1. A Global Reach with a Local Perspective
www.decosimo.com
Nexus and Jurisdiction: I Owe Taxes Where?
Sarah Denton, Tax Supervisor
2011 Decosimo Tax Seminar
November 15, 2011
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 company's economic contacts
with this state, without regard to physical presence, and
to the extent permitted by the Constitution of the United
States
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. 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. 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. 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. 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. 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. 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. Amazon Case
Amazon.com 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. Click-Through Nexus Laws
Eight states have click-through nexus laws
Arkansas
California
Connecticut
Illinois
New York
North Carolina
Rhode Island
Vermont
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. 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. Other Issues
Digital products – treatment varies by state
Books
Music
Movies
Cloud computing
Tangible property or service
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. 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. 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. CONTACT SARAH DENTON
Sarah Denton
sarahdenton@decosimo.com
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. A Global Reach with a Local Perspective
www.decosimo.com
QUESTIONS?