRS program

View the slideshow >>