Discussion:Nexus in the modern era

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Discussion Forum Index --> Basic Tax Questions --> Nexus in the modern era


Discussion Forum Index --> Tax Questions --> Nexus in the modern era

Gfisher (talk|edits) said:

15 July 2010
I’m afraid that this is going to come up more and more and the conclusion we keep having to draw seems grossly unfair. Telecommuting appears to create an office of the business in a state and then the state asserts nexus.

A client is in Virginia and all of its contracts are in Virginia. They hire experts in other states – actually put them on the payroll as employees – to work on the Virginia contracts from their homes. Now and then, they come in person and meet or present results, but for the most part, they’re sitting in their homes, using their own furniture and equipment, and performing analysis/consulting/research services for the client.

The various states (so far, CA and PA, two states I have never prevailed against) keep asserting nexus because there’s an employee and an office in the state, even though no revenue is sourced there and there is no owned or leased property in the state, either. No business is solicited, nothing is shipped to or from the state, no meetings are conducted there, no administrative services are performed, etc, but they have that one factor and the state is grabbing the corporation wanting taxes (and penalties for failing to register to do business in that state!).

This is going to become an increasing problem with telecommuting and other Internet changes to how we do business. I have a new title company client who is hiring settlement processors all over the country – they do the number-crunching and upload everything through his software to his computer, at which point he can print out documents and provide what’s needed for closing the sales. I can see him filing in 25 states just because he has people physically parked there working on his accounts.

What are the feelings and experiences of the rest of the group? To me, it’s an inequity but we can’t beat down the states who are attacking. With computerized matching, more and more of them will be finding clients because they’ll cross-reference with payroll taxes (as California did) or other such indices. Ugh.

Thanks.

KatieJ (talk|edits) said:

15 July 2010
I agree, states are increasingly aggressive and have the technology to track down the telecommuters and tax their employers. The bright side of this coin, though, is the increasing weight on the sales factor in the apportionment formula. Even California (barring reversal or postponement due to the budget problems) is moving to an elective single-sales factor in 2011. If the employer has no sales to customers in the telecommuter's state, the employer has nexus but no taxable income.

Michaelstar (talk|edits) said:

15 July 2010
This should always be a concern from my perspective (now with all of the knowledge Katie has passed on) to any entity in their decision to hire employees located and working in other states. Nexus is created once employees are hired and the following decisions - do I really want to go through the hassle - register to do business in that state - file payroll returns and pay w/c insurance. Also while they may have no taxable income as Katie points out - there is still the minimum tax and business returns to file as well as the annual reports.

All of these are factors that need to be addressed BEFORE they go out and hire that one employee in the "foreign" state. So - yes - once an employee has been hired - your not going to prevail unless it is all done correctly.

Marcilio (talk|edits) said:

15 July 2010
That's interesting. I think that right now they presume that the activities of the EE contribute to sales somewhere along the line, so even if an EEs are just a staffers, sales are attributed to their activities. We not only have the income tax factor, most notably CA with it's $800 tax, but also registration with various state SOS & franchise taxes. Also U/C filings.

KatieJ (talk|edits) said:

16 July 2010
Yes, Marcilio, whether there are any sales attributed to the state does depend on how sales other than sales of tangible personal property are assigned to the numerator of the sales factor. The standard UDITPA rule is that such sales (sales of services, e.g.) are assigned to the jurisdiction where the greater part of the income-producing activity takes place, which generally means where the greater part of the cost of performing the service is incurred. If the resident employee's compensation is the predominant part of the cost of providing a service or producing an intangible product, all of the sale may be assigned to the numerator of the employee's state.

However, states are generally moving away from UDITPA and towards a more market-based approach to assigning such sales. California is going in that direction also, beginning in 2011.

Of course you are also right about the compliance costs associated with registration as an employer, use tax collection, qualification to do business, annual information filings, minimum taxes if any, etc. The presence of an employee will bring all of those requirements into play regardless of whether there is any taxable income arising from it.

CinSee (talk|edits) said:

July 16, 2010
I have a similar situation. The client performs it/help desk support. The main clients are the federal government. They have payroll in 37 states. In researching on which states they need to file for, I worked it down to 7 states. Several states refer to Public Law 86-272 Bright Line Test. If you read through, some states give a definition of "doing business" which allowed me to eliminate some states.

PHIL MOODY (talk|edits) said:

16 July 2010
Had a small bank located in one state, make loans to customers in another state #2. No bank offices or employees in state #2. Bank only recorded the lien in state #2, by mail. State #2 does audit, by mail, ended up paying state #2 income taxes for 6 years. I talked to state #2 auditor, tried to work a deal in that our fees was greater than the tax owed in state #2, to see if we could just file one year's return with the total income for the 6 year period on it. NO, would not work. We ended up filing 6 years of returns, with all the allocations, etc. In talking with state #2 auditor, she was quite nice, we discussed her job. She said they had a special section, all they did was similiar type of audits on financial companies (including credit card companies). They received UCC filings from each county, which they cross referenced to exisiting state income tax returns. If no return, automatic audit. She said they were making lots of money.

KatieJ (talk|edits) said:

16 July 2010
Public Law 86-272 protects ONLY companies whose employees or representatives solicit sales of tangible personal property in the state. Any other activity, such as CinSee's IT/help desk support, cannot be protected by 86-272.

It sounds like the state Phil is dealing with is taking an aggressive approach to economic nexus. Although his client bank has no physical presence in the borrower's state, it is exploiting that state's market. There is considerable uncertainty in this area because the U.S. Supreme Court has so far declined to consider the issue, even when it was presented in cases with excellent factual development. The Tennessee Supreme Court held that a bank's mail solicitation of credit card customers in the state does not create nexus for income tax purposes, while the West Virginia Supreme Court of Appeals held that it did. SCOTUS denied cert. petitions in both those cases.

Michaelstar (talk|edits) said:

16 July 2010
I was waiting for your comment on PL 86-272. CinSee's interpretation of it did not sound correct to me but I thought I would just wait and see since you are the expert. Thanks for confirming Katie.

Payroll in 37 states sure would have me telling the client they will be receiving notices sometime soon if they do not register and start filing business returns in those states.

For those not aware of this - states such as CO (just recently dealt with this)have what is called a "Voluntary Disclosure Agreement" that is available before contacted by a state looking for delinquent tax returns.

KatieJ (talk|edits) said:

16 July 2010
State and local tax consultants negotiated agreements with states long before the formal "voluntary disclosure" programs were enacted. Back in the 1980s we used to be able to negotiate an agreement with most states to bring a client into compliance with a limited look-back period. Often penalties were waived, and sometimes even interest. There were no formal programs; you just had to know whom to talk to in the state tax authority. We were careful to start out on a no-name basis and to get the agreement in writing before we disclosed the identity of our client. Of course such agreements were always conditioned on the state's not having previously contacted the client.

California was the historic holdout. The FTB always told us they had no legal authority to enter into such an agreement. Finally California enacted its voluntary disclosure program, in the mid 1990s IIRC, with a six-year look-back. This was somewhat disappointing because in the old days, we often were able to negotiate a three-year look-back with other states.

RoyDaleOne (talk|edits) said:

17 July 2010
Have the out-of-state services performed by contract with an entity that is not an individual.

CinSee (talk|edits) said:

September 29, 2010
I wanted to take a minute and thank everyone who has posted. I have reviewed the information, contacted various states to determine where my client has nexus. Good news and bad news is we ended up filing in more states than we originally thought we would need to.

This is one reason I find this forum very valuable. I would like to be able to learn everything and know everything but I know it is impossible task for any one person.

Again, thank you all who has responded.

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