Nexus and Jurisdiction: I Owe Taxes Where?


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Sarah Denton presented this PowerPoint at Decosimo's 2011 Tax Seminar on November 15, 2011 in Chattanooga, Tenn.

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Nexus and Jurisdiction: I Owe Taxes Where?

  1. 1. A Global Reach with a Local Perspective www.decosimo.comNexus and Jurisdiction: I Owe Taxes Where?Sarah Denton, Tax Supervisor2011 Decosimo Tax SeminarNovember 15, 2011
  2. 2. In General Nexus – extent of contact a person, item of income, or transaction has with a state Jurisdiction – the right of states to tax a company and impose indirect tax burdens (collection of use tax or file information returns) Different taxes have a different threshold standards for establishing nexus
  3. 3. Background Due Process Clause  Minimal connection requirement Commerce Clause  State can’t regulate interstate commerce P.L. 86-272  Income tax protection only  Protects solicitation activities
  4. 4. Background Significant Case Law  Income Tax  Wisconsin Department of Revenue v. William Wrigley Jr. Co. 505 US 214 (1992)  Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (1993)  Sales Tax  Quill Corp v. North Dakota, 504 US 278 (1992)  National Bellas Hess v. Department of Revenue, 386 US 753 (1967)
  5. 5. Current Sale Tax Nexus Standard Quill Case is still the authority used for sales and use tax Physical presence is required before taxpayer has to collect sales tax as long as it exceeds a “slightest presence” Physical presence – office, warehouse, employees or agents
  6. 6. Current Income Tax Nexus Standard No clear guidance as with Quill – P.L. 86-272 protects solicitation of orders for tangible personal property Some state require physical presence others have adopted “economic nexus standard” Need to do state by state analysis to ensure compliance
  7. 7. Nexus – Other Taxes Franchise Tax:  no protection under P.L. 86-272  generally subject if nexus present for sales tax Gross Receipts/Margin Tax:  Michigan, Texas, Ohio  no protection under P.L. 86-272  Minimal activity can establish nexus
  8. 8. Agency or Alter Ego Nexus Activities of the following can create nexus  Independent contractor  Sales rep  Related entity  Owner or director Scripto Inc. v. Carson, 362 US 207 (1960)  Function not label rules determination  Unimportant if agent has several principals
  9. 9. Affiliate or Attribution Nexus MTC Nexus Program Bulletin 95-1  Local service provider for out-of-state seller can cause nexus MTC Affiliate Nexus Proposal – nexus if:  Out-of-state vendor is related to in-state vendor with physical locations  use identical or substantially similar name, tradename, trademark, etc. to develop sales Borders Online, LLC v. State Bd of Equal., Cal. Ct. App. 1st District, No. A105488, 5/31/05
  10. 10. Affiliate Nexus Following states have provisions where nexus exists if out-of-state retailer uses same trademark or uses same name (or both) as in-state entity  Arkansas  Illinois  New York  Oklahoma  South Dakota  Texas
  11. 11. Economic Nexus Taxpayer exploits a state market through advertising or other activities and derives income from such activities Idea has grown out of intangible property cases  Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (1993)  KFC Corporation v. Iowa Department of Revenue (No. 09-1032, 2010)
  12. 12. Economic Nexus How do you determine a threshold?  Quantify – MTC factor presence standard  Description –  Connecticut definition of substantial economic presence  a purposeful direction of business toward this state, examined in light of the frequency, quantity and systematic nature of a companys economic contacts with this state, without regard to physical presence, and to the extent permitted by the Constitution of the United States
  13. 13. Economic Nexus Single Sales Factor Formula  Many states adopting for income tax  Shifts burden to out-of-state retailers  No dilution of factors for sellers falling under economic nexus
  14. 14. Multistate Tax Commission (MTC) Functions to promote uniformity across states and simplify multistate tax laws  1990 National Nexus Program  2002 Adopts factor presence nexus standard  $50,000 of property,  $50,000 of payroll,  $500,000 of sales, or  25% of total for any one factor  2004 Affiliate Nexus Proposal
  15. 15. Multistate Tax Commission (MTC) States adoption of factor presence standard  Business Activity Taxes:  Ohio – July 1, 2005 – first state to adopt  Oklahoma – January 1, 2010  Washington – June 1, 2010 – B&O tax - $250,000 threshold for sales  Michigan – not conforming to MTC but nexus for MBT is gross receipts exceed $350,000  Income Taxes:  Connecticut –Jan 1, 2010  Colorado – April 30, 2010  California – January 1, 2011
  16. 16. Streamlined Sales and Use Tax Agreement Created in 1999 – response to changing market Purpose – to simplify sales and use tax collection and administration  Uniform tax definitions  Uniform exemption procedures  Rate simplification  Uniform sourcing (where the sale is taxable)  State level administration of all sales tax
  17. 17. Streamlined Sales and Use Tax Agreement 24 of 45 states with a sales tax have adopted SSUTA  Full member states - in compliance with the SSUTA through its laws, rules, regulations, and policies  21 states – including GA (2011), NC (2005)  Associate member states - in compliance with the SSUTA except laws haven’t gone into effect but will within 12 months  Tennessee
  18. 18. Internet Tax Freedom Act Signed into law in 1998 under Clinton Prohibits state and local taxation of internet access  Bit taxes, bandwidth taxes, e-mail taxes Prohibits multiple or discriminatory taxes on electronic commerce  Does not protect from sales tax on internet sales
  19. 19. Click-Through Nexus Nexus is established if an on-line retailer enters into an agreement with a resident to refer customer’s to the on-line retailer’s website for a commission 2008 - New York Amazon Law – Sec. 1101(b)(8)(vi)
  20. 20. Amazon Case v. NYS (NY State Sup. Crt. 877 N.Y.S. 2d 842  Commerce Clause Challenge – court rules constitutional since required agreement with in- state rep  Due Process Challenge – rational connection exists through the contract  Equal Protection Clause – statue applied to all vendors with similar contracts
  21. 21. Click-Through Nexus Laws Eight states have click-through nexus laws  Arkansas  California  Connecticut  Illinois  New York  North Carolina  Rhode Island  Vermont
  22. 22. Click-Through Nexus Laws Bills have been introduced in the following states:  Massachusetts  Michigan  Pennsylvania  Tennessee Amazon’s response to laws has been to cancel relationships with in-state residents California – reprieve for 1 year and start collecting 2013
  23. 23. Amazon – Recent Developments Amazon has completely reversed position Amazon will now offer to handle sales tax collection for merchants who sell through their site for a fee of 2.9% of the taxes collected Amazon plans to roll out this optional service to vendors February 1, 2012
  24. 24. Other Issues Digital products – treatment varies by state  Books  Music  Movies Cloud computing  Tangible property or service
  25. 25. Voluntary Disclosure Agreements Agreement with state to submit delinquent returns and tax payments in exchange for benefits and protections from state Agreements vary from state to state but some common benefits include:  Limited lookback period  Waiving of penalties
  26. 26. What’s Ahead? H.R. 1439 Business Activity Tax Simplification Act of 2011  Sales and income tax filing with physical presence  Extend P.L. 86-272 to services and intangibles  Physical presence test of 15 days or more in a state for income and sales tax  House Judiciary Committee voted favorably in July 2011
  27. 27. What’s Ahead? Main Street Fairness Act  Allows states to collect sales and use tax from on-line retailer if they have signed on to the Streamlined Sales and Use Tax Agreement Marketplace Equity Act  States would have authority to require on-line sellers to collect sales tax  Provides flexibility in how states conform to the law
  28. 28. CONTACT SARAH DENTON Sarah Denton 423-756-7100 DISCLAIMER: The contents and opinions contained in this presentation are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals.
  29. 29. A Global Reach with a Local Perspective www.decosimo.comQUESTIONS?