Economic Nexus

• taxpayer organized or domiciled in CA
• sales in CA exceed lesser of $500K or 25% of taxpayer's total sales
• taxpayer's real and tangible personal property in CA exceeds lesser of $50K or 25% of taxpayer's total of such property
• compensation paid by taxpayer in state exceeds lesser of $50K or 25% of total compensation paid

The above dollar amounts are to be indexed for inflation annually by the FTB.

FTB summary.

The Florida Dept of Revenue held that a financial services firm providing various services to retailers in Florida had nexus for income tax purposes even though it had no physical presence in the state. T is licensed with the Florida Dept. of Financial Services under Florida law. The license indicates that T has a number of authorized retailers in the state and T paid a fee for each one. The retailers bind T because if a retailer does not pay for any transaction, T is liable to the service provider.

P.L. 86-272 does not apply to T because it is not selling tangible personal property. In analyzing due process, the DOR stated: “the U.S. Supreme Court has said that the “simple but controlling question is whether the state has given anything for which it can ask return.”  See Wisconsin v. J. C. Penney Co., 311 US 435, 444 (1940).  In this case, Florida has provided the Taxpayer with a license, and with an orderly and regulated marketplace.  Florida is also providing the Taxpayer with access to its courts.  Therefore, Florida meets the requirements of the Due Process Clause.”

In analyzing commerce clause concerns using Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)., the DOR also found no problem with imposing tax. “Florida has provided the Taxpayer with a license, and with an orderly and regulated marketplace.  Florida is also providing the Taxpayer with access to its courts and police and fire protection for its authorized agents/representatives.  Therefore, Florida’s corporate income tax has a fair relation to the services Florida provides.”

In analyzing any physical presence requirement, the DOR noted that cases in other states have found that the Quill physical presence standard does not apply for income tax purposes. The DOR also noted that the US Supreme Court had declined to hear a state case on this issue. It found these cases to be “persuasive, especially given the fact that the U.S. Supreme Court declined to hear the cases.”

The DOR found that T had substantial nexus in the state.

Geoffrey, Inc., 453 Mass 17, 899 NE2d 87 (2009)

licensing trademark = nexus

Dept. of Treasury, Revenue Administrative Bulletin 2007-6 (12/07) - add'l guidance on nexus for the Michigan Business Tax

MBT Nexus Standards - Revenue Administrative Bulletin 2008-4

"Although the Department recognizes that some states have reached the opposite conclusion, the Department concludes that MBNA best summarizes the current state of Commerce Clause jurisprudence" (RAB 2007-6)

Nexus and in-state repairs - Revenue Notice 96-16

Lanco, Inc v Director, New Jersey Div of Taxation, 879 A2d 1234 (NJ Sup Ct App Div, 2005), cert den 127 S Ct 2974 (2007) - summarized in next column.

Also see AccuZip case of 8/09 of the NJ Tax Court. The court held that software sales on CD-Roms by AccuZip and Quark were of tangible personal property, and did not derive a substantial economic benefit in NJ. It found that Quark was doing business in NJ but its activities were de minimis under PL 86-272 so it only owed the minimum tax.  See case for discussion of Lanco.

The New Jersey Supreme Court, in a per curium opinion, upheld the holding of the appellate court in finding that the Quill nexus standard only applies for sales and use tax (A-89-05; 10/12/05). In Lanco, Inc. v. Director, Division of Taxation, N.J. App. Div., No. A-3285-03T1 (Aug 2005), the court reversed the lower court decision to find that the Quill decision only applies to sales and use tax matters. Lanco licenses trademarks and similar intangibles to a related retailer in New Jersey – Lane Bryant. Lanco has no physical property in New Jersey. The “minimum contacts” and fairness considerations of the Due Process clause were not at issue. Instead, the “substantial nexus” consideration of the Commerce Clause was.

The Director argued that “there is no principled reason why the Commerce Clause should require a corporation’s physical presence to justify State taxation … provided the State can establish that the corporation derives significant benefits from the continued and deliberate economic activity in the taxing State.” The Director also noted that Quill’s connection with customers was via the U.S. mail or common carrier whereas Lanco’s connection with its customer (Lane Bryant) was a long-term contractual one designed to increase Lane Bryant’s sales and the parties were affiliated corporations. The Director noted that there is an increased burden to NJ from such increased retail sales activity relative to Quill mailing catalogs and products to customers.

The appellate court agreed with the Director that Quill was inapplicable to the case.

A&F Trademark, Inc v North Carolina, 605 SE2d 187 (NC Ct App, 2004), cert den 546 US 821 (2005)

Held that G was subject to income tax in the state on royalties received from the licensing of intangible property. G, domiciled in Delaware, has no property or employees in Oklahoma. Its licensee operates stores (TRU) there and pays license fees to G. TRU pays income taxes in Oklahoma and deducts the license fees it pays to G. The Oklahoma Tax Commission (OTC) found no due process or commerce clause issue with assessing tax on G because it had substantial nexus because the use of the trademarks in Oklahoma to generate substantial income shows a connection between the income and the interests of the state in imposing its income tax. OTC also noted that G “purposefully directed its activities toward residents” and “availed itself of the benefits of Oklahoma’s economic market.”

The court agreed with the Lanco decision (879 A.2d 1234 (N.J.Super.A.D., 2005)) that the physical presence required in the Quill sales and use tax case (504 U.S. 298 (1992)) for commerce clause purposes does not apply to income tax. The court also found no due process clause problem because G had purposefully directed its activities at residents of the state – it was a willing party.

It was also held that G was a unitary business and its royalty income should be apportioned (rather than allocated to Delaware) using a “modified one-factor apportionment formula” based on G’s sales factor with such approach serving as an “accurate reflection of the business done” in the state.

“Substantial nexus exists where a taxpayer regularly takes advantage of Oregon’s economy to produce income for the taxpayer and may be established through the significant economic presence of a taxpayer in the state.”

To determine if substantial nexus exists the DOR may look at the regularity of contacts in the state, deliberateness of marketing to Oregon customers, and significant gross receipts from Oregon customers or from the use of intangible property in Oregon. Also relevant is whether the business is protected by Oregon laws, has court access, uses state roads, benefits from Oregon’s educated workforce, or receives “police and fire protection for property in Oregon that displays taxpayer’s intellectual or intangible property.” http://arcweb.sos.state.or.us/rules/OARS_100/OAR_150/150_317.html

Per the court: "[W]e simply wish to acknowledge the great challenge in applying the Commerce Clause to the ever-evolving practices of the marketplace. James Madison, Benjamin Franklin, and the other Framers at the Constitutional Convention who adopted the Commerce Clause lived in a world that is impossible for people living today to imagine. The Framers' concept of commerce consisted of goods transported in horse-drawn, wooden-wheeled wagons or ships with sails. They lived in a world with no electricity, no indoor plumbing, no automobiles, no paved roads, no airplanes, no telephones, no televisions, no computers, no plastic credit cards, no recorded music, and no iPods. Likewise, it would have been impossible for the Framers to imagine our world. When they fashioned the Commerce Clause, they could not possibly have foreseen the complex and varied ways that commerce is conducted today, especially via the internet and electronic commerce. It would be nonsense to suggest that they could foresee or fathom a time in which a person's telephone call to his or her local credit card company would be routinely answered by a person in Bombay, India, or that a consumer could purchase virtually any product on a computer with the click of a mouse without leaving home. This recognition of the staggering evolution in commerce from the Framers' time up through today suggests to this Court that in applying the Commerce Clause we must eschew rigid and mechanical legal formulas in favor of a fresh application of Commerce Clause principles tempered with healthy doses of fairness and common sense. This is what we have attempted to do herein."

Guidance will be needed on the meaning of "regularly." (see right)

"Two provisions are added to the definition of “doing business in this state.” The definition as revised is provided below with the additional provisions shown in bold. The definition of “doing business in this state” provides that “doing business in this state” includes, except as prohibited under P.L. 86−272, issuing credit, debit, or travel and entertainment cards to customers in this state; regularly selling products or services of any kind or nature to customers in this state that receive the product or service in this state; regularly soliciting business from potential customers in this state; regularly performing services outside this state for which the benefits are received in this state; regularly engaging in transactions with customers in this state that involve intangible property and result in receipts flowing to the taxpayer from within this state; holding loans secured by real or tangible personal property located in this state; owning, directly or indirectly, a general or limited partnership interest in a partnership that does business in this state, regardless of the percentage of ownership; and owning, directly or indirectly, an interest in a limited liability company that does business in this state, regardless of the percentage of ownership, if the limited liability company is treated as a partnership for federal income tax purposes. A taxpayer doing business in this state for any part of the taxable year is considered to be doing business in this state for the entire taxable year."

"The statutory language relating to P.L. 86-272 is effective for taxable years beginning on or after January 1, 2009. The statutory language relating to the non-recognition of part-year nexus applies to any period for which the statute of limitations has not expired."