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More States Likely Eyeing Economic Nexus for Corporate Income Tax

Posted on Oct. 30, 2019

Several states have adopted an economic nexus threshold for corporate income tax purposes post-Wayfair — a trend that is likely to continue, according to a Multistate Tax Commission staff member.

On top of the flurry of activity among states implementing economic nexus and marketplace facilitator regimes for sales tax purposes, the South Dakota v. Wayfair Inc. ruling abandoning the physical presence standard for state sales taxes has started to reach into the income side of state tax systems. "We haven't seen as much activity on the income tax side, but I think that's going to be a growing trend," said Richard Cram, director of the MTC’s National Nexus Program.

Speaking on an October 29 panel during the Paul J. Hartman State and Local Tax Forum in Nashville, Tennessee, Cram highlighted states that have already introduced an economic nexus threshold for corporate tax purposes, including:

The Texas comptroller has also released proposed regulations that would apply an economic nexus threshold of $500,000 in annual gross receipts for the state’s franchise tax.

One positive aspect of states setting nexus standards for corporate income taxes is that states have provided guidance and clarity regarding their positions, according to Cram. He further noted that as states continue to eye economic nexus thresholds, there likely will be more regulatory activity from state tax departments as compared with statutory changes from legislatures.

“It’s easier to do a regulation than a statutory change,” Cram said. He explained that for states with a statute providing that the state can extend nexus to the fullest extent permitted under the U.S. Constitution, the respective tax agencies may take the position that they have authority to establish a threshold that they consider to be compliant.

Speaking to Tax Notes on the sidelines of the conference, Cram noted that state legislatures could affirm or challenge a regulatory threshold after the fact.

Public Law 86-272

Speaking on the same panel, Mark McCormick with EY discussed the P.L. 86-272 considerations following Wayfair.

P.L. 86-272, which was enacted in 1959, prohibits states from imposing net income taxes on nonresident businesses whose in-state activity is limited to the solicitation of orders for the sale of tangible personal property, and the orders are approved out of state and shipped or delivered from a point outside the state.

P.L. 86-272 is not a nexus statute but rather a “fairly limited exemption from taxation,” according to McCormick, who noted that the law remains on the books absent congressional action. If a business qualifies for the protection, P.L. 86-272 trumps Wayfair and states’ economic nexus statutes, according to McCormick.

However, “the bad news is [that] it’s got very limited applicability in today’s world, where almost every business prides itself on delivering service as part of their product,” McCormick added. “Caution — know your facts.”

An MTC work group has been tasked with advising whether to update a statement of information on P.L. 86-272 to address the modern digital economy. The statement, adopted by the MTC and signatory states, offers guidance on business activities that are treated as protected or unprotected by P.L. 86-272.

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