Although millions of Americans are using “sharing economy” services such as Uber and Airbnb, states are struggling to apply existing tax laws to these technologies.

Only eight states require companies such as Uber to collect sales tax, while a number of states consider this to be a nontaxable transportation service, according to Bloomberg BNA’s 2017 Survey of State Tax Departments. Moreover, 25 states said that the owner of property listed for short-term accommodations on a third-party site such as Airbnb is responsible for collecting the sales tax, while 15 states said that the third party was responsible. A number of states hold both the owner and the third party responsible for collecting the tax.

The result of questions on the sharing economy are somewhat surprising, according to Lauren Colandreo, a Bloomberg BNA state tax editor who oversaw the survey. “You would think that states would go after one party – the company – as opposed to multiple drivers,” she said. “That would ease the compliance burden.”

One reason for states’ hesitation in taxing sharing economy companies is the difficulty they had in imposing sales tax on remote sellers, according to Peter Stathopoulos, a tax partner at Top 100 Firm Bennett Thrasher. “States may face similar issues with the sharing economy as they had in trying to impose Amazon laws,” he observed.

Bloomberg News

“States attempting to impose sales taxes on sharing technology companies like Uber and Airbnb will have the same problems they are having imposing these taxes on remote Internet sellers – namely, that a physical presence by such taxpayers in the state is still likely required under the U.S. Constitution,” he said. “The U.S. Supreme Court likes to overturn its own cases and not have state courts do it for them under the guise that conditions have changed. Accordingly, until and unless Quill Corporation v. North Dakota is overturned, states are gambling by trying to impose sales and use taxes on sharing companies and remote sellers absent a physical presence in the state.”

Quill is the 1992 U.S. Supreme Court decision that established the physical presence test for sales and use tax nexus. It left unanswered the question as to whether the physical presence test must also be used for income tax nexus.

Varying definitions

The concept of nexus -- the minimum amount of contact between a taxpayer and a state necessary to allow the state to tax a business on its activities -- continues to vary widely between states both for income tax nexus and sales tax nexus.

State tax policies, including nexus, can change from year to year as states address new technologies and seek to increase revenue. The changes can be reflected as the result of administrative edicts, legislation or litigation, according to Colandreo. “The survey provides insight into the states’ position on issues even when there is no other guidance,” she said.

This year’s survey, now in its 15th year, addressed issues that include corporate income tax nexus, sales tax nexus, sourcing methods, and pass-through entities. Almost every state, as well as the District of Columbia and New York City, participated in this year’s survey, with only Ohio choosing not to participate.

“A handful of states, including South Dakota, Alabama, Tennessee and Massachusetts, have taken an economic nexus approach in sales and use tax,” noted William Gorrod, a shareholder at law firm Greenberg Traurig.”That’s a vast departure from the traditional approach in sales and use tax,” he said. “Everyone thought that Quill was settled, and these states are basically asking for Quill to be overturned. These cases are working their way through the courts.”

The survey found that 19 states said that sales tax nexus is created when a company enters a state for disaster relief assistance, such as utility companies entering a state to repair downed power lines, Colandreo observed: “That sounds surprising because one would think that states would want to encourage out-of-state companies to enter their states to assist in repairing public safety issues and addressing their citizens’ concerns.”

While New York did not answer this portion of the survey, both Pennsylvania and New Jersey answered “Yes,” she noted. Both states were impacted by Superstorm Sandy in 2012, and were the recipients of out-of-state aid.


”The hot topic in corporate income tax nexus is that states are attempting to move away from the physical presence standard, and toward a factor presence standard,” she said. The factor presence standard attempts to construct a bright-line standard based on taxpayers exceeding a specified threshold of physical or economic presence in the state.

”This year, 13 states indicated that their nexus standard is based on factor presence,” she said. “Of these states, five indicated that they conform, in whole or in part, to the Multistate Tax Compact’s model statute, Factor Presence Nexus Standard for Business Activity. Alabama and Tennessee indicated that they generally conform to the model statute, while California, Colorado and Connecticut indicated that they only partially conform to the model statute.”

The survey questions regarding ownership of pass-through entities were expanded this year by asking states to indicate whether nexus would be created as a result of an ownership interest in a pass-through entity, which limits its activities in the state to those that generate passive income. Thirty-one states indicated that a limited interest in an entity that manages real property would create nexus.

The survey asked states to identify the sourcing method used to source receipts from cloud computing or software-as-a-service transactions. Nineteen states indicated that they use market-based sourcing, nine states reported that they use cost of performance, and four states said that they use a different sourcing method other than cost of performance or market-based sourcing.

“A lot of states are moving from cost of performance to market-based sourcing,” said Michael Barbera, a principal at New York accounting firm Edelstein & Co. “They realized they were losing revenue under the cost of performance method. Market-based sourcing provides a better allocation of revenue for sales of services.”

Although the states’ positions taken on the survey are helpful in determining their stance on particular issues, they don’t have the force of law, observed Bennett Thrasher’s Stathopoulos. “It is important to remember that survey responses by state departments of revenue alone are only administrative positions that may not be enforceable prior to being formally promulgated in regulations,” he said. “Most states have an ‘Administrative Procedures Act’ that requires agency positions to be formally promulgated in rules and to be supported by statutory language in order to be enforceable.”

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