Article written by:
George Vrettos, CPA
Director, State & Local Tax Services


For state income tax purposes, an out of state business is taxable when it has “nexus” and is “doing business” within a state. What does “nexus” and “doing business” mean?  The answer depends on multiple factors.

An out of state business, at a minimum, has nexus with a state if it has some sort of property or employee(s) within the state. Historically, with no property or employees within a state, sales alone were generally not sufficient to establish nexus with a state.  Without nexus, states have no authority to impose income taxes on out of state businesses.  As state revenues decline, states are broadening the definitions of “nexus” and “doing business” in an effort to apply these terms to out-of-state businesses, which under past definitions of “nexus” and “doing business” were not taxable.

In recent years, a number of states have passed (or are planning to pass) legislation which broadens the definitions of “nexus” and “doing business.” The enacted (and planned) legislation establishes “bright line” or “factor presence” standards, or thresholds, which if exceeded presume the out state business has “nexus” and is “doing business” in the state and therefore taxable.

For the sake of argument, assume that maintaining property and employee(s) in a state is sufficient to meet the definitions of “nexus” and “doing business.” Now, assume that an out-of-state business has over $500,000 in sales in a state but has no property or employees within that state. Does the out-of-state business still meet the definitions of “nexus” and “doing business? Depending on the state, and under the “factor presence” or “bright line” standards, the answer could be “yes.”

The out-of-state taxpayer would still have the protection of Public Law 86-272, but Public Law 86-272 only applies to the sales of tangible personal property. Sales of services or intangible property, are not protected under Public Law 86-272. Out-of-state businesses that derive revenue from the sales of services and intangible property, under “bright line” or “factor presence” standards, would now be subject to tax.

Challenges by taxpayers to “bright line” and “factor presence” standards, as well as the definitions of “nexus” and “doing business”, will likely increase in the years to come. However, as long as State Supreme Courts continue to rule in favor of the states and the Supreme Court of the United States continues its reluctance to rule on state tax matters, state governments will continue to the push the limits when defining “nexus” and “doing business.” As businesses grow and expand into new states, it is imperative that the finance and tax managers/directors consult with their state and local tax advisors to help manage and mitigate risk from theses expanded definitions of “nexus” and “doing business.”



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