What is a company nexus?
The State nexus of an entity, i.e., corporation, Limited Liability Company, (LLC), Trust, Foundation, Non-Profit or Partnerships is established by the links and relationships that the entity maintains within a particular State. Some of these include the State where the bank account is established, the listed phone numbers of the company, the mailing address of the company, and most important is any physical plant or office location.
How does a state tax auditor view the nexus?
Different states in the U.S. define the entity nexus in different ways. Massachusetts defines the business nexus as (830 CMR 63.39.1):
- the buying, selling, or procuring of services or property.
- the execution of contracts.
- the exercise or enforcement of contract rights.
- the maintenance of a place of business.
- the employment of labor; and
- every other act, power, right, privilege or immunity exercised or enjoyed in Massachusetts as an incident to or by virtue of the powers and privileges acquired through the corporate form.
Public Law 86-272 (15 USC 381) Exemption
In 1959 U.S Congress passed Public Law 86-272 (15 USC 381); this law prohibits a State from imposing an income tax where a taxpayer’s activities are limited to solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which those orders are sent outside the State for approval or rejection, and if approved, are filled by shipment or delivery from a point outside the State. Public Law 86-272, (15 USC 381) applies to companies that sell tangible personal property, it is unavailable for firms that offer a service or other product, generally.
Every state and local taxing jurisdiction approaches taxation differently— this is the primary reason state and local tax issues are complicated and require planning. There are jurisdictional boundaries and exemptions established under State law available for firms that offer services or products other than tangible personal property. This is dependent on the nexus test(s) for each State. In most cases the general test focusses on the physical location of the office or plant.
Physical Presence Test
Most court challenges have focused on whether out-of-state corporations must pay sales tax in another state it sells products in. Cases like National Bellas Hess, Inc. v. Department of Revenue of Ill., and Quill Corp. v. North Dakota, have shown that a foreign company only pays tax in a state in which it has a physical presence.