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Brian Gordon, CPA, is the Director of State and Local Taxes at Sanders Thaler Viola & Katz, LLP. Previously, Brian was with the NYS Department of Taxation and Finance as the District Audit Manager in Manhattan and Brooklyn. He is a member of the NYSSCPA New York, Multistate & Local Taxation Committee and writes and speaks on various tax issues. He can be reached at 516-704-7130 or 516-510-6041 and email: bgordon@st-cpas.com.

Changing Nexus Rules: What you need to know

By Brian Gordon

How can states increase revenue without raising taxes? The answer is to create new taxpayers. Many states have created new taxpayers by expanding the reach of their nexus laws. This means making laws that require companies physically located in other states to either pay their state's taxes or collect their state’s sales tax. This is referred to as economic nexus as opposed to physical nexus.

Business Taxes

Several states have now passed economic nexus laws that require businesses to pay taxes in their state by simply having sales that exceed a certain threshold. This includes New York, California and Ohio to name a few. States are being added to the list on a gradual, but steady basis. The threshold may be different in each state. These laws have gone unchallenged as the federal government is willing to let the states write their own laws. You must become familiar with the tax laws of states where you are making sales.

The way sales are sourced to states is also changing. Many states are changing from the cost of performance method to market-based sourcing. When discussing income from services, this can mean allocating to the state where the customer is located rather than where the service was performed. The result of this change is that income that was allocated to New York last year may possibly be allocated to another state this year and create taxable nexus in that new state.

Sales Tax Issues

States have also expanded their reach for sales tax dollars. Expanded nexus laws require out-of-state companies to collect sales tax.

Click-through nexus refers to a company having nexus in a state by having a link on a website of a company located in another state. Certain conditions apply.

Affiliate nexus refers to a company located only in State A, which I will call Widgets Online Inc selling via the Internet or catalogs into State B and they have common ownership and are selling the same products as another company in State B, Widgets Inc. Both corporations will have nexus in State B.

One of the biggest problems that states face today is how to increase collection of use tax. "Use Tax" is due from a purchaser of goods when sales tax is not collected. The most common occurrence of this is when someone purchases goods from an out-of-state company on the internet. The out-of-state company is generally not required to collect sales tax for your state. It was decided many years ago by the Supreme Court in the case of Quill v. North Dakota that physical presence in the state is required in order to enforce collection of sales tax. Most people are not aware that they owe use tax as the purchaser, and that liability goes uncollected due to the inability of states to monitor those transactions.

Colorado came up with a unique law, which compels an out-of-state seller to notify the customer as well as the state of Colorado of the amount of these sales and that use tax is due. This is similar to receiving a form 1099 notifying you and the government that income was earned and that it should be reported on your tax return. This law was challenged in federal court and Colorado prevailed. In the decision, they mentioned that the Quill case protected only against collection of tax. The Colorado law asks these sellers to report the transaction, not to collect tax.

The state of Alabama didn’t wait for the Colorado decision. They stared Quill in the face and passed a law requiring states to collect tax in some cases, even if they have no physical presence in Alabama. Alabama feels that the Quill decision is very old and does not hold up in this era of Internet selling. The states of Connecticut and Minnesota are right behind Alabama with similar proposed legislation of their own.

Nexus laws are changing quickly. If you have any nexus concerns, call me for assistance.

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