State Tax Nexus: Everybody's Talking About It, but Why?

Do you know what states your business or your clients have a taxable presence in? Do you know what activities your business is conducting across the country? Has the activities your business conducts across the country changed?

State tax laws regarding nexus continue to change either through legislation or interpretation by the courts; therefore, it is very important to gain an understanding of nexus, and to determine what states your company has a filing obligation or tax liability exposure.

NOTE: Steps can be taken to mitigate this exposure.

What is “Nexus"?

Nexus, in simple terms, is having a taxable connection or presence with a state.

Why Should I Care?

If you are a corporation, pass-through entity (i.e., LLC, partnership S corporation), nexus will determine what states the entity is required to file returns and pay tax. If you are a partner, member of an LLC, or a shareholder of an S corporation, the nexus determination affecting the entity within which you own an interest, will determine what states you file in as an individual (in addition to your state of residency).

What is the Problem?

As you might expect, there are different nexus thresholds for different types of taxes (i.e., income tax, sales/use tax, gross receipts taxes, etc.). As with just about every state tax issue, there is also a lack of uniformity among the states regarding nexus which creates complexity and confusion.

“Old School Nexus”

“Old School Nexus” as I like to call it, is physical presence nexus. In other words, a company would only have nexus in a state if the company had a physical presence in the state.

This appears to have become “old school” now, since states are considering companies with the following activities to have nexus in their state:

1. Using independent contractors, affiliates or others in a state.
2. Having a web-link to your site on an affiliate or unrelated party’s website in a state.
3. Having customers who hold your company’s credit cards in a state.
4. Licensing intangibles to related or unrelated parties in a state.
5. Having sales in a state over a certain threshold.
6. Having payroll in a state over a certain threshold.
7. Having a certain percentage of your total sales, property and payroll in a state.

These are just a few examples. There are many more (trust me).

The “New Nexus”

The “New Nexus” (vs. “Old School Nexus”) is apparently for the “New Economy.” In other words, the “New Nexus” does not require having a physical presence in a state.

For example, selling items over the Internet can create “Amazon nexus" (as discussed in a previous post), and “exploiting the market in a state” by expending effort (without a physical presence) to generate income from customers in a state can create “economic nexus.”

As a side note, “Amazon nexus” applies to sales and use tax, and “economic nexus” appears to apply to income taxes, gross receipts taxes and business activity taxes.

NOTE: not all states apply the “new nexus” rules, but many are proposing legislation or strongly considering adopting the “new nexus” rules.

What Does This Mean For You?

States are experiencing a deep financial budget crisis and therefore, have been changing their laws and proposing legislation to balance their budgets, resulting in higher taxes or new taxes in some cases. In addition, more and more states are looking to tax out-of-state companies with the slightest presence in-state, as economic nexus and Amazon nexus become more acceptable or challenged without success.

As a result, I highly recommend businesses operating across the U.S. either physically or online, consult a state and local tax professional who can help you walk through the analysis and determine if you have nexus in certain states; or determine if any changes can be made to the way you do business to eliminate nexus.

Please contact me at brian.strahle@bakertilly.com to help you find your "nexus solution."

Florida: Canned Software Downloaded Electronically Can Escape Sales Tax

In case you didn't know, the sale of canned software is not always taxable for sales tax purposes.

According to Florida Technical Assistance Advisement (TAA) 10A-028, the license to use software that is downloaded electronically by the customer is a service transaction and is not subject to sales tax provided it is not part of the sale of tangible personal property.

FLORIDA STATUTES

Section 212.05, F.S., provides that the sale of tangible personal property is subject to tax. The term “sale” includes a license to use tangible personal property. See Section 212.02(15), F.S. Service only transactions, except those authorized for taxation by Chapter 212, F.S., are generally not subject to tax. When tangible personal property and services are a part of the same sale, the entire sales price is subject to tax. See Section 212.02(16), F.S. Software supplied on a tangible medium is taxable. Charges for services that are part of the sale of such taxable software are part of the sales price and are subject to sales tax.

Rule 12A-1.032, F.A.C., provides that a sale of customized software is a service transaction and is not subject to sales tax provided the customized software is not part of the sale of other tangible personal property. Likewise exempt is a sale that solely involves software, canned or customized, that is provided to the customer in an electronic format, as there is no conveyance of tangible personal property. Keep in mind that electronically accessed software is subject to Florida sales tax when sold as part of the sale of tangible personal property.

Section 212.0506, F.S., indicates that an agreement that covers the cost of maintaining, repairing, or replacing canned or prepackaged software (tangible personal property) is subject to sales tax, while an agreement that covers the cost of maintaining, repairing, or replacing customized software or software that was downloaded electronically is not subject to sales tax.

BOTTOM LINE:

Please know that a Technical Assistance Advisement under section 213.22, F.S. is binding on the Department only under the facts and circumstances described in the request.

Your company's or client's facts will determine whether or not a sale or purchase of software is taxable.

Please contact me at brian.strahle@bakertilly.com for assistance in determining the taxation of your software in Florida or other states.

Colorado Releases Final Emergency Regulations for Out-of-State Retailer Notification Requirements

Colorado's notification requirements as imposed or created by HB 1193 (in February 2010) for non-collecting retailers has obtained additional guidance.

Colorado recently released "final" Emergency Regulations (39-21-112.3.5) which provide clarification regarding several issues raised in the previously released Emergency Regulations. See previous posts for all of the details and confusion.

Here are a few of the main points as outlined in the Final Emergency Regulations:

1. A "retailer that does not collect Colorado sales tax" does not include retailers that only make sales in Colorado by means of download of digital goods or software. It includes a retailer that makes sales in Colorado both by means of download of digital goods or software and by means of shipping goods to a Colorado purchaser.
2. A "retailer that does not collect Colorado sales tax" only includes retailers that make more than $100,000 in Colorado gross sales in the prior calendar year and reasonably expects total gross receipts in Colorado in the current year to exceed $100,000. The term "total gross receipts" only includes the sales of goods. It does not include sales of services.
3. A "Colorado Purchaser" is a purchaser that requests the goods be shipped to Colorado. In other words, the purchaser may not be in Colorado, but may still be considered a "Colorado purchaser" if the purchaser requests the goods to be shipped to Colorado.
4. For sales of downloaded or digital goods, a Colorado purchaser is a purchaser whose "bill to" address is in Colorado.
5. A "Colorado Purchase" is one that is shipped to Colorado. For downloaded goods it is the "bill to" address.
6. A non-collecting retailer must give notice to all Colorado purchasers that Colorado sales or use tax is due on all purchases that are not exempt from sales tax. This notice must be provided with respect to each transaction.
7. The notice must be clearly legible, reasonably prominent and located in close proximity to the total price. It shall be sufficient if the non-collecting retailers provide a prominent linking notice that reads: "See important sales tax information regarding the tax you may owe directly to your state," if the linking notice directs the Colorado purchaser to the principal notice required.
8. A non-collecting retailer is required to provide an end-of-year summary of Colorado purchases to the customer.
9. A non-collecting retailer is required to provide the Colorado Department of Revenue with an annual report of the total dollar amount of all of a Colorado purchaser's Colorado purchases at the end of the year. The only detail to be provided is the amount of the purchase.
10. If the retailer is required to provide a similar notice for another state in addition to Colorado, the retailer may provide a single notice to all purchasers with respect to items purchased for delivery in all states if the notice contains substantially the information required in a form that is generalized to any state.

BOTTOM LINE: If your company or your clients meet the definition of a "retailer that does not collect Colorado sales tax," then you need to meet the notification requirements (invoice and annual) as outlined by the Emergency Regulations.

Please contact me at brian.strahle@bakertilly.com for assistance in determining if you meet the definition, and how to comply with the notification requirements.

New Mexico Amnesty Program in Effect!

New Mexico's Tax Amnesty Program is in effect now through September 30, 2010. The program provides individuals and businesses relief from the interest and penalties associated with unreported state taxes which were due prior to January 1, 2010.

The amnesty program is extended to taxpayers subject to one or more tax programs under the Tax Administration Act. The Department can conduct an amnesty review for qualifying taxpayers under prescribed circumstances.

According to the program, from June 7, 2010 to September 30, 2010, qualifying taxpayers who enter into an Amnesty Agreement will not be assessed penalties, and if they pay the resulting assessment of taxes due within 180 calendar days of assessment, no interest will be due.

What is Amnesty?

Amnesty allows taxpayers to conduct an audit on themselves as specified in a signed amnesty agreement between the Secretary or the Secretary’s delegate (“the Secretary”) and the taxpayer or the taxpayer’s authorized representative (“the taxpayer”).

Amnesty is a limited-time opportunity to disclose unreported and unassessed taxes due without incurring penalties. In addition, the Department will not assess interest as long as the liability is paid within 180 calendar days of assessment. If tax due is not paid within the 180-day period, interest will accrue from the time that tax was originally due.

Are You Eligible?

To be eligible to receive New Mexico Tax Relief, you must be a taxpayer with unreported or under-reported state taxes due prior to January 1, 2010. State taxes that have already been assessed or are currently under audit or investigation are not eligible. However, if you have other unreported state taxes that have not been assessed, audited or investigated, they may be eligible.

Taxpayers interested in participating in this amnesty program must submit an application and agreement to the Department on a form prescribed by the Secretary outlining the nature of the amnesty issues. Go to http://www.taxamnesty.newmexico.gov/ or call 1-888-668-2979 to request a copy of the application and agreement. The approval to enter into an amnesty agreement rests solely with the Secretary. The Secretary is not required to do so if the taxpayer’s application or agreement is incomplete.

The Department will consider the following to determine eligibility for amnesty:

• the taxpayer has not been selected for audit by the Department
• amnesty is not being requested for existing liabilities
• the taxpayer is not the subject of a criminal investigation
• Taxpayers in bankruptcy have bankruptcy court approval of agreement, if required by bankruptcy law.

If you have additional questions, please go to the Department's Website.

If you need assistance in taking advantage of this program, please contact me at brian.strahle@bakertilly.com.

Minnesota Tax Credits for High Tech Investments: Applications NOW Available!

As a reminder (see earlier posts), the Minnesota Department of Employment and Economic Development (DEED) released the application forms this week for the new Minnesota Angel Investment Credit on their website.

If you are a start-up or early stage company inquiring about the credit, please contact me for assistance.

Also, if you are a venture capital firm or private equity firm interested in investing in an early stage company, please contact me as well.

The credit is on a "first come, first serve basis." Therefore, timing is everything.

I have prepared a "special report" that outlines the qualifications for taking advantage of the credit. Please contact me at brian.strahle@bakertilly.com for a free copy.

Nevada Tax Amnesty Program In Effect!

On June 30th, the Governor of Nevada announced the 2010 Tax Amnesty Program, which began on July 1, 2010 and ends on September 30, 2010.

The program was authorized by Assembly Bill 6 of the 26th Special Session of the Nevada Legislature and signed into law by Governor Gibbons.

For eligible taxes due and payable to the Department prior to July 1, 2010, the program provides for a one-time waiver of penalty and interest so long as the outstanding tax liability is paid in full during the amnesty period.

The tax types included in the amnesty program are as follows: Sales & Use Tax, Modified Business Tax, outstanding Business License fees payable to the Department due on or before September 30, 2009 (The Secretary of State now administers the business license fee), Cigarette Tax, Other Tobacco Products Tax, Liquor Tax, Bank Branch Excise Tax, Insurance Premium Tax, Tire Tax, Live Entertainment Tax (non-gaming), Short-term Lessor (Passenger Car), and Exhibition Facilities Fees, Property Tax that are Centrally Assessed, and Net Proceeds of Mineral Tax.

For an amnesty application and more information, please visit the Department’s website.

If you need assistance in taking advantage of the program, please contact me at brian.strahle@bakertilly.com.

Minnesota Creates Voluntary Disclosure Program for Undisclosed Offshore Accounts

Minnesota has created a Voluntary Disclosure Program for taxpayers to avoid penalties on any unpaid state taxes on undisclosed offshore accounts. The program runs from July 1, to October 29, 2010. Minnesota will forgive penalties that would be otherwise imposed on foreign entities and accounts used to avoid tax compliance with Minnesota laws.

RISK?

If a taxpayer fails to disclose any foreign accounts or entities, they should make a voluntary disclosure in order to become compliant with Minnesota’s tax laws. In exchange for making a voluntary disclosure, the taxpayer can eliminate the risk of criminal prosecution and avoid substantial civil penalties.

If a taxpayer does not submit a voluntary disclosure, they run the risk of detection by Minnesota Revenue.

To this end, the Department of Justice and the Internal Revenue Service (IRS) have recently entered into an agreement with the Swiss Confederation/government to release the names of thousands of United States residents suspected of using foreign bank accounts held by UBS AG to avoid and evade taxes. As the IRS and Minnesota Revenue have information sharing agreements, Minnesota Revenue will ultimately obtain the names of those individuals.

Making a Voluntary Disclosure

To make a voluntary disclosure, taxpayers should submit the information listed below. To remain anonymous when making a voluntary disclosure, taxpayers may engage a representative such as a tax preparer, accountant, or attorney.

A voluntary disclosure must contain the following information:

• A cover letter stating an intention to enter the MN Offshore Voluntary Disclosure Program;
• A description of the source of funds or other assets in each account;
• The date the initial deposit was made or the date on which the taxpayer took control or ownership of each account;
• Documentation indicating whether the principal (which includes initial deposits and all subsequent contributions) has been taxed or untaxed and the years involved;
• The amount of potential tax liability; and
• Whether the taxpayer participated in the IRS Offshore Voluntary Disclosure Program.

If you need assistance in pursuing a voluntary disclosure agreement, please contact me at brian.strahle@bakertilly.com.

For more information, visit Minnesota's website: Offshore Accounts Voluntary Disclosure

Highlights of Recent State and Local Tax Developments

While I was on vacation last week, several state and local tax developments occurred that I want to highlight. I am planning on going into greater detail on several of these in future posts, but thought I would provide you with a brief list now, due to the time sensitivity of some of the items:

1. Minnesota taxpayers with undisclosed offshore accounts. Minnesota has created a voluntary disclosure program for undisclosed offshore accounts running from July 1, 2010 to October 29, 2010.
2. Companies with employee withholding requirements in Minnesota. Minnesota issued a new withholding form (W-4MN) along with specific criteria for when it is required.
3. Online Retailers. Federal Legislation was introduced which would impact state and local sales and use tax requirements for online retailers. The Main Street Fairness Act would bring outlying states into compliance with the voluntary Streamlined Sales and Use Tax Agreement (SSUTA) by backing the accord with congressional authority. The bill does not compel any state to join, but those that choose to adopt this system would then have the authority to require online retailers to collect and remit sales taxes the same way that businesses on local Main Streets do now.
4. Retailers without nexus in Colorado, but selling into Colorado. The Direct Marketing Association filed a lawsuit against Colorado’s notification requirements (HB1193) alleging the requirements to be unconstitutional.
5. Retailers without nexus in Colorado, but selling into Colorado. Colorado issued final regulations on the out-of-state notification, reporting requirements for non-collecting retailers. The final regulations do have some changes from the preliminary regulations/emergency regulations issued earlier this year.
6. Retailers without nexus in Oklahoma, but selling into Oklahoma. Oklahoma has issued proposed emergency regulations to implement their notification requirements for out of state Internet retailers.
7. Taxpayers with unresolved Nevada tax liabilities. Nevada’s tax amnesty program began July 1st and runs to September 30, 2010.
8. Taxpayers with unresolved Florida tax liabilities. Florida’s tax amnesty program began July 1st and runs to September 30, 2010.
9. Taxpayers with property, payroll, sales or customers in Washington. Beginning June 1st, Washington has an “economic nexus” standard for Business and Occupation (B&O) Tax purposes. Meaning, you don’t have to have a physical presence in Washington to have nexus. In addition, Washington now has a single sales apportionment factor. Service providers determine their sales factor by treating sales as Washington sales if the benefit of the service was derived in Washington. Previously, service providers allocated their sales to Washington based on costs of performance.

Please contact me at brian.strahle@bakertilly.com if you would like additional information on any of the above items.

Direct Marketing Association Challenges Colorado Sales Tax Law

The Direct Marketing Association has filed a lawsuit against Colorado's Internet sales tax law, or notification requirements imposed on out-of-state retailers as a result of HB 1193. For details of HB 1193, see previous posts.

The DMA suit asserts that the law and regulations violate both the United States Constitution and the Colorado Constitution. The DMA’s complaint details how the new law:

1. Discriminates against interstate commerce;
2. Exceeds the permissible scope of state regulatory authority over out-of-state companies;
3. Violates the right to privacy of Colorado consumers;
4. Infringes upon the free speech and due process rights of both consumers and retailers; and
5. Exposes confidential consumer information to the risk of unauthorized disclosure.

For more information, see the Direct Marketing Association's notification and lawsuit.

In previous posts, I mentioned that lawsuits were expected to be filed. Whether or not this lawsuit will be successful remains to be seen. If the Colorado notification requirements apply to your company, you will want to keep a close eye on this case.

Please contact me at brian.strahle@bakertilly.com if you would like me to personally contact you with changes or updates regarding this case.

Independent Contractors Creating Nexus for Your Company?

If your company uses the services of an independent contractor it may have nexus exposure in the states where the independent contractor resides or provides those services. That exposure could create filing and reporting requirements for various state taxes (income tax, sales tax, franchise tax, gross receipts taxes, etc.).

According to current state tax case law and statutes, generally an independent contractor that provides services “to” your company would not create nexus for your company in the state where the independent contractor resides or provides services.

However, if the independent contractor provided services to your company's customers (more than solicitation of sales of tangible personal property) on behalf of your company, then it is likely that the independent contractor would create nexus for your company in the state where the independent contractor resides or provides those services.

If the independent contractor is controlled by your company and should be treated as an employee, then not only may you have nexus issues, but also employee misclassification issues creating payroll tax exposure.

If you would like assistance in determining your independent contractor nexus exposure, please contact me at brian.strahle@bakertilly.com.

Florida Amnesty Program Details

As mentioned in an earlier post, Florida has enacted tax amnesty beginning July 1 and running through September 30, 2010.

Last week, Florida released a new website with all of the details.

To register, all you have to do is submit a tax amnesty agreement (online or paper form) by September 30, 2010.

If you have any questions or need assistance, please contact me at brian.strahle@bakertilly.com.