There are some interesting developments taking place as a result of the 2018 Supreme Court Wayfair ruling. These developments involve states extending the Wayfair sales tax decision to the state income tax arena.
For corporate income tax purposes, most states use a combination of the Factor Presence Standard, the Economic Presence Standard, and the Physical Presence Standard to determine income tax nexus for out-of-state businesses.
The “physical presence” standard applies nexus rules when out-of-state businesses have offices, employees, agents, or property in the state.
The “factor presence” is similar to the Multistate Tax Commission’s model which establishes nexus with the state if any of the following thresholds is exceeded during the tax period. Sales of $500,000, payroll of $50,000, or property of $50,000. More than half of the states use some form of this standard.
The “economic presence” standard applies nexus rules for direct economic activity in the state or income derived from a state’s local market by making sales to customers in the state, receiving income from intangible property located in the state or through independent contractors selling, managing, or providing consulting services in the state. Often states also include or incorporate a bright line sales factor test in determining economic presence.
These three income tax standards vary in application, state by state, and have been shifting in recent years. While several states, including Alabama, California, Colorado, Connecticut, Michigan, New York, and Tennessee already used economic or factor-presence nexus standards, additional states were passing laws based on economic presence prior to the Wayfair decision. In the South Dakota vs. Wayfair case, the court ruling in the summer of 2018, eliminated the physical presence requirement for application of sales tax on activity conducted by out-of-state businesses.
We are now seeing some additional shifting in the income tax rules as a result of this Supreme Court decision on the sales tax rules. While the constitutionality of this has yet to be fully vetted, states are moving forward aggressively to assert nexus and expand their tax base.
If your business makes sales out-of-state, you may need to consider the impact of Wayfair on your income tax nexus as well as your sales tax nexus and how it affects your business tax obligations.
Need additional information & consultation regarding your tax situation? Contact JPS.
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