We are back with Mary Jo Dolson, CPA and partner at Skoda Minotti, talking “SALT” or State And Income Taxes. I hope people appreciate the change of pace from another blog on formaldehyde!
Mary Jo is taking us through some common terms in tax law. Last week we did the basics like what is a “taxpayer” and now we are going to explore the concept of having a “Nexus.”
Mary Jo, the floor is yours:
Mary Jo: Thank you! Having a Nexus is the heart of the ability of a state to apply taxes to a company or a person who might reside or be otherwise based outside of their state. It is applied slightly differently in State Income Tax law vs. Sales/Use taxes and understanding that distinction is very important.
First stated simply, a Nexus is sufficient contact with state that requires a taxpayer (either a person or a business) to comply with a state’s tax laws. Nexus can be established either through a physical presence and/or an economic nexus standard.
Let’s start with the Physical. That seems easier.
Mary Jo: You would think so, but unfortunately some states are being very aggressive in trying to define a physical Nexus.
- Physical Nexus for Income Tax – physical nexus is created by a taxpayer by having property and/or payroll in a state. If a taxpayer has property and/or payroll in state this would create nexus with the state and require the taxpayer to comply with the state’s state income tax requirements. Some examples:
- If payroll is located in the state we would need to determine the activities being performed by the employees to determine if the activity is protected by Public Law 86-272 (more on that shortly).
- Consigned inventory in state would be sufficient to create nexus with the state.
- If you are renting an office or warehouse, this is usually sufficient to create physical nexus with the state.
- Having a home office and reimbursing the employee for use of the office is normally a protected activity, meaning it is not enough for a physical nexus, but it is not an absolute as states become more aggressive.
- Physical presence nexus standard for Sales Taxes – this was the long standing means for determining sales tax nexus in the different states until the Wayfair vs. South Dakota Supreme Court case which expanded the nexus determination beyond the physical.
Under the physical presence standard an entity must have a physical presence in a state to require that entity to uphold the sales tax laws of the state. The physical presence standard could be property and/or payroll. The presence does not have to be permanent presence in the state – it could be established just by a sales rep traveling into the state. States still impose this standard even in light of the Supreme Court decision and the switch to economic nexus standard.
Sorry, can you dumb that down for me?
Mary Jo: Sure, how about a chart to compare the two?
Wow, just having a sales rep visit? That doesn’t seem fair at all.
Mary Jo: I don’t think it is either! However, that comes from the relatively new concept in the arena of state and local income tax known as an Economic Nexus. An Economic Nexus is different than a physical presence nexus standard. Nexus can be created with a state without having property and/or payroll in the state. The use of an Economic Nexus standard is now much more common for Sales Tax purposes and the approach is quite different between Income and Sales Tax standards:
- Economic Nexus Standard for Income Tax – Generally for economic nexus in the case of income tax, the standard is based on values: having so much in property, payroll and/or sales in state is sufficient to create nexus with state. The general standard is $50,000 on property or payroll in state and $250,000 or $500,000 of sales in a state. The standard will also be reflected as 25% of entire property or payroll in state and 50% of total sales in the state. California has adopted an economic nexus standard that is increased each year for inflation. New York also has an economic nexus standard for sales of $1 million but this standard only applies to C Corporations.
- Economic Nexus Standard for Sales Tax – This has become a factor in the sales tax arena since the Supreme Court decision in Wayfair vs. South Dakota. Only within the last few years have states begun adopting an economic nexus standard for sales tax. Economic sales tax nexus is based on the amount of sales into a state and/or the number of transactions. Generally, the sales figure is $100,000 in sales – with some states adopting other amounts ranging from $200,000 to half a million, but $100,000 is the most common amount. Some states also enacted a number of transactions as part of the economic nexus standard which is generally 200 transactions. You might not meet the sales figure but if you have sufficient sales transactions you would still have sales tax nexus. If a taxpayer meets a state’s economic nexus standard based on sales and/or transactions, the taxpayer is required to register and comply with a state’s sales tax laws. A future blog will discuss the ramifications of sales tax nexus and economic nexus under Wayfair.
Break it down again, please?
Mary Jo: Sure, here you go:
Ok, wow, that’s a lot to take in! Let’s do another chunk next week!
Elizabeth Baldwin is Environmental Compliance Officer for Metropolitan Hardwood Floors. In her 25 plus year career in the wood industry has visited over 70 countries and hundreds of facilities of all sizes and types. She describes herself as a “jack of all wood trades.” Familiar with jungles of all sorts–having camped out along the Amazon and walked the halls of Congress–she blogs for the NWFA on both environmental and regulatory issues for educational and informational purposes only. Her blog is not intended and should not be construed as legal advice. Persons seeking legal advice on compliance with CARB, TSCA, the U.S. Lacey Act or any other law, regulation, or compliance requirement/claim should consult with the regulatory agency directly and/or a qualified legal professional.