The states’ taxation statutes have never been simple but are becoming more complex and farther reaching in recent years. As states are trying to deal with their budget crisis, there have been sweeping changes. They are becoming more aggressive in their legislation and collection processes.
You may have heard of the term “nexus” in conversations before. So what does this term mean in regards to states? Having nexus in a state generally means having a connection or tie to that state. Every state has different definitions of what creates nexus in the state such as a physical office, a certain amount of gross receipts, or employees. So for the most part in the past, you needed a physical presence in the state. This is no longer true as states are adding more nexus definitions which can include “economic nexus” such as marketing to customers in the state or having significant gross receipts. The rules are often different for sales, income, gross receipts, and franchise tax. How they apply to your business also entails what industry you are in and whether you are providing services, selling goods, or manufacturing.
One change is the way some states are starting to tax services. Traditionally, these sales were sourced to the location where the majority of the cost of performance occurred, which usually meant the state where the services were performed. As a result, a business often had to look only to the laws of its home state to determine whether it owed tax on income from such sales. Many states, however, have grown dissatisfied with the results of the traditional rule and are exploring alternatives. Most of these alternatives involve some sort of “market-based” approach to sourcing sales of services and intangibles.
For example, beginning with the 2011 tax year, California law provides that income from the sale of services is assigned to California to the extent the purchaser of the service received the benefit of the service in California. Similarly, income from the sale of intangibles is assigned to California to the extent the intangible is used in California. Other states might also follow California’s lead.
A business needs to be proactive and diligent when having any kind of transactions with a state since every state has different definitions and taxation rules. Failure to keep abreast of these changes could result in an unexpected tax liability, interest and penalties. We can assist you with how the state taxation rules apply to your particular situation.
Please contact Nancy Schulze at 972-644-7112 if you have any questions on this matter.