In late October 2012, Superstorm Sandy devastated much of the U.S. Northeastern coastline, including my Long Island neighborhood. In addition to the immediate destruction caused by high winds and flooding, power was out in much of the area for days. The utility crew that finally arrived on my street was from Wisconsin, one of many states that sent crews to help out.
Although I didn’t think about it at the time, and I doubt the utility companies knew, their action in sending a work crew into a state might have made them liable for tax under the particular state’s nexus determination. This is one of the surprising findings in Bloomberg BNA’s 17th Annual Survey of State Tax Departments, released this week.
The concept of nexus, the minimum amount of contact between a taxpayer and a state which allows the state to tax a business, is not new. It arises from two clauses in 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. What is new is the increasingly aggressive stance taken by many states in asserting nexus.
While New York did not answer the questions as to whether sending in a work crew to help out with disaster relief efforts would create sales tax nexus, Pennsylvania and New Jersey, both impacted by Superstorm Sandy, answered “yes,” according to Lauren Colandreo, a state tax editor who oversaw the survey.
“Nineteen 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,” she said. “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.”
Only five states indicated that making remote sales of digital content that is downloaded by a resident in the state would create nexus for sales tax purposes.
With the continued growth of the sharing economy, the general public is becoming more comfortable utilizing services offered by companies such as Uber and Airbnb. The survey found that states are struggling to apply existing tax laws to transactions for these and other new technologies, Colandreo indicated. “Only eight states impose sales tax collection responsibility on Uber and other car sharing companies,” she noted. “It’s a surprising result because you would think states would go after one party as opposed to many drivers, to ease the compliance burden.”
In response to questions related to short-term accommodations facilitated by third-party sites like Airbnb, 25 states indicated the property’s owner is responsible for collecting the sales tax. Fifteen states said the third party was responsible for sales tax collection, while several states, including Colorado, Iowa and North Carolina, noted that the owner and third party are jointly liable for the collection of sales tax.
“The hot topic on corporate income tax nexus is that states are moving away from the physical presence standard, and toward a factor presence standard,” said Colandreo.
This year, 13 states indicated their nexus standard is based on factor presence. 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 they only partially conform to the model statute.
State tax nexus can change from year to year as the result of administrative change, legislation or litigation, and year-to-year changes are often left unpublished. “One of the biggest takeaways from the survey is that there is still a growing amount of complexity in state tax law and policy,” Colandreo said. “Our survey provides insight into the states’ positions on these issues even when there is no other guidance available.”