As they continue to seek new sources of revenue to deal with tight budgets, states are looking to expand their nexus with taxable activities, according to a recent comprehensive survey.

Nexus, the minimum amount of contact between a taxpayer and a state that permits the state to impose income tax or sales tax obligations on an entity, arises from both the Commerce Clause and the Due Process Clause of the Constitution.

The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it wishes to tax.

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.

Bloomberg BNA's just-released annual Survey of State Tax departments focused on the nexus consequences of Internet servers, alternative work arrangements, and transactions involving non-U.S. entities, according to Steven Roll, assistant managing editor of BNA's blog, State Tax.

Since state tax nexus can change from year to year as the result of administrative change, legislation or litigation, it can come as a surprise to even seasoned tax practitioners, he observed. Therefore it's instructive to take a look at some of the areas in which the scope of nexus is increasing.

The sales tax policy portion of the survey asked about sourcing rules, the treatment of social media coupons, and the extent to which each state conforms to the Streamlined Sales and Use Tax Agreement as of Jan. 1, 2013.

The survey found that reimbursing sales staff for the costs of maintaining an in-home office would trigger income tax nexus in 25 states. Soliciting services for six or fewer days would trigger nexus in every state but Hawaii, Massachusetts, Oklahoma, Rhode Island, Vermont and Virginia.

Attending a trade show for 14 or fewer days, meanwhile, is enough to trigger nexus in nine states, although California, New York City and Texas each said that they had a special exclusion for trade show participants. Conducting job fairs, hiring events or other recruitment activities would trigger nexus in 20 states.



Income tax nexus also would result from owning a Web server in their jurisdiction, according to 36 states and the District of Columbia. Several of these jurisdictions said that they would find nexus even if the corporation did not make sales into the state. Twenty-six jurisdictions would find nexus for an out-of-state corporation that leased space on a third-party's Internet server located within their borders.

The states still appear to be grappling over their positions on the nexus consequences of activities related to cloud computing, Roll indicated. "As compared with 2012, more jurisdictions said that nexus would arise from cloud computing activities," he said.

Nexus would also result for cloud-based service providers that lacked a physical presence within the jurisdiction, but had a substantial number of customers with billing addresses in the state or earned a substantial amount of revenue from customers in the state, 16 jurisdictions said, up from 14 in 2012. Thirty-six states, plus the District of Columbia and New York City, said that income tax nexus would result for an out-of-state corporation with employees who telecommute from homes within their jurisdiction. Joining these states for the first time was Virginia, which previously said that telecommuting would not trigger nexus.

Twenty-nine states said that sales tax nexus would result for a corporation that makes remote sales into the state and stores and ships items from an in-state distribution center. States reaching the opposite conclusions were Indiana, Maine, Nevada, Vermont, and West Virginia. Eighteen states - one less than last year -- said that a remote vendor that enters into affiliate agreements with one or more residents in the state would trigger nexus if sales attributable to all such arrangements totaled $10,000 or more.



With the increasing likelihood that the Marketplace Fairness Act will be enacted, Roll noted that the states first would have to simplify their sales and use tax regimes in accord with federal law, and only then would they be allowed to collect sales tax from remote retailers. "There is an express provision in the law that says it has no effect on nexus," he noted. "For example, if a remote seller collects sales tax, it would have no impact on income tax nexus or any other kind of nexus."

Although the Marketplace Fairness Act passed the Senate, it faces much tougher opposition in the House, said Jack Stewart, SALT senior manager at Pittsburgh-based Top 100 Firm Schneider Downs & Co.

"It would make the nexus issue moot for sales tax," he said. "But what is lost is the burden it will place on smaller companies. For the Amazons there's no problem, because they have the infrastructure, but it would be very much a problem for smaller online companies, even with the simplification standards in the bill. The million-dollar threshold [the act would require only remote sellers with more than $1 million in sales to collect and pay over sales tax from in-state residents] is not that big, and it will drag in a lot of companies that just don't have the infrastructure. And a lot right now are just trying to get their hands around Obamacare."

"The software tells you what the rates are, but what you can't find out are the different nuances and policies, some of them unwritten, that affect different issues," he added. "If you're a remote seller with a tax department of one person, these burdens will be difficult to overcome."

David Hryck, U.S. head of international tax at Chicago-based Dentons, agreed. "It means a lot more compliance burden for the small sellers," he said. "The larger firms have an advantage because they are already dealing with the issue. It really places an added economic burden on both the seller and the buyer, and could have an impact on sales and the overall economy."

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