Bloomberg BNA has published its annual survey of state tax departments, which asks questions of senior tax department officials aimed at clarifying each state’s position on certain gray areas of corporate income and sales and use tax administration, focusing on nexus policies. Some of the questions asked this year focused on the nexus consequences of internet servers, alternative work arrangements and sourcing rules.
Nexus from web server
Among other findings, the survey found that 36 states would find that a corporation has income tax nexus if it owns a web server in their jurisdiction. Several of these jurisdictions, including Georgia, Louisiana and Maryland, stated that they would find income tax nexus even if the corporation did not make sales into their jurisdiction. Twenty-six of those jurisdictions would find income tax nexus for an out-of-state corporation that leases space on a third-party’s internet server located within its jurisdiction. Only 12 states, including Tennessee and the District of Columbia, said that income tax nexus would be triggered by using the service of a web-hosting provider with a web server in their jurisdiction.
Almost all of the states indicated that owning a web server within their jurisdiction would create sales tax nexus, most of which agreed that such nexus would be created regardless of whether the corporation owned or leased such web server or if the corporation’s data was on the web server for less than six months. Twenty-three states, including Arizona, said sales tax nexus would not be triggered by a seller paying a web-hosting provider with a server located in their jurisdiction to provide web services enabling such seller to make sales over the internet.
Nexus from cloud computing
Compared to the 2012 survey, more jurisdictions stated that income tax nexus would be created from cloud computing activities. Thirty-two states (up from 30 states in 2012) said that they would find that a corporation has income tax nexus with their jurisdiction if it grants access to software via the internet to in-state customers and hires independent contractors to provide set-up or configuration services within their jurisdiction. Thirty-two states (up from 29 states last year) would also find income tax nexus with such cloud-based service providers if the service providers allow their employees to solicit services within the state’s jurisdiction. Having a substantial number of customers within the state or earning a substantial amount of revenue from customers in the state was sufficient to create income tax nexus with the cloud-based service provider in 16 states (up from 14 states last year) even if such cloud-based service providers lacked a physical presence within the state. In addition, in 27 states (up from 25 states last year) said income tax nexus would be created with such cloud-based service providers if they rent space on a server located within such state.
Nexus from telecommuting
The survey found that income tax nexus would result in 36 states, the District of Columbia and the City of New York for an out-of-state corporation with employees that telecommute from homes located within their jurisdiction. The states that would not find income tax nexus from the presence of telecommuting employees in their jurisdictions were Indiana, Kentucky, Maryland, Mississippi, and Oklahoma. Consistent with prior surveys, most of these states said their position would remain the same even if the corporation had made no sales in the state or the employees only telecommuted on a part-time basis. Thirty-three jurisdictions said income tax nexus would be triggered from a single telecommuting employee performing back-office administrative business functions. Thirty-four jurisdictions said that income tax nexus would be created from a single telecommuting employee performing product development functions.
Nexus from unrelated distribution center
A corporation that makes remote sales into the state and stores and ships items from an in-state distribution center would trigger sales tax nexus in 29 states. States reaching the opposite result were Indiana, Maine, Nevada, Vermont, and West Virginia.
Nexus from internet activities
A remote vender that enters into affiliate agreements with one or more residents in a state would trigger sales tax nexus with 18 states if sales attributable to such agreements totaled less than $10,000 for the year and with 21 states if sales attributable to such agreements totaled more than $10,000 for the year. A remote seller that enters into an arrangement with an in-state website operator to host ads directing customers to the remote seller’s website would trigger sales tax nexus with 11 states if the website operator is paid each time the ad is displayed and would trigger sales tax nexus with 15 states if the website operator is paid each time the customer clicks on the ad and buys a product from the remote seller.
While this survey is valuable in providing insights regarding the various states’ treatment of certain activities which could result in nexus, all nexus determinations are fact specific and subject to interpretation. Therefore, the state responses provided in such survey and summarized in this article should not be relied upon as definitive nexus policy statements.