An article in Forbes asked, “Why is multi-state tax compliance so hard?”
One answer to that question can be found in a single word: nexus. The most thought-provoking sessions at the Tax Executives Institute Region VIII conference last month covered the gray areas of state nexus. Below are 4 key points that the panelists highlighted:
- Do you want nexus or don’t you? One session began with this simple question. In general, tax executives try to manage away from nexus. You try to limit the employees and properties that you have in other states. But, one speaker argued, sometimes nexus can be good. If you’re already planning to enter a state within the next few years, you may want to claim nexus now. Why? Because claiming nexus can give you the right to NOLs (net operating losses) in that state. Of course, this takes planning ahead and knowing what your operations are going to do a couple years in advance.
- The right to apportion. What if most of your operations are in one state and you happen to not have nexus in any other states? If you had the right to apportion, perhaps you can more proactively manage your taxes across states.
- Filing methodologies. Consider the different filing methodologies you can elect. Around half the states allow some form of elected consolidation or accommodation. As you evaluate filing methodologies, it’s important to keep in mind elected consolidation, accommodation, apportion and nexus.
- How does the state define business income? In some instances, courts have found that the definition of what qualifies as income doesn’t include a functional tax, and then a state has to amend its statute. There are multiple factors to consider here, not just marketing sourcing.
All of the speakers agreed that its critical to understand where you have nexus and where you don’t. If you’re claiming nexus, make sure that you have the economic substance in a state to legitimately create nexus. In some instances, states have gone after companies for falsely claiming nexus.