States Expand Definition of ‘Nexus’ for Taxes

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State tax officials are expanding their concept of what constitutes a taxable economic presence in their state as more economic activity moves online.

Senior state tax officials in all 50 states were asked in a new survey by Bloomberg BNA how their jurisdictions are taxing the new technologies and types of transactions that continue to emerge as the U.S. economy shifts from the brick and mortar to Web based.

While most states once accepted the concept that a corporation needed a physical presence within their borders before it could be subject to an income-based tax, new technologies, such as cloud computing, and group coupon sites such as Groupon and LivingSocial, are challenging the parameters of most states’ tax codes.

At issue is the question of how states are applying the legal doctrine known as “nexus,” the level of contact that must exist between a taxpayer and a state before the state has the authority under the U.S. Constitution to assess a tax. Now, most states have shifted to a nexus standard based on “economic presence” within their borders, upon which an income tax can be imposed.

The Bloomberg BNA 2012 State Tax Department Survey identifies a number of different scenarios that could trigger income tax nexus in different states:
Sixteen states said having a Web site on a server physically located within their jurisdiction would trigger income tax nexus.
What about having a substantial number of customers with billing addresses in the state? Fourteen states said that would trigger nexus for the firm.

Thirteen states would apply sales and use tax to fees paid by in-state customers to remotely access canned or prewritten software that is hosted on a web server.

Nearly every state agreed that social media coupon companies, such as Groupon or LivingSocial, are not liable for taxes when their coupons are redeemed at in-state retailers or restaurants. But the states were very much divided on the question of whether sales taxes, paid by the end user, should be assessed on the full or the discounted price of the product or service.

All but six jurisdictions tax an out-of-state employer that permits an employee to telecommute from a home within their borders.

Twenty-three states said nexus would arise for reimbursing sales staff for the costs of maintaining an in-home office.

Job fairs or other recruitment activities would trigger income tax nexus in 21 states.

Thirty-six states said nexus would arise from having employees hire, supervise, or train other employees within their borders.

For a copy of the annual survey, click here.

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Tax practice Tax research