CPA Practice Advisor

MAR 2015

Today's Technology for Tomorrow's Firm.

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18 March 2015 • www.CPAPracticeAdvisor.com A YEAR IN THE LIFE: SALT ACCOUNTANT So, what exactly is Nexus? For state ta x pu r poses, t he ter m "nexus" describes the amount and degree of business activity that must occur before a state can subject the company's activities to income tax, a nd/or a l low t he state to requ i re sa les a nd u se t a x col lec t ion a nd remittance. T he issue of nex us is comple x bec au se it i nvolves t he juxtaposition of constitutional law, federal and state judicial decisions, and state laws and regulations. Sales Tax Nexus In the landmark case Quill Corpora- t i o n v. N o r t h D a k o t a , t h e U S Supreme Cour t held that for pur- poses of sa les a nd use ta x , nex us m e a n s h a v i n g " m o r e t h a n d e minimis" physical presence in the state. Because the Quill Court did not defne "more than de minimis," most states have taken an aggressive v iew poi nt when i nter pret i ng t he meaning. Not surprisingly, this has led to confusion and inconsistency among the states as to the amount and ty pe of physical presence that gives rise to sales and use tax nexus. For example, some states will deem a company to have nexus if the only presence is an employee entering the state for a single day! In general, the "more than a de minimis" physical presence standard c a n a p p l y t o e i t he r (o r b o t h) a company's ow nership of propert y (i.e., inventor y) or personnel (i.e., employees and independent con- tractors) in a particular state. Most states do not prov ide a ny mea n- ingful guidance as to the extent of t h e i n - s t a t e p h y s i c a l p r e s e n c e required to create nexus. Absent a specifc statutor y rule, companies are lef t w ith inter preting a state's administrative guidance and/or case law to make a nexus determination. Some states, however, have provided specifc guidance depending on the t y pe of proper t y a nd/or ac t iv it y conducted by the business in the g iven state. For ex a mple, cer ta i n s t a t e s p r o v i d e t h a t e m p l o y e e s attending in-state trade shows or conventions (w ithout engaging in selling activity) less than a certain amount of days a year should not c reate ne x u s for t he out-of-st ate business (assuming such business has no other contact with the state). Income Tax Nexus S i nc e t he Q u i l l d e c i s ion w a s specifc to sales and use tax, there is a great deal of disagreement among the experts on whether the physical presence requ i rement appl ies to other state taxes, such as income tax. To no one's surprise, most states say t h a t t h e Q u i l l d e c i s i o n i s o n l y applicable to sales and use taxes and, therefore, states may impose other ta x t y pes on businesses that don't have physical presence in the state. Benefts of a Nexus Study Ta x obligations var y from state to state, so understanding multi-state f i l i ng responsibi l it ies is c r it ic a l . States have goten more aggressive w ith non-conforming companies, especially in today's uncertain eco- nomic climate. Being fscally moti- vated, the States are desperate to fll their cofers in order to pay for the ser v ices they prov ide. A lso being politically motivated, they atempt to "export" the tax burden to out-of- state companies, who coincidentally, don't get to vote in that state's elec- tions. Therefore, it is increasingly important for multi-state businesses to fully understand their state nexus "footprint." Nex us St ud ies a na ly ze u n ique business practices while looking at how business is generated across the country. Depending on how a busi- ness is earning revenue, it might be subject to income, franchise, gross receipts, business activ ities ta xes, and/or sales and use ta xes (not to m e n t i o n v a r i o u s r e g i s t r a t i o n responsibilities). Watch a video on understanding sales tax nexus . State Tax "Nexus" and Its Impact on Your Clients By Alexander Korzhen A l l b u s i n e s s o w n e r s wa n t to o p e r a t e a s u c c e s s f u l a n d g r o w i n g b u s i n e s s . A c c o m - p l i s h i n g t h i s g r o w t h o f te n requires entering new markets in diferent states. While these new states can ofer exciting growth opportunities, they can also create various new tax obligations for the business. Determining whether these states have a legal right to tax your out-of-state busi- ness depends on whether your business has "nexus" with the state. Alexander Korzhen, JD, MBA , is State & Local Tax Manager at Eide Bailly LLP. Te frm's State & Local team provides Nexus Studies that help identify the various state tax fling and registration requirements. We work with our clients to identify how various tax standards apply to their unique business, advise them as they grow, and provide fling recom- mendations and strategies. Visit www. eidebailly.com to learn more. What is NEXUS? Generally speaking, "nexus" means a connection. w w w. e i d e b a i l l y. c o m In relation to tax law, nexus occurs when a business has a "connection" to a state other than the one in which the business primarily resides. In person Through third parties Via the internet How do you know if nexus has been established? Are you in compliance? Tax obligations vary from state-to-state. Understanding multi-state filing responsibilities is critical. In order to determine if you have nexus in a state, a nexus study should be completed. Experience the Eide Bailly Difference 877.459.9777 A properly completed nexus study analyzes your unique business practices— looking at how business is generated through: income gross receipts business activity taxes sales and use taxes prope rty taxes other transaction taxes franchise Eide Bailly works with clients to identify potential state tax filing requirements, and provides filing recommendations and strategies. Eide Bailly can help. Contact us today. For sales tax purposes, this connection could mean sales taking place:

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