State and Local Tax: State Tax Nexus No Physical Presence Required

Sarfraz Bacchus Manager Brian McCuller Managing Director

National State and Local Tax Practice

Objectives

Describe the general rules of state income/franchise and sales/use tax nexus Contrast sales/use tax nexus rules from those for income/franchise taxes Describe recent trends in both income/franchise and sales/use tax nexus Discuss remedial options available to taxpayers

Agenda
Constitutional Underpinnings Public Law 86-272 Economic Nexus Factor Presence Nexus Attributional Nexus Click-Through Nexus

State Tax Nexus

Nexus definite link or minimum contacts Jurisdiction must have sufficient nexus with:
person, property, or transaction

A business operating in more than one state must address whether it has nexus with each jurisdiction Level of activity giving rise to sufficient nexus varies

State Tax Nexus

Constitutional Hurdles to State Taxation Due Process
Fourteenth Amendment Minimum connection Fair warning embodies traditional notions of fair play and substantial justice.

Commerce Clause
Congress regulates interstate commerce Requires substantial nexus to tax Protect states from trade wars Imposition of tax could impede interstate commerce
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State Tax Nexus

Commerce Clause Violations Double taxation Discrimination against out-of-state business Taxation of activities unconnected to the taxing state Taxation of taxpayers with insufficient contact to the taxing state

Public Law 86-272

Federal Defense of Interstate Commerce Federal response to concerns about state nexus Prevent undue burden on interstate commerce Protect solicitation activities from creating nexus Applies only to income taxes Applies only to sales of tangible personal property Goods must be shipped from out of state Not applicable to sales/use, franchise, gross receipts Immunity extends to independent contractors
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Public Law 86-272

Wisc. DOR v. Wm. Wrigley, Jr. Co., 505 U.S. 214 (1992). Defined the term solicitation of orders
explicit verbal requests for orders and any speech or conduct that implicitly invites an order

P.L. 86-272 protects solicitation activities, not the sales process De minimis or trivial unprotected activities is allowed pursuant to P.L. 86-272 In light of Wrigley decision, the Multistate Tax Commission issued guidance on protected and unprotected activities

Public Law 86-272

What are protected activities?
Approving sales orders Making repairs Distributing free samples Training a sales force Maintaining a home office Collecting on delinquent accounts Making credit decisions Training a customer to sell the product Taking a check as a deposit Recruiting sales personnel Using a telephone answering service Training marketing staff Resolving customer complaints
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Public Law 86-272

Attempts to Update Public Law 86-272 Business Activity Tax Simplification Act legislation Apply P.L. 86-272-type concepts to all business taxes Create uniformity among types of taxes imposed on interstate commerce by states Significant pushback from states

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State Tax Nexus

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) Four-prong test for state income tax nexus
Substantial nexus Fair apportionment Cannot discriminate against interstate commerce Fairly related to services received

Established two standards for valid imposition of tax Failed to adequately define substantial nexus

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State Tax Nexus

Quill Corporation v. North Dakota, 504 U.S. 298 (1992) Distinguished the Due Process and Commerce Clause standards Targeting a states marketplace gives fair warning of Due Process Cited National Bellas Hess v. DOR that physical presence is needed to satisfy the Commerce Clause substantial nexus requirement for sales and use taxes. Limited holding to solely sales and use taxes
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State Tax Nexus

Economic Nexus States have successfully argued Quill only applies to sales and use tax No physical presence required for other taxes Two approaches (not mutually exclusive)
Stretching of attributional nexus principle Directing ones economic activity at a states marketplace (Due Process) might be enough contact

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State Tax Nexus

Judicial Application of Economic Nexus Related party intangible holding company
SC: Geoffrey MD: W.L. Gore; Chicago Classics; SYL MA: Geoffrey NJ: Lanco NM: Kmart Properties NC: A&F Trademark

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State Tax Nexus

Judicial Application of Economic Nexus Unrelated intangible holding company
IA: KFC Corp.

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State Tax Nexus

Judicial Application of Economic Nexus Directing economic activity
MA: Capital One Bank TN: J.C. Penney WV: MBNA America Bank

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State Tax Nexus

Legislative/Administrative Application of Economic Nexus FL: TAA No. 07C1-007 CT: Conn. Gen. Stat. 12-216a MN: Minn. Stat. 290.15(1)(b) NE: Ruling 24-08-1 NJ: TAM (1-10-11) OR: Rule 150-317.010 VA: Ruling No. 08-63

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Factor Presence Nexus

Typical factor presence standard (ex. MI)
$500,000 of receipts in a state; $50,000 of property in a state; $50,000 of payroll in a state; or At any time during the calendar year within the state at least 25 percent of the taxpayers total property, total payroll, or total gross receipts.

Adopted in:
OH: Commercial Activity Tax MI: Michigan Business Tax and Corporate Income Tax CA, CO, & CT: Corporate income/franchise taxes OK: Business Activity Tax

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State Tax Nexus

Attributional/Agency Nexus Out-of-state entitys relationship with an in-state entity Scripto, Inc. v. Carson and Tyler Pipe Ind., Inc. v. Washington DOR
Independent contractor can create nexus Agent, even working for several principals, creates nexus

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Amazon Laws and Sales Tax Nexus

Click-Through Nexus Not a tax on Internet sales Relates to affiliate nexus Origin from New Yorks Amazon Law Marketplace Equity Act
Recent federal legislation introduced to authorize states to require remote sellers to collect taxes without having to conform to the Streamlined Sales and Use Tax Agreement.

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Amazon Laws and Sales Tax Nexus

Click-Through Nexus Two types:
Impose Collection Requirement:
Enacted: NY, RI, NC , IL, AK, CA (temporarily suspended), CT Proposed: AZ, HI, MN, MS, NM, TX, VT, LA , MI, PA

Impose Notification Requirement:

Enacted: OK, SD, VT Proposed: AL

Growing trend:
Newly enacted in 2011: IL, AK, SD, VT, CT, CA (temporarily suspended)
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State Tax Nexus

Click-Through Nexus Successful Challenges:
Discriminates and unduly burdens interstate commerce
Direct Marketing Association v. Huber (Civil Case No. 10-CV01546-REB-CBS)

Violates First Amendment free speech

Amazon v. Lay (No. C10-664 MJP)

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Preventative Measures
Nexus Study Voluntary Disclosure Agreements (VDA) Tax Amnesty Programs

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When the State Calls

Usually the initial contact is in the form of a nexus questionnaire No longer eligible for VDAs or amnesty programs? Consequences of losing or not completing a nexus questionnaire

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Summary/Key Takeaways

Sales Tax
Substantial nexus Physical presence Attributional nexus Click-through nexus Quill

Non-SalesTax
Substantial nexus No physical presence Attributional nexus Economic nexus Factor presence nexus Quill not applicable PL 86-272 protection (income tax only)
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National SALT Contacts

Craig Williams Managing Director (770) 858-4464 Brian McCuller Managing Director (901) 842-2850 Todd Harke Senior Manager (770) 858-4465 Sarfraz Bacchus Manager (770) 858-4454

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CBIZ MHM Business Tax Planning Guide

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Thank You

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