States moving fast on economic nexus standards
The 19th annual Bloomberg Tax Survey of State Tax Departments found that states with an economic nexus standard for sales tax more than doubled over the last year in the wake of the Supreme Court’s Wayfair ruling. Thirty-three states responded that they now have an economic standard in place for sales tax nexus. Six states said they have an economic nexus standard that is not currently being enforced due to the legislation’s effective date or pending litigation.
Nexus is the minimum amount of contact between a taxpayer and a state allowing the state to tax a business on its activities or require it to collect and remit sales tax.
Every year, senior tax officials are asked to clarify their states’ position on a number of areas. This year, all 50 states, Washington D.C. and New York City responded to the survey. In addition to questions on sales tax nexus, Bloomberg Tax asked questions on corporate income tax nexus, conformity to federal tax reform, state sourcing provisions, and state policy for marketplace facilitators.
Fourteen states said that their corporate nexus standard is based on factor presence, according to Christine Boeckel, deputy editorial director at Bloomberg Tax. “This matches the amount from 2018 responses. Also matching the 2018 results of these states, five said that they conform in whole or in part to the Multistate Tax Compact’s model statute, ‘Factor Presence Nexus Standard for Business Activity.’ Alabama and Tennessee reported that they generally conform to the model statute, while California, Colorado and Connecticut stated that they only partially conform to the model statute.”
For the first time, the survey asked whether an employee flying into the state on a company airplane for business purposes would create nexus. “Twenty-five states said that this activity creates nexus for the corporation,” said Boeckel. “The answers were the same regardless of the number of flights — one to four versus five or more — into the state.”
This year the survey asked whether states conform to a variety of code sections impacted by the Tax Cuts and Jobs Act. “Of the code sections addressed, states most often said that they conform to the changes made to Code Section 163(j), which limits the business interest expense deduction,” said Boeckel. “States are least likely to conform to the new Section 199A, which allows a deduction for qualified business income, with only 11 states responding ‘Yes.’”
States were also asked to identify their general sourcing method for sourcing receipts from sales other than sales of tangible personal property. Twenty-eight states, a significant increase over 2018, said that they use a market-based sourcing approach, while 11 states, one less than last year, stated that they use a cost-of-performance approach.
“Seventeen states responded that they apply different sourcing methods to different sourcing methods to different categories of receipts,” Boeckel said.
According to the survey, 18 states classify guaranteed payments for services, other than personal or professional services, as business income. “Only one state, Mississippi, stated that it classifies these payments as non-business income,” said Boeckel.
“New for 2019, we asked the states to identify the extent to which they comply with the federal partnership audit rules. Among these questions, we asked states whether they make adjustments, determine imputed tax, and assess and collect tax at the partner level or at the entity level. Fourteen states responded that they conduct these activities at the entity level, while nearly double the number of states — 27 — said they do so at the individual partner level. Ten states, including Illinois and Pennsylvania, responded ‘Yes’ to both questions.’”
For the first time, the survey asked states to identify the timeframe used and the type of transactions counted when determining whether their economic sales tax nexus has been met. “The responses also showed that sales for resale, tax-exempt sales of tangible personal property, sales of services and sales of electronically delivered items are almost always counted, but sales of intangibles are counted less frequently,” Boeckel said.
“This year, we added questions addressing sales made on marketplace platforms,” she said. “Thirteen states said they require third-party marketplace facilitators to collect and remit sales tax on sales made by out-of-state corporations using their platforms. Of these 13 states, only nine said that the marketplace seller is relieved of the liability for the tax if the third-party marketplace facilitator is required to collect and remit the tax on their behalf.”
“We also asked whether nexus is created when an out-of-state corporation makes sales into the state through a third-party facilitator,” Boeckel said. “In the majority of states, using a third-party facilitator creates nexus when the facilitator stores inventory in the state. However, in most states the out-of-state corporation will not have nexus just because the third-party facilitator does.”