Companies can no longer assume they only have a filing requirement in their home state, even if they don’t have a physical presence in another state. Since states are looking to generate additional revenue, they are broadening the definition of what constitutes “doing business” in their state.
What is Economic Nexus?
In the past, most states required a physical presence in the state to be subject to state or local taxes. This is the idea that a business has to have employees, inventory, property, and/or rents in a state to be subject to any state or local taxes. With the growth of internet sales, out of state businesses are able to sell to consumers in a state without ever setting foot in a state. So instead of increasing taxes on the brick and mortar stores, most states are moving towards the idea of economic presence. Economic presence is simply benefiting from sales to consumers in the state. This would mean if a business has sales in a state, there is a potential for the sale to be subject to state or local taxes. However, there are federal limitations on a state’s power to tax out of state consumers.
Public Law 86-272: Soliciting Sales in Other States
Public Law 86-272 protects out-of-state business from income tax if the only connection to the state is a sales person soliciting sales. This only protects businesses that sell tangible personal property and only allows protection from income tax, not sales or gross receipts taxes.
The sales person can only solicit sales; they cannot provide any installations, training, collecting on accounts, or repairs. It is also important to note if you have an independent contractor acting on your behalf in the state, it may create nexus or may exclude a business from protection under Public Law 86-272.
Quill Corp V North Dakota
Quill Corp V North Dakota ruling was recently over-ruled in the U.S. Supreme Court by South Dakota V Wayfair as it relates to sales tax.
Read more about this topic and watch the video: Major Changes in Sales Tax: Supreme Court Ruling South Dakota v. Wayfair
How DHJJ Can Help
It is important for businesses to keep track of what states they have sales in and to keep record of where employees, inventory and independent contractors are going. With the states constantly changing their laws as to what constitutes doing business in a state, it should be evaluated yearly in order to avoid costly penalties. DHJJ’s State and Local Tax (SALT) Group can help you review your state sales and determine filing requirements. For more information, call DHJJ’s SALT Group at 630-420-1360.
