Nexus - the amount of contact between a taxpayer and the state that subjects the taxpayer to taxation - continues to vary widely from state to state. In addition, the nexus for sales and use tax differs from the nexus for income tax.The nexus requirement is derived from the language in two different places in the Constitution - the commerce clause, which prohibits states from unduly burdening interstate commerce, and the due process clause, which requires a minimum connection between a state and an entity it seeks to tax.

Since nexus is a dynamic factor in state taxation - it can change from year to year within a state due to administrative changes, legislation or litigation - it can surprise even the most astute state tax specialist. In fact, it is possible for a business to accidentally trigger nexus, resulting in unexpected income tax or sales tax liability, according to George Farrah, executive editor of state taxes for BNA.

BNA conducts an annual survey of state tax departments to clarify state positions on the gray areas of corporate income and sales and use taxes, according to Farrah.

"The survey results help practitioners gauge how the states will handle issues for which there is otherwise limited information," he said. "Because taxpayers want more guidance from the states in understanding the types of activities that trigger taxability in a state, the survey plays a crucial role in providing important details. It's also a great way for the states to disseminate information."

Farrah said that only Pennsylvania did not participate in BNA's seventh annual survey.

"A valuable component to the survey is not simply the state responses, but the footnotes they provide that offer insight into how state officials are thinking," said Farrah. "For example, California indicated in a footnote that it intends to treat the new Texas margin tax as an income-based tax, as opposed to a gross receipts tax, which makes it nondeductible for California purposes."

"Another example is the Virginia response on whether a telecommuter in Virginia subjects a state to income tax nexus," he added. "They didn't answer the yes or no question, but in a footnote they said that a significant issue is whether the employer reports the telecommuter's wages for Virginia unemployment compensation tax purposes."

Each survey question asked the states whether a particular activity, by itself, would create nexus. Among the survey results:

* There is a wide disparity as to whether income tax nexus could result from general business activities such as registering to do business, having a Web site server located in the state, or maintaining an in-home office in the state. There was also considerable variance on whether merely having a phone listing in a state would trigger nexus.

* Fifteen states said that sales tax nexus would result for an out-of-state corporation that sells tangible personal property via a Web site that is maintained on a server located within their borders. Last year, only 13 states said so.

* Only 11 states - down from 13 - said that sales or use tax nexus would be triggered by virtue of an out-of-state corporation's participation in a trade show within their borders.

Farrah noted that case law has developed separately for income tax nexus and sales tax nexus. "Although they're both bound by the Constitution, the Supreme Court hasn't joined them," he said. "A lot of people would like to see the court address the issue for both."

"There's also Public Law 86-272, which adds another element to income tax nexus," he explained. That law 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.

For the first time in its surveys, the same number of states as in the previous year - 37 - said that an employee who telecommutes from a home located within their borders would create nexus for an out-of-state employer. The consistent result on the telecommuting question suggests that the states have solidified their positions on an issue that appeared to be in flux in previous surveys, according to Farrah.

In 2001, only 32 states said that nexus would be triggered by a telecommuting employee. The high was in 2004, when 40 states said that nexus would arise from telecommuting.


Nearly all the states agreed that registration alone would not subject an out-of-state corporation to their income tax. The seven exceptions were the District of Columbia, Florida, Kansas, Kentucky, Massachusetts, New Mexico and Ohio. California and Tennessee both noted that while registering to do business with their jurisdictions would not trigger nexus, it would subject an out-of-state corporation to their respective minimum franchise taxes.

In response to whether traveling through their borders six or fewer times per year in taxpayer-owned trucks without picking up or delivering goods would create nexus, eight states said that it would - two less than last year.

Ten states - one less than last year - would claim nexus if an out-of-state corporation traveled through their jurisdiction more than six but fewer than 12 times. Thirteen - two less than last year - would claim nexus if the out-of-state corporation made more than 12 trips. At the opposite ends of the spectrum, Florida said that it would find nexus based on six or fewer trips, while Connecticut said that it would not find nexus based on even more than 12 trips.

For sales tax nexus, most states said that an out-of-state corporation that makes remote sales into their jurisdiction by phone, the Internet or direct mail would be subject to sales and use tax nexus if an employee made visits within the state four or more times during the year. Most states also agreed that an employer that sent an employee or independent contractor to repair or install property, or used an employee or third party to investigate or resolve customer complaints, would trigger sales tax nexus.

A retailer's contacts with customers in the state over the Internet generated greater disparity. Fifteen states stated that nexus would result if the corporation sold tangible personal property on a Web site maintained on a server located within their borders, while four states said that nexus would result if the retailer owned the server.

Nine states would find nexus if the corporation's Web site linked to a third party located within their borders, while eight states said that nexus would result if the out-of-state corporation linked to a third party that maintained a Web site on a server that is located within their borders.

The survey findings are especially important given the decision by the Financial Accounting Standards Board not to defer the effective date of FASB Interpretation No. 48, since they give insight into the thinking of particular states as to what activity will trigger the imposition of tax.

Under FIN 48, an uncertain tax position may not be recognized on a company's financial statements unless it is more likely than not that it will be sustained on its technical merits, and there is more than a 50 percent likelihood that it would be sustained if it were challenged and considered by the highest court in the particular jurisdiction.

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