State Nexus for Taxes

[meganh]

Something we've been discussing on other Forums for the last year or so is nexus -- what it means, and what it means to you and your business (and your taxes!)

In tax terms, nexus marks the location or locations where you owe taxes, either for items sold, or services delivered. At one point it was a pretty simple argument: you owed taxes in the state where you sold the product or provided the service. But these days, nexus is being redefined, often on a state-by-state basis, and business owners aren't liking what they see. There's been a growing movement in the states towards something called "economic nexus" which is a fuzzy term that means "if you made money off residents of this state then we want some."

For example, California enacted economic nexus regulations last spring. Starting in 2011, California will be asking out-of-state businesses who derive either $500,000+ or 25% or more of their revenues from California-based customers to pay sales tax. I'm not sure how California will force businesses to comply ... but that is the current state of the law.

New York went a step further and created both the "Amazon" tax law and a new horror, a tax on Internet-based services as a sale of tangible personal property. The Amazon tax slammed businesses that use affiliate marketers to sell their products, claiming that if an affiliate was located in New York and provided a gateway through which New York consumers could purchase goods from Amazon, that was enough to pull Amazon into New York for tax purposes. Amazon countersued, lost, and promptly terminated its relationship with all NY-based affiliate marketers. Since then, hundreds of other companies followed suit.

The new move by NY claims that services provided over the Internet are the same as prewritten software. In other words, you, as a web designer, are now considered to be selling your services in New York as a piece of software, and thus the value of your service is subject to sales tax. The NY tax department is taking this position despite the fact that they have no legal authority to do so, and, to make things worse, are applying the standard retroactively in audit situations. The issue hasn't made it into court (yet) but will surely be challenged. However, so was the Amazon decision, and that didn't work out so well for Amazon.

The bottom line is that you, as a business owner, need to be careful about nexus these days. Talk with your tax advisors regularly about whether you have existing or upcoming nexus problems, particularly if you sell or provide services over the Internet.

[Megan Hughes]

Reviewing my info sources today and learned of the following states that are either considering changing their nexus laws (particularly regarding affiliates) or have introduced legislation to make changes. If passed, these states would conform to New York, Rhode Island and North Carolina's current tax climate (aka "Amazon" law):

California
Colorado
Connecticut
Florida
Hawaii
Idaho
Illinois
Maine
Maryland
Minnesota
Missouri
New Mexico
South Carolina
Tennessee
Texas
Virginia
West Virginia
Wisconsin

So what does that mean?

If you own a company that allows affiliate marketing of your product, you may want to rethink who you allow in as an affiliate.

If you're an affiliate marketer, it means that some of your companies may drop you, if you live in a state that passes Amazon legislation.

However, that's 21 states now with existing, proposed or contemplated law changes. At some point the potential loss of revenue from customers in those states outweighs taxes that would be paid. But it sure would be nice if the Supreme Court would step in and give some overall guidance, rather than the piecemeal approach we're seeing now.

[Diane Kennedy]

Good grief!

I don't know how I missed this post. And I talk to Megan at least twice a day...can't believe I missed it.

This is hugely significant. That means if you're an affiliate marketer, you might need to think about moving.

Glad to see that Nevada is not on the list. Megan, we need to convince your hubby to keep it that way.

[jenniflow]

Diane and Megan:

This is actually Joe, Jenny's husband. I have a question.

I don't know whether the term "nexus" is used to talk about income taxes as well. I have been told that since I make income in a number of states, I need to pay state income taxes for each project in the state I earned the money, rather than in my home state (California).

As a speaker, I might be hired by an agent in (say) Virginia to do a talk for an association headquartered in (say) Illinois—and the talk might be in (say) Arizona. The check might come from the Virginia-based agent or the Illinois-based client (and a further check for expenses might come from either one). Did I earn the money in Arizona, Virginia, or Illinois?

[Diane Kennedy]

There are actually three different types of nexus:

Income tax nexus,
Sales tax nexus
"other than income tax" nexus

So, yes, you can have nexus for income tax purposes in multiple states. It's not always as clear-cut though as to what states you need to file in. Each state has the ability to make its own rules. So, for example, work in New York state for 12 days and you probably don't owe New York taxes. But if you work just one day in Michigan, you do owe Michigan taxes. And with CA's new crazy economic presence rule, you may NEVER work in California and owe CA taxes.

For more information, please check out our new site http://www.NexusNegotiator.com