At least six states and the City of Brotherly Love have broadened their corporate income tax systems to include standards based on the level of economic activity a company has in their locales—and local governments are just getting started.
“I think we are seeing an increasing trend here and more states jumping on board,” said Richard Cram, director of the Multistate Tax Commission’s National Nexus Program.
Speaking during a Vanderbilt University Law School state and local tax forum, Cram pointed to a rush of taxing jurisdictions weaving features from the Wayfair ruling into their corporate income tax systems in the last six months. In most cases the laws and regulations are going into effect in the 2020 tax year.
The Supreme Court’s seminal South Dakota v. Wayfair ruling tossed out the court’s 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law, which requires remote sellers to collect sales tax if they have more than $100,000 in sales or 200 transactions with buyers in the state, would pass constitutional muster.
Since the June 2018 decision, more than 40 states have begun imposing remote sales tax based on a measure of economic activity, as opposed to physical presence. In addition, more than 30 states have passed marketplace facilitator laws, which place a duty to collect and remit sales tax on large online web sites such as Amazon Marketplace, eBay Inc., and Etsy Inc. that broker transactions for other, typically smaller, vendors.
State actions taxing corporate income based on an economic nexus—or connection—to a state include these:
- Hawaii passed an economic nexus threshold of 200 or more transactions and $100,000 in gross income;
- Washington reduced the economic nexus threshold for its business and occupation tax to $100,000 in gross income;
- Oregon adopted an economic nexus standard for its corporate activity tax with “factor-presence” nexus, which includes $750,000 or more in commercial activity;
- Massachusetts has proposed guidance that incorporates features of its Wayfair-inspired law as a basis for capturing corporate income taxes;
- Texas is amending its franchise tax regulations, adopting an economic nexus threshold of $500,000 or more in gross sales;
- Pennsylvania’s revenue department just published guidance adhering to a $500,000 standard for its corporate income tax; and
- Philadelphia has established a $100,000 threshold for its business income and receipts tax.
While these developments may be creating some heartburn for out-of-state businesses operating in these jurisdictions, Cram said the businesses at least have clarity about their duties.
“One plus to the taxpayer community is that the states are at least providing guidance,” Cram said. “They are explaining their nexus standard for the corporate income tax.”
Work Group Statement
On a related issue, Cram said the MTC work group updating its 2002 statement regarding the federal Interstate Income Tax Law (P.L. 86-272) would ultimately yield a series of digital economy examples designed to help businesses understand their duties better.
Generally, the 1959 law bars states from imposing tax on income derived by out-of-state businesses engaged in interstate commerce if that activity is limited to soliciting orders for sales of tangible personal property and then shipping to an in-state customer. The work group is reexamining this narrow exemption in the aftermath of the Wayfair ruling.
Already the work group has reached a “general consensus” that virtual interactions between remote sellers and customers in a particular state “should be considered in-state activity,” Cram said.
Cram said the revised statement on P.L. 86-272 would include several scenarios focusing on the digital economy to help taxpayers deal with newer ways that goods and services are used and delivered.
Parting Shot in Colorado
A special task force looking at ways to simplify Colorado’s byzantine system of state and local sales taxes wrapped up its final meeting.
The group on Oct. 22 issued a final report to the state General Assembly on how to streamline the state’s existing system, which forces out-of-state vendors to comply with state-administered tax filing requirements in statutory cities, towns and counties in addition to meeting a dizzying number of requirements imposed by constitutional home-rule jurisdictions, with widely varying differences in tax bases and rates.
One of the report’s chief recommendations: Let’s keep the band together! Rep. Tracy Kraft-Tharp (D), chair of the task force, said one draft bill proposes that the task force continue for at least two more years. “We need to be educating legislators,” she said. “We really are trying to get legislators to see the value in this.”
A second draft bill concerns the state’s ramping up use of Geographic Information Systems to help vendors track local government tax rates and bases when selling into the state or selling intrastate into another taxing jurisdiction.
At the same time it implemented new remote sales tax requirements on out-of-state vendors post-Wayfair, Colorado said it would implement destination sourcing—basing the sales tax rate on the address of the buyer—for all inter- and intrastate transactions.
The bill would hold companies harmless if a tax error is made when they rely on state-generated GIS data. The state is currently seeking software companies to bid on a single filing portal to include GIS data for all state and local taxes in Colorado.
—With assistance from Michael J. Bologna in Nashville.