by Roger Russell

The activities of a corporation that are sufficient to create a taxable nexus vary so much from state to state that the same company with relatively light activity in one state might be subject to tax in that state — and yet not be subject to tax in a state in which its activity is greater.

For example, in eight states, traveling through their borders six or fewer times per year in taxpayer-owned trucks without picking up or delivering goods creates nexus, while in the majority of states, actual delivery of goods in corporate-owned trucks does not create nexus.

In fact, it’s possible for a corporation to trip into nexus accidentally, according to George Farrah, director of state services for BNA Tax Management. “When that happens, the ramifications can be serious,” he said. “A company can have plenty of sales in a state without having nexus, and therefore no income tax to pay in that state. But once there’s nexus, the state can tax a percentage of the company’s entire net income.”

Although states have the authority to impose income tax, the commerce clause of the U.S. Constitution prohibits the states from unduly burdening interstate commerce, and the due process clause requires a definite nexus between the state and the taxpayer’s activities in order for the state to impose a tax.

Public Law No. 86-272 further limits the states’ power to impose 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.

Nevertheless, states vary considerably on what they consider to be a level of activity constituting sufficient nexus, according to Farrah. “There are plenty of gray areas, and on some issues a state will say it depends on the facts and circumstances.”

Each year, Farrah oversees BNA Tax Management’s survey of state tax departments. Questionnaires are sent to senior state tax officials in each of the 46 states that have a state corporate income tax, as well as to the District of Columbia and New York City. Top department personnel are asked to identify which of certain specified activities or relationships would create nexus in their state, assuming that the listed activity or relationship is the only such activity or relationship that a corporation has in the state. Forty-four states, plus the District of Columbia and New York City, responded.

“We prepare it because we think it helps practitioners understand the state tax department positions,” said Farrah.  The survey, now in its fourth year, is published as part of BNA’s State Tax Library.

“If there’s a trend, it’s that there is still a great inconsistency in how states view these different activities,” said Farrah. Also, he noted, “More states now say that telecommuting by an employee creates nexus on companies for whom the employee works.”

“For example,” he said, “an employee who lives in New Jersey but works for a company in New York by telecommuting may be creating a New Jersey nexus for his company.”

For 2004, 40 states said that telecommuting creates nexus, up from 32 states when the survey was first conducted in 2001.

Nearly all of the states said that the mere registration to do business would not subject an out-of-state corporation to their jurisdiction’s tax. Four tax jurisdictions — the District of Columbia, Florida, Massachusetts and Ohio — said that registering to do business would subject an out-of-state corporation to their state’s tax.

States were more evenly divided on the question of whether nexus would be created by an out-of-state corporation that reimburses its in-state salespersons for the costs of maintaining an in-home office.  While 23 states said that such an arrangement would result in nexus, 21 said that it would not.

Owning property within a state is generally agreed to create nexus. Whether or not providing cars to employees within a state creates nexus depends on whether the employee is a salesperson in many states: While 41 states said that nexus would be created by providing cars to non-sales employees, only 11 states said that the provision of cars to sales representatives, by itself, would create nexus.

There was general agreement that employee activities such as accepting orders, checking credit, and collecting delinquent accounts would, by themselves, be enough to establish a nexus with their employers.

Nexus was less likely to result from other employee activities, such as attending seminars and trade shows.  Only Indiana, New Jersey, New Mexico and Vermont said that nexus would result from attending a seminar within their borders.  Missouri said that it would find nexus if the employee traveled to the seminar in a corporate-owned plane.

However, 11 states said that attending a trade show for 14 or fewer days in the state would be sufficient to establish nexus, while 13 states indicated that attending a meeting for the same time period would create nexus.

“The difficulty involved in deciding if nexus exists is that there’s usually more than just one activity involved,” said Farrah. “The survey helps practitioners know whether activities by themselves create nexus, but they also have to consider the interaction of having more than one activity in a state. There could be a number of activities, each of which by itself would not create nexus, but when you have them together they might add up to a taxable connection to the state.”

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