Infiltrating Nexus

Nexus, the minimum amount of contact between a taxpayer and a state that permits the state to impose income tax or sales tax obligations on an entity, arises from both the Commerce Clause and the Due Process Clause of the Constitution. 

The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it wishes to tax.

In the “old days”, nexus was much easier to establish, as businesses or individuals had to have a “presence” in the state to establish nexus.  But in these complex times, especially with a world wide web of communication, what does “presence” actually mean?

In a recent survey by Bloomberg BNA of state tax departments across the country, nexus was the focus.  The sales tax policy portion of the survey asked about sales sourcing rules, treatment of social media, and the looming federal stance on internet sales. It also focused on home office issues as it related to “presence”.

The survey found that reimbursing sales staff for the cost of maintaining a home office constituted nexus in 25 states.  Soliciting services for a minimum of six days would trigger nexus in almost every state.  Attending a trade show for 14 days was enough to trigger nexus in 9 states, although some states had exclusions for trade show participants.  And conducting job fairs or other recruitment activities would in 20 states.  Can you image?  Having a booth at a job fair means you owe income tax in that state?

The really tricky one is internet sales, of course.  Or Nexus in the Cloud, as we like to call it. According to the survey, nexus would result from owning a web server in the jurisdiction in 36 states and DC.  Several of the states said that this would be the case even if those companies did not make one single sale in that state!  26 jurisdictions would find nexus for an out of state company that leased space on a third party server in that state!  And 36 states plus DC and NYC said that nexus would result for an out of state company who had in-state employees who telecommute from homes within their border.

29 states said that sales tax nexus would result for a company that makes internet sales, and stores and ships items from an in-state distribution center.  And 18 said it’s the same even if a company enters into an affiliate agreement with a distribution company.

Bottom line is that states are starving for tax revenue to meet their budgets, and are looking for ways to make a money grab.  These are challenging times, and it is important for business owners and individuals to understand the tax implications of the internet world we live in.  By the way, you DO have a say – it’s called voting.