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Extreme Nexus-ing: States Get Creative to Assert Nexus

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As a Florida state and local tax attorney, I see how aggressive states can be on a daily basis. Many states often take unreasonable positions that force taxpayers into a bind. Many businesses throughout the country are faced with a dilemma: Do they pay the tax to the state or pay a professional to battle? With the advent of the Internet, the unwillingness of the Supreme Court to hear a case, and the refusal of Congress to act, states will continue to push the envelope as to what constitutes nexus for state tax purposes.

For the unfamiliar, nexus is a jurisdictional proposition. It does not constitute whether tax is due or not, rather if a company has nexus with a state, the company can be forced to collect state sales tax or pay state corporate income tax. In order to show the states’ increase aggression, Bloomberg conducted a poll in 2013. The results were not surprising.

The poll taken was whether certain activities constituted nexus. According to the results, the poll suggested that 37 states believe having an internet server in its state constituted nexus. About half (26 states) take the position that company also has nexus in if it shared space on a 3rd party’s internet server, nexus is created in 24 states if it has data on a leased server, and only 13 states assert nexus if a company uses services of a web hosting provider. While there is not a theory on how this creates nexus, it appears to be an economic presence theory.

One other important issue addressed by the poll is whether a telecommuting employee in a state creates nexus. Thirty-eight states take the position that if an employee telecommutes from home, then nexus is created. States included in that figure are New York and Washington D.C. Of those 38 states, 33 of them believe that one employee doing back-office administrative work is nexus creating and 34 states believe even development functions, such as computer coding creating nexus. Based on another report, the states that do not attribute nexus to telecommuters are Indiana, Kentucky, Maryland, Mississippi, Oklahoma, and Virginia.

Other ideas discussed in the report are borrowing, having a general partner in a state, and even foreclosing on as few as one property in state. The report identifies that an activity as limited as borrowing creates nexus in California, Oregon, Wisconsin, Indiana, West Virginia, New Hampshire, Georgia, Louisiana, and Arkansas. Fifteen states believe having a general partner in a state is enough to give a company nexus, and foreclosing one property gives a company nexus in all but 16 states. Can making sales through a 1-800 phone number give a company nexus? Oregon, Minnesota, Iowa, Missouri, Arkansas, Tennessee, New Mexico, and Maryland all seem to think it does.

What is clear from the report is that more and more activities are being found to give a company nexus in a particular state. Even if the state is wrong and their position is not technically constitutional, an uphill battle is ahead. It can be extremely costly for a company to fight a nexus battle as cases are routinely appealed. If you or your company believes it may have nexus creating activities please contact us for a consultation.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at or call 954-642-9390.

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