By: Jack Schmoll
Tax season is often when CPAs discover clients have started making sales into new states.
This provides a great opportunity to discuss nexus. Income tax nexus standards are constantly evolving as states struggle to balance budgets. Traditional reliance on standards such as physical presence is no longer valid in many circumstances.
Several states have adopted “factor presence” nexus. For example, if a business has any of the following in California, the business is presumed to have income tax nexus in California:
- $500,000 of sales
- $50,000 of payroll
- $50,000 of property, or
- 25% of any one of these factors in California.
Essentially, if a business reaches $500,000 of sales in California the business has nexus even if it never physically enters the state.
Another relatively new nexus issue is “economic” nexus, which is built on idea that nexus is created by intentional exploitation of the state’s market without physical presence. West Virginia and New Jersey have been the leaders in this area, but many other states now have economic nexus standards of some type. Again, a business can generate nexus despite never entering the state.
There are some Constitutional questions related to these standards, but the Supreme Court does not appear to be interested in addressing them. Because of this, we are very likely to see additional states adopt “factor presence” or “economic” nexus standards.
For additional information on this topic or to ask questions, please feel free to contact me at (704) 661-5164 or [email protected].
NCACPA’s Taxation Committee’s mission is to further the development of fair and reasonable systems of taxation at the federal, state, and local level. The group attempts to increase members’ awareness of the responsibilities and opportunities for service in the various areas of taxation, and enhance the public’s understanding of the CPAs’ special competence in the field of taxation. For more information about the Taxation Committee, contact Jim Ahler.
Jack Schmoll, CPA, has worked exclusively in state and local taxation for 20 years, including 11 years in public accounting and nine with the Washington State Department of Revenue. He is also a member of NCACPA’s Taxation Committee.