In 1959, Public Law 86-272 was passed restricting states from imposing a net income tax from income derived within a state from interstate commerce if the company does not have nexus in that state. This set up the physical presence test, which looks for employees or property, such as buildings or inventory, domiciled within a state. This test also applied to the imposition of sales taxes on interstate shipments of goods.

The Covid-19 Pandemic has given rise to remote working arrangements, and employees have scattered across the country. Companies that never had physical nexus issues, and weren’t concerned with interstate commerce before, are finding themselves entrenched in the depths of multi-state taxation. For example, the employee that moved to the beach just created physical nexus under PL -86-272. As a multi-state company, sales by state must also now be tracked for income tax purposes. Complicating matters further, there is no consistency of rules relating to registering your business within a state for all tax types, i.e., withholding, sales, and/or income taxes.

Additionally, the dawning of the internet and online sales have become a standard mode of commerce. As a result, the states saw millions of dollars of potential tax revenue just out of their reach. In June 2018, the United States Supreme Court sided with South Dakota in a landmark decision. This case established “economic nexus” for purposes of imposing sales tax on online sales into the state. Currently, 43 of the 46 states that impose sales tax have adopted economic nexus rules for sales tax.

Nexus by State

 

An unforeseen side effect to this decision is the breaking down of the definitions of PL 86-272, and new interpretations on what establishes physical presence are being written into law. More and more states are adopting economic nexus rules for income tax purposes, and as of the publishing of this blog,  23 states have done so. Vermont best sums up the overall viewpoint that Income tax nexus is established when a foreign corporation intentionally or regularly exploits Vermont’s market (VT Tech Bull. TB-70).  Any business that conducts business outside of their home state must be aware and track their interstate sales on an annual basis. Routine analysis is required to determine if a filing requirement is being met in any given year for both sales tax and income tax issues. Income tax nexus is still evolving, and the number of participating states will soon match the list of sales tax states.

Your tax advisors at Wilke & Associates vigilantly monitor this changing landscape and can guide you through this very confusing and complicated subject. Contact us for a consultation.

Jennifer Petyk, EA, MST

Jennifer is a Tax Manager for Wilke & Associates CPAs & Business.  Jenn is not your everyday tax pro.  She is a seasoned accounting and tax professional with direct experience in all areas of the balance sheet, income statement, income tax preparation, and business consulting.