1. Economic Nexus – The New Challenges
Stuart M. Schabes, Esquire
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.
November 16, 2017

2. Overview Several levels of tax in the United States
Federal
State
Local
Several categories of taxes
Business Income Tax
Sales and Use Tax
What “nexus/connection” do you need to be subject to State tax?

3. Why be concerned?
Without proper planning, can increase effective tax rate to more than 50%
Multi-State tax concerns
Aggressiveness of State Tax Revenue Departments
Easy for foreign companies to conduct business in the United States especially with increased technology

4. Ability to Impose State Level Tax
Title 15 U.S.C.A §381(a) enacted in 1959 (Public Law ) prohibits applying income tax when taxpayer’s only business in the taxing State is “solicitation of sales” of tangible goods in inter-State commerce.
What does “solicitation of sales” mean?
Limitations imposed by U.S. Constitution and Supreme Court

5. Ability to Impose State Level Tax
Due Process Clause
Must be some “minimal connection” or “link” between the taxable activities and the taxing State
Must be reasonably related to activities in this State
Commerce Clause (as interpreted by Supreme Court decision in Complete Auto Transit in 1977) requires
Substantial “nexus” with taxing State
Fairly apportioned
Not discriminate against interstate commerce
Fairly related services provided by the State

6. Nexus What does Nexus mean?
Sufficient connection to State to make it subject to Sales and/or Income Tax
Fact Sensitive Analysis

7. Nexus
Additional Supreme Court decision in National Bellas v. Department of Illinois (1967)
no substantial nexus/not subject to tax if vendors only contact with State are by mail and/or common carrier
Supreme Court decision in Quill (1992)
New licensing of software in-State and resulting presence of a “few floppy diskettes” owned by licensor foreign company did not establish substantial nexus nor subject the company to State tax
decision further established no imposition of State Sales and Use Tax unless “physical presence” is established
presence must be more than “slight presence” but not “substantial physical” presence required

8. It’s frustrating because…
Nexus unclear?
How much activity creates nexus?
Selling Online?
States want you to collect, but you may not be required to…
Hello “economic nexus”!
Using FBA?
You have inventory. Inventory = Nexus. Nexus = Collection & Filing
Engaging in “click thru” revenue models?
If more than $10,000 (amount varies per State), you could have nexus
What’s your competition doing?
Not everyone does the “right” thing!

9. Examples of Nexus (in Maryland) – Physical Location/Physical Presence (corporate income tax)
Office Space
Employee/staff located in State
Any independent contractors/agents in State
Inventory/tangible property
On-line sales
Technical assistance and training offered by corporate personnel to purchasers or users of corporate products after the sale
Corporate personnel repairing or replacing faulty or damaged goods
Installation or assembly of a companies product
Employees soliciting and accepting orders

10. Examples of Nexus (in Maryland) – Physical Location/Physical Presence (sales and use tax)
Substantial nexus/imposition of sales and use tax established in Maryland (followed in other jurisdictions):
permanently or temporarily maintaining or occupying an office for the sale of tangible personal property or taxable services directly or indirectly through an agent or subsidiary
have an agent, representative salesman or solicitor operating in the State for purposes of delivering, selling or taking orders for tangible personal property or taxable service
entering the State on a “regular” basis to provide service or repair for tangible personal property

11. Aggressive Economic Presence by a few States
Some States have become aggressive and are questioning the requirement for “physical presence” under core corporation
In Alabama, a sufficient amount of sales on an annual basis constitutes economic presence. The annual threshold is $250,000.
The South Dakota yearly threshold is $100,000.
The Tennessee yearly threshold is $500,000. Although there is a challenge to these cases pending before the United States Supreme Court.

12. Collecting & Remitting = Compliance Can be Frustrating
Nexus
Tax rate (must factor in State and local)
Exemptions
Registration
Forms – Electronic vs. Paper
Due dates – varies per jurisdiction

13. Sales and Use Tax
45 out of 50 States have some form of a State wide sales/use tax
The 5 highest combined State and local sales tax rates are:
Louisiana (9.98%)
Tennessee (9.46%)
Arkansas (9.30%)
Alabama (9.01%)
Washington (8.92%)

14. How High Are Sales Tax in Your State?

15. Various State and Local Registrations
Secretary of State
State Sales Tax
State Income Tax
Employment Taxes
Local Taxes
City Business Licenses

16. Sales Tax Exemptions Due to the nature of the seller
Due to the nature of the buyer
Nature of the property/service transferred/performed
Intended use by the purchaser

17. Taxability Varies by State
Digital Products
Food Products
Medical Products
SaaS – Software as a Service
Services
Software

18. Suggestions Regarding Nexus Strategies
Identify the top 10 States where your customers reside or your marketplace exists
need to analyze net business income tax and sales nexus rules
Consider requesting rulings from State Revenue Departments in the more high profile customer/market place States
Use of wholly owned subsidiaries in State to protect unrelated activities of a parent business
Include in customer contracts a sales/use tax indemnity provision

19. Suggestions Regarding Nexus Strategies
Proactively establishing a strategic plan for providing goods and services to customers as opposed to being reactive
If issues arise, possible participation in Voluntary Disclosure Programs to mitigate adverse tax, interest and penalty costs

20. How to Gain Peace of Mind
Perform a nexus review
Determine taxability of products/services
Quantify risk and exposure
Implement a plan to correct deficiencies
Plan ahead – no surprises