In prior blogs, we have shared that states like to audit and tax businesses that are outside of their borders rather than in-state businesses. In-state business owners complain when a state increases its tax rates or audit compliance. However, if the state taxes a business created in another state, it’s a win-win for all in-state parties.
Bloomberg BNA releases a state tax survey every year. We would like to share with you some items in its 2015 survey as it provides business owners with a better perspective as to how aggressive state taxing authorities are. Bloomberg contacted all 50 states (and the District of Columbia and NYC) and questioned them about how they determine nexus. “Nexus” is the minimum amount of contact a company can have in a state to become subject to the state’s taxes.
The “old” rules were that a state would tax businesses that had a physical presence in its state. If a company had no physical presence in a state, it seldom was taxed. Now, all but seven states, are saying that the physical presence rule only applies to sales taxes. With respect to income taxes, the other 43 states are now including businesses that have an economic presence, such as taxing out-of-state companies’ receipts from services and intangibles attributable to in-state customers.
There are 11 states for income tax and 10 states for sales tax that say that nexus is created merely by registering to do business with the Sec. of State.
There are 16 states that find for sales tax nexus if a business registered as a government vendor or contractor.
The taxation of drop shipments was found to be complex. Drop shipments involve three parties – a customer, a retailer (seller), and a third-party supplier that delivers the goods to the customer. Seventeen states said that nexus is created when a manufacturer ships tangible personal property by a common carrier to in-state customers based on orders received from a distributor where the distributor has nexus within that state. The good news is that no state found that the manufacturer had nexus in this situation if the distributor did not have nexus within its borders and did not hold title to the property. If title were held by the distributor, 33 states found nexus.
The survey discussed the new nexus, looking at how states source revenues. Whereas in the past many states’ sourcing rules were based on the location where the majority of the costs of performance were incurred, there is a growing minority of states using a market-based approach that focuses on the sales made to customers within its borders. Receipts from cloud computing are characterized as services by 12 states; and the sale, lease, license or rental of intangible personal property in 5 states.
Thirty-eight states, plus D.C. and NYC, found that owning or leasing a Web server in a state resulted in income tax nexus and very likely sales tax nexus.
What the survey concluded was that there is little uniformity across states from sourcing income on services, intangibles and cloud computing, resulting in confusion for businesses.
How does this impact your business? If your business is found to have nexus in a state and did not file tax returns, that state has the authority to tax the business and is not hampered by the statute of limitations (SOL). Since no tax return would have been filed, the SOL never expired, and the taxing state can go back to the date that the taxable events started and assess taxes, interest and penalties for a multitude of years. This could result in double taxation since if the income had been reported to another state, the SOL to file an amended return with that state would likely have expired except for the three most recent years.
Operating a business has become more expensive for the business owner as he/she may not be aware that they have nexus in another state. To avoid unexpected nexus issues, businesses should periodically have a nexus study done to determine if they are subject to another state’s taxes.
If you want to discuss your business and its potential nexus exposure as well as its overall tax planning and tax preparation concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.