Economic Nexus and State Taxation Laws
Learn about economic nexus, state taxation challenges, and the importance of proper tax planning to avoid high effective tax rates. Explore the key concepts of nexus, sales tax, income tax, and the implications of Supreme Court decisions on state taxation. Stay informed to navigate multi-state tax concerns and comply with tax regulations effectively.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
Economic Nexus The New Challenges Stuart M. Schabes, Esquire Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. sschabes@bakerdonelson.com November 16, 2017 www.bakerdonelson.com
Overview Several levels of tax in the United States Federal State Local Several categories of taxes Business Income Tax Sales and Use Tax What nexus/connection do you need to be subject to State tax? www.bakerdonelson.com
Why be concerned? Without proper planning, can increase effective tax rate to more than 50% Multi-State tax concerns Aggressiveness of State Tax Revenue Departments Easy for foreign companies to conduct business in the United States especially with increased technology www.bakerdonelson.com
Ability to Impose State Level Tax Title 15 U.S.C.A 381(a) enacted in 1959 (Public Law 86-272) prohibits applying income tax when taxpayer s only business in the taxing State is solicitation of sales of tangible goods in inter-State commerce. What does solicitation of sales mean? Limitations imposed by U.S. Constitution and Supreme Court www.bakerdonelson.com
Ability to Impose State Level Tax Due Process Clause Must be some minimal connection or link between the taxable activities and the taxing State Must be reasonably related to activities in this State Commerce Clause (as interpreted by Supreme Court decision in Complete Auto Transit in 1977) requires Substantial nexus with taxing State Fairly apportioned Not discriminate against interstate commerce Fairly related services provided by the State www.bakerdonelson.com
Nexus What does Nexus mean? Sufficient connection to State to make it subject to Sales and/or Income Tax Fact Sensitive Analysis www.bakerdonelson.com
Nexus Additional Supreme Court decision in National Bellas v. Department of Illinois (1967) no substantial nexus/not subject to tax if vendors only contact with State are by mail and/or common carrier Supreme Court decision in Quill (1992) New licensing of software in-State and resulting presence of a few floppy diskettes owned by licensor foreign company did not establish substantial nexus nor subject the company to State tax decision further established no imposition of State Sales and Use Tax unless physical presence is established presence must be more than slight presence but not substantial physical presence required www.bakerdonelson.com
Its frustrating because Nexus unclear? How much activity creates nexus? Selling Online? States want you to collect, but you may not be required to Hello economic nexus ! Using FBA? You have inventory. Inventory = Nexus. Nexus = Collection & Filing Engaging in click thru revenue models? If more than $10,000 (amount varies per State), you could have nexus What s your competition doing? Not everyone does the right thing! www.bakerdonelson.com
Examples of Nexus (in Maryland) Physical Location/Physical Presence (corporate income tax) Office Space Employee/staff located in State Any independent contractors/agents in State Inventory/tangible property On-line sales Technical assistance and training offered by corporate personnel to purchasers or users of corporate products after the sale Corporate personnel repairing or replacing faulty or damaged goods Installation or assembly of a companies product Employees soliciting and accepting orders www.bakerdonelson.com
Examples of Nexus (in Maryland) Physical Location/Physical Presence (sales and use tax) Substantial nexus/imposition of sales and use tax established in Maryland (followed in other jurisdictions): permanently or temporarily maintaining or occupying an office for the sale of tangible personal property or taxable services directly or indirectly through an agent or subsidiary have an agent, representative salesman or solicitor operating in the State for purposes of delivering, selling or taking orders for tangible personal property or taxable service entering the State on a regular basis to provide service or repair for tangible personal property www.bakerdonelson.com
Aggressive Economic Presence by a few States Some States have become aggressive and are questioning the requirement for physical presence under core corporation In Alabama, a sufficient amount of sales on an annual basis constitutes economic presence. The annual threshold is $250,000. The South Dakota yearly threshold is $100,000. The Tennessee yearly threshold is $500,000. Although there is a challenge to these cases pending before the United States Supreme Court. www.bakerdonelson.com
Collecting & Remitting = Compliance Can be Frustrating Nexus Tax rate (must factor in State and local) Exemptions Registration Forms Electronic vs. Paper Due dates varies per jurisdiction www.bakerdonelson.com
Sales and Use Tax 45 out of 50 States have some form of a State wide sales/use tax The 5 highest combined State and local sales tax rates are: Louisiana (9.98%) Tennessee (9.46%) Arkansas (9.30%) Alabama (9.01%) Washington (8.92%) www.bakerdonelson.com
How High Are Sales Tax in Your State? www.bakerdonelson.com
Various State and Local Registrations Secretary of State State Sales Tax State Income Tax Employment Taxes Local Taxes City Business Licenses www.bakerdonelson.com
Sales Tax Exemptions Due to the nature of the seller Due to the nature of the buyer Nature of the property/service transferred/performed Intended use by the purchaser www.bakerdonelson.com
Taxability Varies by State Digital Products Food Products Medical Products SaaS Software as a Service Services Software www.bakerdonelson.com
Suggestions Regarding Nexus Strategies Identify the top 10 States where your customers reside or your marketplace exists need to analyze net business income tax and sales nexus rules Consider requesting rulings from State Revenue Departments in the more high profile customer/market place States Use of wholly owned subsidiaries in State to protect unrelated activities of a parent business Include in customer contracts a sales/use tax indemnity provision www.bakerdonelson.com
Suggestions Regarding Nexus Strategies Proactively establishing a strategic plan for providing goods and services to customers as opposed to being reactive If issues arise, possible participation in Voluntary Disclosure Programs to mitigate adverse tax, interest and penalty costs www.bakerdonelson.com
How to Gain Peace of Mind Perform a nexus review Determine taxability of products/services Quantify risk and exposure Implement a plan to correct deficiencies Plan ahead no surprises www.bakerdonelson.com
