Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services
Over the past year and a half since the South Dakota v. Wayfair Supreme Court case changed the state and local tax landscape forever, we have seen most of the states publish guidance regarding sales tax nexus. Now, the states have started to shift their focus to income tax, and this is likely a trend we will see continue throughout 2020. So the question is – where are we now on the income tax nexus front and where do we go from here?
- L. 86-272 still exists! P.L. 86-272 is a federal law that prohibits states from imposing a net income tax upon an out-of-state company if the company’s activities in a state are limited to the solicitation of orders for the sale of tangible personal property and the orders are approved and filled from outside the state. Even if a taxpayer’s sales exceed a state’s bright-line nexus sales threshold, the taxpayer will not be required to pay income tax if P.L. 86-272 applies. So now, more than ever before, P.L. 86-272 plays a critical role in income tax nexus determinations.
- R. 3063: Business Activity Tax Simplification Act of 2019 – This bill was introduced into Congress on June 3, 2019, and would expand P.L. 86-272 protection to include sales of services or digital goods. Further, the bill would prohibit the state taxation of an out-of-state entity unless the entity has a physical presence in the taxing state. These provisions are significant and obviously very taxpayer-friendly. But the likelihood of this bill becoming law anytime soon is slim.
- Which states have we heard from? In 2019, Hawaii became the first state to enact an income tax nexus standard based on the Wayfair bright-line tests. The states of Massachusetts and Pennsylvania, as well as the city of Philadelphia, soon followed by incorporating Wayfair’s economic nexus principles into their state income tax nexus guidance. Most recently, in a change that will likely impact many taxpayers, Texas adopted an economic nexus threshold of $500,000 of Texas gross receipts for Texas franchise tax purposes.
So what should taxpayers do in this ever-changing nexus environment? They should review current income tax filing positions and each state’s specific guidance. There are still states that utilize a physical presence nexus standard for income tax purposes. In addition, taxpayers should review if P.L. 86-272 is applicable. Lastly, for bright-line tests based on sales, it is critical to review a state’s sales-sourcing methodology, in particular, for taxpayers who are service providers.
For more information on state and local tax nexus, contact your GBQ State and Local Tax team.