Nexus is a complicated topic and every state views it very differently. Nexus is the minimum connection with a state that creates a filing requirement and potentially tax due with the state. What creates nexus in one state, may not create it in another. There is a public law, P.L 86-272, that affords protection to businesses that meet certain criteria from creating income tax nexus in a state.
Public Law – P.L 86-272 Protects Businesses from Some Nexus
The law prohibits states from imposing a net income tax (not other taxes like gross receipts, commercial activity, franchise, excise, etc.) on the income of business derived within the state from interstate commerce if the only business activities within the state conducted by or on the behalf of the person consist of the solicitation of orders for sales of tangible personal property (not services), provided that the orders are sent outside the state for acceptance or rejection, and if accepted, are filled by shipment or delivery from a point outside the state.
Multistate Tax Commission Says Online Engagement Creates Nexus
The Multistate Tax Commission (MTC) is an intergovernmental state tax agency that works on behalf of member states and taxpayers to facilitate the administration of state tax laws that apply to multistate enterprises. Recently the MTC has updated its interpretation of this law and the protections provided.
The MTC has a whitepaper that describes nexus creating activities and protections amongst member states. They have updated the workpaper to state that when a business interacts with a customer via the business’s website or app, the business engages in a business activity within the customer’s state, which can create nexus. Only when a business presents static text or photos on its website is when they are protected under PL 86-272. Basically, most interactive features on a website may create nexus due to it being an unprotected activity (log on, comment screen, customer service contact portal/chat function, soliciting non-sales job applications, persistent cookies, software updates, video streaming, etc).
Due to the complex nature of nexus and state laws, your company may benefit from a State and Local Tax (SALT) review to determine if nexus has been created in a state.
Read the MTC Adopting Resolution
DHJJ State and Local Tax Advisors
DHJJ offers advisory services to clients for all aspects of taxation, including state and local tax. Read more about DHJJ State and Local tax services and how our SALT advisors can help your business identify nexus and reduce your liabilities.
