Our firm represents both individuals as well as numerous and varied business entities. While determining state tax obligations is always a complex process, when a taxpayer has income from sources in multiple states, the complexity greatly increases. Past considerations relied upon “physical presence” as the main factor in determining tax reporting obligations - those days have quickly changed. Some states now assert obligations based upon “economic presence”.
“Economic nexus” has become the tool employed by states to broaden the number of tax payers. The law is vast and varied and far from being determinative, yet until such time as there is a consistent body of law throughout the United States, taxpayers who operate in multiple states must comply with numerous state requirements in order to be in compliance.
Aggressive states may employ what is referred to as “factor presence” which is an approach resulting from a model statute created by the Multistate Tax Commission. While a discussion of any of these topics is well beyond this brief description, the term simply reflects the amount of property, payroll and sales that a business has within a given state. Property and payroll obviously demonstrate a physical presence. Arguably, most objectionable to a taxpayer is the sales factor resulting in nexus for income or gross receipts tax purposes - in short meaning a state can assert nexus simply by a taxpayer making sales into a state. Simply put – if you have a factor or factors in the state, a state may deem you to have nexus for income based taxes and/or business activity type taxes!
While a taxpayer may still have protection under federal law (what is commonly referred to as “Public Law 86-272”) from a state asserting nexus, such protection is limited.
Certain states have employed either in totality or in a varied form, “factor presence” - those include but are not limited to, Michigan, Ohio, California, Washington state, Nevada, and others. Simply put, if you have sales into one of these states, you may have established (at least possibly in the respective state’s opinion!!) nexus for certain taxes.
If you have questions, please do not hesitate to contact Michael H. Israel, of Duggan Bertsch, LLC to discuss how these state taxation issues may impact you and/or your business.
This update is intended for marketing purposes and for education purposes. It is not intended to and does not create, an attorney client relationship with the reader