Chau H. Tran, Managing Director, SALT Income & Franchise Tax
30-Second Summary:
- As the implications of South Dakota v. Wayfair, Inc., (Wayfair) continue to unfold, the compliance burden will increase, and potential penalties can be costly
- States are slowly responding to the Wayfair decision and seeking to apply the ruling to corporate income tax
- As states move to expand their economic nexus provisions to corporate income tax, taxpayers should review their tax footprint and consider whether they now have a filing obligation in states where they historically did not
When the U.S. Supreme Court overturned the decades-old Quill[1] physical presence standard in South Dakota v. Wayfair, Inc.[2], (“Wayfair”), it was a watershed moment for online retailers throughout the country. The ruling held that the state had the authority to mandate the collection of sales taxes by out-of-state sellers on sales to in-state customers, even when that seller does not have a physical presence in the state (i.e., economic nexus). As a result, states around the country quickly reacted and updated their sales tax nexus provisions to include minimum thresholds.
The concept of economic nexus is not new to state corporate income tax and is one which has been heavily debated for years. In fact, states have been enacting economic nexus provisions into their respective tax laws for over 2 decades now.[3] And more recently, the trend in several states has been moving in the direction of adopting a factor presence nexus standard. While it is closely resembles the economic presence standard, the factor presence standard is less subjective and provides various bright-line rules which are based on property, payroll and receipts in a state. However, the decision in Wayfair essentially paves the way for states to collect taxes from taxpayers without requiring any form of property or payroll within the state. While not as expeditiously as their sales tax regimes, states are slowly responding to the Wayfair decision and seeking to apply those same concepts from a corporate income tax perspective. As such, the ruling has had significant ripple effects that are making waves for state corporate income tax purposes.
For example, the following states have recently enacted various economic nexus provisions for corporate income tax purposes within the past few months, and more are certain to follow:
Hawaii – For taxable years beginning after December 31, 2019, a taxpayer that lacks a physical presence in Hawaii is considered to be “systematically and regularly engaged in business in the State” if the taxpayer engages in: (1) 200 or more transactions with persons in Hawaii, or (2) has gross income of $100,000 or more[4].
Massachusetts – Per a regulation promulgated in October 2019, there is a presumption that an entity’s virtual and economic contacts will subject them to Massachusetts income taxes if the volume of the entity’s Massachusetts-sourced sales exceeds $500,000 for the taxable year.[5]
Oregon – A business, or a unitary group, with Oregon commercial activity of $750,000 or more is subject to the newly enacted Commercial Activities Tax (“CAT”). The Oregon CAT is imposed on businesses for the privilege of doing business in the state for tax years beginning on January 1, 2020[6].
Pennsylvania – Effective for tax years starting on or after January 1, 2020, the Pennsylvania Department of Revenue published guidance stating that taxpayers having $500,000 or more of direct or indirect.
gross receipts sourced to Pennsylvania per year will have a filing requirement even if it does not have a physical presence within the Commonwealth[1].
Texas – Effective for tax reports due on or after January 1, 2020, the state has amended its franchise tax regulations, essentially adopting an economic nexus threshold of $500,000 or more in Texas-sourced gross sales[2].
Increased Tax Compliance Burden
Another significant trend in the state income tax world is the shift from sourcing sales based on cost of performance to adopting some version of market-based approach. The market-based sales sourcing methodology redirects the taxation from where services are provided to where the customer, end user, or benefit of the service is located. To date, there are now over 30 states that have adopted market-based sales sourcing into their regulations. That impact can be significant for a taxpayer who performs a service in one state (or limited states) for its customers located throughout the U.S. as that taxpayer potentially now has sales which will be sourced to those 30+ states. Previously, without a physical presence in those 30+ states there was arguably no nexus, however those days may be forever gone.
As the states move to expand their economic nexus provisions to corporate income tax, taxpayers should review their tax footprint and consider whether they now have a filing obligation in states where they historically did not. These changes, which continue to evolve, create a huge compliance burden, not just for domestic companies, but also for foreign companies that have no physical presence in the U.S. but have customers located here.
As the implications of the Wayfair ruling continue to unfold, the drain on internal resources will increase, and potential penalties can be costly. Global Tax Management (“GTM”) is closely monitoring these developments and will continue to update you on any significant changes as they occur. You do not have to face this new world alone as we are here to help you navigate this ever-changing and complex landscape we live in today. For more information, please contact me at CTran@gtmtax.com.
About GTM’s State & Local Tax Services
Whether you need a person, a small team, or an entire tax compliance function, GTM helps you meet all regulatory requirements and deadlines. We also bring added value by improving your tax processes along the way. GTM understands the landscape of corporate tax and the related compliance life cycle, thus we ensure your compliance process is properly coordinated with your provision and planning functions. We deliver the people, process, and/or technology to your compliance function so internal resources can focus on the areas of tax that provide greater value to the overall business.
[1] Corporate Tax Bulletin No. CT 2019-04, Penn. Dep’t of Revenue (Sept. 30, 2019).
[2] 34 Tex. Admin. Code § 3.586.
[1] Quill Corp. v. North Dakota, U.S. 298 (1992).
[2] 138 S. Ct. 2080 (2018)
3 Geoffrey, Inc. v. S.C. Tax Comm’n, 437 S.E.2d 13 (S.C. 1993)
[4] S.B. 495, 30th Legislature (HI 2019)
[5] 830 Mass. Code Regs. 63.39.1(3)(d).
[6] Corporate Activity Tax FAQ, Ore. Dep’t of Revenue
