The desire for revenue has led states to more aggressively assert nexus over out-of-state corporations in both the income tax and the sales and use tax arenas, according to Bloomberg BNA’s 16th Annual Survey of State Tax Departments.

The survey clarifies each state’s position on the gray areas of corporate income tax and sales and use tax, with an emphasis on nexus policies, or the minimum amount of contact between a taxpayer and a state needed for the state to impose a tax on the taxpayer.

“Given the growing need for revenue, states are increasingly looking for new and unique ways to tax businesses,” said George Farrah, editorial director of Bloomberg BNA Tax & Accounting.

This year, all 50 states and the District of Columbia participated in the survey.

New portions of the survey this year address treatment of pass-through entities, reporting federal changes, and sales tax refunds and qui tam (whistleblower) cases. The survey also features new sections for special industry sourcing rules, including airlines, radio and television broadcasting companies, and oil and gas.



“We come up with new questions by looking at hot topics in the world of state tax, as well as areas of particular complexity,” said Melissa Fernley, managing editor in state tax. ”We will add in a question or a series of questions so that we can get a straight answer from the departments, sometimes even before states release official guidance.”

“One growing area of complexity is nexus,” she said. “This year we asked the states whether employees flying into the state on a commercial airline for business purposes one to four times per year would create nexus in the state. Twenty states (two out of five) said that it would create income tax nexus. This at first seems surprising, but it indicates how states are looking to increase their revenue in any way possible, and are becoming more and more aggressive with their nexus policies.”

Public Law 86-272 further limits the states’ power to impose income tax by prohibiting taxing businesses whose only activity in the state is the solicitation of orders, so long as the orders are accepted at and delivered from a point outside the state. In 1992, the Supreme Court established a physical presence test in Quill for sales tax nexus, but left unanswered its relevance for income tax nexus.

Among states’ recent challenges to Quill are the following:

  • Ohio’s assertion of a theory of Internet nexus that would create taxable presence every time a retailer’s Web site is accessed by a customer in the state.
  • The challenge by the Alabama Department of Revenue by its proposed “Requirements for Certain Out-of-State Sellers Making Significant Sales into Alabama,” which would require out-of-state sellers to collect use tax from Alabama customers if they have substantial economic presence within the state.
  • A lawsuit filed by South Dakota seeking a determination that it may validly require out-of-state retailers to remit the state’s sales tax on purchases made into the state.

“It’s becoming increasingly popular for states to try to enlarge their tax base,” said Peter Stathopoulos, a partner and leader in Top 100 Firm Bennett Thrasher’s state and local tax practice. “It’s always easier to raise taxes on nonresidents because they are not voters and they won’t make things difficult, so many states want to shift as much as possible of their tax base to nonresidents. You do that by having a very low nexus standard. They’re always pushing the boundaries of minimum nexus to subject nonresidents to nexus — that’s the trend.”
The situation is akin to a speed trap designed to get revenue from nonresidents, according to Stathopoulos. “That’s why it’s important for courts to remember why we have the Commerce Clause in the first place,” he said. “States will always have the incentive to try to impose their tax burdens on interstate commerce, and that’s why courts should weigh the intent of the Commerce Clause, which was to prevent that.”



For the first time, the survey has been expanded to include the treatment of pass-through entities, Fernley noted.

“We asked questions about whether the state requires partnerships to apportion their income at the entity level, or whether the state requires partnerships to apportion their income at the owner level,” she said. “The states were split on this issue, but what was really interesting about this question was that several states responded ‘yes’ to both questions — which are conflicting answers. This is an example of how the survey highlights areas of complexity and uncertainty — sometimes the states aren’t even sure of their positions yet.”

Coverage of industry-specific sourcing methods also increased, with the addition of questions addressing airlines, broadcasting companies, and oil and gas. “Industry-specific sourcing methods are popular among the states because they allow the state to capture more tax from industries that do not follow the typical patterns of sellers of tangible personal property or services,” she said.

“Overall, the biggest takeaway is the continually increasing variety of state tax positions,” Fernley said. “Fewer states are applying physical presence nexus standards, while more are applying factor-based presence standards.”

The growing focus on remote sellers has led many states to develop special click-through nexus policies, or to impose nexus when a remote seller uses a contract carrier to deliver goods, for example. “One in four states said that if an out-of-state corporation makes remote sales into the state and delivers goods into the state via contract carrier, it would trigger nexus,” she said.

Additional survey findings include:

  • States are still unable to reach a consensus on how to source income, potentially leading to double taxation for companies. Complicating the issue are the myriad industry-specific rules imposed by the states.
  • States are split on whether they require pass-throughs such as partnerships, S corporations and REITs to apportion their income using the same rules as corporations. Only six states have rules that are specific to pass-throughs, so many taxpayers lack guidance in this area.
  • Adjustments to tax returns by other states, municipalities or foreign governments do not trigger a reporting requirement in most states.
  • Only one in 10 states has consumer protection laws that allow purchasers to bring class actions against vendors for over-collection of sales tax.

“Navigating through the states’ different tax policy positions has not gotten any easier,” said Fred Nicely, senior counsel at the Council on State Taxation. “What is nice about this survey is that businesses and practitioners have all the state tax administrators’ responses to an issue, and state-by-state comparisons can be made.”

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