Nexus Tax – Multistate businesses

by amansoor on July 19, 2012

Nexus Tax – You may be liable for tax if you conduct businesses in different states.  Ask yourself the following question:  ”If I were the Governor of State X and I tax the resident business owners because they use the advantages of the state to conduct their business, should I tax out of state businesses that reap the benefits of doing business in my state as well?”

If you live in Florida and operate your business selling tables in that state, what happens when you open an office in Nebraska?  Do you pay sales tax in both states? Do you pay franchise tax in both states? Do you pay corporate tax in both states? Why even considering paying tax in both states if you never visit your office in Nebraska (for reasons besides why anybody would ever want to step foot in Nebraska).  Multistate business operations give rise to NEXUS TAX.

Nexus and types of tax:

Sales tax:  The test used here is the “substantial nexus test.”  This requires a seller have a physical presence in the state among other factors.  A physical presence is not limited to a retail front.  This element can be fulfilled by the presence of an employee or a contractor.  Owning or leasing tangible personal property or real property may also establish a sales and use tax nexus.

Income, franchise and other business taxes:

Having nexus for sales tax purposes does not necessarily mean a taxpayer will have nexus for income tax purposes, as a higher level of business activity may be required. Historically, state income tax nexus has been created when an out-of-state company derives income from sources within the state, owns or leases property in the state, or employs personnel who engage in activities that go beyond those “protected” under federal interstate commerce laws. Under 15 USC § 381 (commonly referred to by its 1959 enacting legislation, PL 86-272) states imposing a tax based on or measured by net income may not impose that tax on out-of-state taxpayers whose only connection with the state is the solicitation of orders for sales of tangible personal property when such orders are approved and shipped from outside the state. Since PL 86-272 applies only where the in-state activities are the solicitation of orders for sales of tangible personal property, it has no applicability where the solicitation is for the sale of intangible property, real estate or services.

Although PL 86-272 offers protection from income tax, it does not offer protection from a state’s franchise tax, which is imposed for the privilege of doing business in the state and generally based on an apportioned capital, net worth or another non-income base. Currently, about half the states impose a franchise tax, either in conjunction with, or in lieu of, an income tax. In general, a taxpayer with sales tax nexus will be subject to the state’s franchise tax.

Mansoor Ansari J.D., LL.M. (TAX)

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