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The Ever-Changing State of State and Local Taxes
For tax professionals, particularly those who specialize in the area of state and local taxes, nexus is a topic that is discussed all too often. Nexus rules have lagged behind the ever-changing economic landscape, but states are beginning to catch up. Nonetheless, the nexus rules are very important for professional services firms such as law firms.
Missing Pieces of the Nexus Pie
While the federal courts have established a set of standards for determining nexus for sales and use taxes, there is no clear-cut rule that service providers can use for determining nexus for income-based tax purposes. As a result, states have started applying several new standards, such as economic nexus and factor presence (also known as bright-line nexus). Out-of-state service providers can establish economic nexus by directing consistent and substantial economic activity to the state or deriving income from a state's local market. This requirement can be met by making sales to customers in the state or receiving income from intangible property in the state — even if the business has no physical presence in the state. Massachusetts and New York have established thresholds to define substantial economic activity. See, Mass. Gen. L. Chapter 63 §39; N.Y. Tax Law §209(2). California and Connecticut have adopted bright-line nexus rules, which set forth thresholds for property, payroll and sales within a state. See, Cal. Rev. & Tax. Cd. §23101(b); Conn. Gen. Stat. §12-216a.
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