The 2018 Wayfair court case substantially changed the filing threshold for sales tax by overturning the Quill physical presence requirement and allowing an economic presence standard. For income tax purposes, however, the economic presence standard was already widely adopted. In addition, taxpayers engaged in the sale of tangible personal property have interstate commerce protection under Public Law 86-272. Although Wayfair did not dramatically change the income tax landscape, we can still expect to see changes as states overhaul their tax policies.
“Nexus” generally means the threshold of contact that must exist between a taxpayer and a state before the state has jurisdiction to impose taxes. States have adopted three standards for determining income tax nexus: physical presence, economic presence and factor presence. The standard that applies to businesses depends on the business’ activities and to which state and year the standard is being applied.
PHYSICAL PRESENCE: This policy generally requires a taxpayer to have an office, employee, real estate, or other tangible property within the state before it will impose an income tax. Some states have adopted policies that include both physical presence and economic presence standards. According to the Bloomberg 2019 State Tax Survey (Bloomberg Survey), nine states responded as having an income tax policy based on physical presence.
ECONOMIC PRESENCE: This is the most popular standard with 33 states responding as having an economic presence policy in the Bloomberg Survey. This policy can trigger income tax nexus by merely making sales into the state. Although this standard is widely adopted, economic presence thresholds can vary from state to state. FACTOR PRESENCE: This policy uses both physical and economic presence to quantify the level of activity that constitutes nexus. The Multistate Tax Commission (MTC) established a factor-based model having nexus thresholds of more than:
- $50,000 of property;
- $50,000 of payroll;
- $500,000 of sales; or
- 25% of total property, payroll or sales.
According to the Bloomberg Survey, 14 states have a factor presence policy. However, uniformity is not obtained because few states have fully adopted the MTC model. Some states only partially conform, while other states do not conform at all.
Determining state income tax nexus can be a complicated undertaking because nexus policies vary from state to state. In the wake of the Wayfair sales tax case, it is expected that states will shift from physical presence to economic presence standards if they have not already done so.
If you have questions or would like more information, please contact Tim Suarez at tsuarez@windes.com or 844.4WINDES (844.494.6337).