Sarah Denton presented this PowerPoint at Decosimo's 2011 Tax Seminar on November 15, 2011 in Chattanooga, Tenn.

1. A Global Reach with a Local Perspective
www.decosimo.com
Nexus and Jurisdiction: I Owe Taxes Where?
Sarah Denton, Tax Supervisor
2011 Decosimo Tax Seminar
November 15, 2011

2. In General
 Nexus – extent of contact a person,
item of income, or transaction has with
a state
 Jurisdiction – the right of states to tax a
company and impose indirect tax
burdens (collection of use tax or file
information returns)
 Different taxes have a different
threshold standards for establishing
nexus

3. Background
 Due Process Clause
 Minimal connection requirement
 Commerce Clause
 State can’t regulate interstate commerce
 P.L. 86-272
 Income tax protection only
 Protects solicitation activities

4. Background
 Significant Case Law
 Income Tax
 Wisconsin Department of Revenue v. William
Wrigley Jr. Co. 505 US 214 (1992)
 Geoffrey, Inc. v. South Carolina Tax Commission,
437 S.E.2d 13 (1993)
 Sales Tax
 Quill Corp v. North Dakota, 504 US 278 (1992)
 National Bellas Hess v. Department of Revenue, 386
US 753 (1967)

5. Current Sale Tax Nexus Standard
 Quill Case is still the authority used for
sales and use tax
 Physical presence is required before
taxpayer has to collect sales tax as
long as it exceeds a “slightest
presence”
 Physical presence – office, warehouse,
employees or agents

6. Current Income Tax Nexus Standard
 No clear guidance as with Quill – P.L.
86-272 protects solicitation of orders
for tangible personal property
 Some state require physical presence
others have adopted “economic nexus
standard”
 Need to do state by state analysis to
ensure compliance

7. Nexus – Other Taxes
 Franchise Tax:
 no protection under P.L. 86-272
 generally subject if nexus present for sales
tax
 Gross Receipts/Margin Tax:
 Michigan, Texas, Ohio
 no protection under P.L. 86-272
 Minimal activity can establish nexus

8. Agency or Alter Ego Nexus
 Activities of the following can create
nexus
 Independent contractor
 Sales rep
 Related entity
 Owner or director
 Scripto Inc. v. Carson, 362 US 207 (1960)
 Function not label rules determination
 Unimportant if agent has several principals

9. Affiliate or Attribution Nexus
 MTC Nexus Program Bulletin 95-1
 Local service provider for out-of-state seller can
cause nexus
 MTC Affiliate Nexus Proposal – nexus if:
 Out-of-state vendor is related to in-state vendor with
physical locations
 use identical or substantially similar name,
tradename, trademark, etc. to develop sales
 Borders Online, LLC v. State Bd of Equal., Cal. Ct.
App. 1st District, No. A105488, 5/31/05

10. Affiliate Nexus
 Following states have provisions where
nexus exists if out-of-state retailer uses
same trademark or uses same name (or
both) as in-state entity
 Arkansas
 Illinois
 New York
 Oklahoma
 South Dakota
 Texas

11. Economic Nexus
 Taxpayer exploits a state market through advertising
or other activities and derives income from such
activities
 Idea has grown out of intangible property cases
 Geoffrey, Inc. v. South Carolina Tax Commission,
437 S.E.2d 13 (1993)
 KFC Corporation v. Iowa Department of Revenue
(No. 09-1032, 2010)

12. Economic Nexus
 How do you determine a threshold?
 Quantify – MTC factor presence standard
 Description –
 Connecticut definition of substantial economic
presence
 a purposeful direction of business toward this state,
examined in light of the frequency, quantity and
systematic nature of a company's economic contacts
with this state, without regard to physical presence, and
to the extent permitted by the Constitution of the United
States

13. Economic Nexus
 Single Sales Factor Formula
 Many states adopting for income tax
 Shifts burden to out-of-state retailers
 No dilution of factors for sellers falling under
economic nexus

14. Multistate Tax Commission (MTC)
 Functions to promote uniformity across
states and simplify multistate tax laws
 1990 National Nexus Program
 2002 Adopts factor presence nexus standard
 $50,000 of property,
 $50,000 of payroll,
 $500,000 of sales, or
 25% of total for any one factor
 2004 Affiliate Nexus Proposal

15. Multistate Tax Commission (MTC)
 States adoption of factor presence standard
 Business Activity Taxes:
 Ohio – July 1, 2005 – first state to adopt
 Oklahoma – January 1, 2010
 Washington – June 1, 2010 – B&O tax - $250,000
threshold for sales
 Michigan – not conforming to MTC but nexus for MBT is
gross receipts exceed $350,000
 Income Taxes:
 Connecticut –Jan 1, 2010
 Colorado – April 30, 2010
 California – January 1, 2011

16. Streamlined Sales and Use Tax Agreement
 Created in 1999 – response to changing
market
 Purpose – to simplify sales and use tax
collection and administration
 Uniform tax definitions
 Uniform exemption procedures
 Rate simplification
 Uniform sourcing (where the sale is taxable)
 State level administration of all sales tax

17. Streamlined Sales and Use Tax Agreement
 24 of 45 states with a sales tax have
adopted SSUTA
 Full member states - in compliance with the SSUTA
through its laws, rules, regulations, and policies
 21 states – including GA (2011), NC (2005)
 Associate member states - in compliance with the
SSUTA except laws haven’t gone into effect but will
within 12 months
 Tennessee

18. Internet Tax Freedom Act
 Signed into law in 1998 under Clinton
 Prohibits state and local taxation of internet
access
 Bit taxes, bandwidth taxes, e-mail taxes
 Prohibits multiple or discriminatory taxes on
electronic commerce
 Does not protect from sales tax on internet sales

19. Click-Through Nexus
 Nexus is established if an on-line retailer
enters into an agreement with a resident
to refer customer’s to the on-line retailer’s
website for a commission
 2008 - New York Amazon Law – Sec.
1101(b)(8)(vi)

20. Amazon Case
 Amazon.com v. NYS (NY State Sup. Crt. 877
N.Y.S. 2d 842
 Commerce Clause Challenge – court rules
constitutional since required agreement with in-
state rep
 Due Process Challenge – rational connection
exists through the contract
 Equal Protection Clause – statue applied to all
vendors with similar contracts

21. Click-Through Nexus Laws
 Eight states have click-through nexus laws
 Arkansas
 California
 Connecticut
 Illinois
 New York
 North Carolina
 Rhode Island
 Vermont

22. Click-Through Nexus Laws
 Bills have been introduced in the following states:
 Massachusetts
 Michigan
 Pennsylvania
 Tennessee
 Amazon’s response to laws has been to cancel
relationships with in-state residents
 California – reprieve for 1 year and start collecting
2013

23. Amazon – Recent Developments
 Amazon has completely reversed position
 Amazon will now offer to handle sales tax
collection for merchants who sell through
their site for a fee of 2.9% of the taxes
collected
 Amazon plans to roll out this optional
service to vendors February 1, 2012

24. Other Issues
 Digital products – treatment varies by state
 Books
 Music
 Movies
 Cloud computing
 Tangible property or service

25. Voluntary Disclosure Agreements
 Agreement with state to submit delinquent
returns and tax payments in exchange for
benefits and protections from state
 Agreements vary from state to state but some
common benefits include:
 Limited lookback period
 Waiving of penalties

26. What’s Ahead?
 H.R. 1439 Business Activity Tax Simplification Act of
2011
 Sales and income tax filing with physical presence
 Extend P.L. 86-272 to services and intangibles
 Physical presence test of 15 days or more in a state
for income and sales tax
 House Judiciary Committee voted favorably in July
2011

27. What’s Ahead?
 Main Street Fairness Act
 Allows states to collect sales and use tax from on-line
retailer if they have signed on to the Streamlined
Sales and Use Tax Agreement
 Marketplace Equity Act
 States would have authority to require on-line sellers
to collect sales tax
 Provides flexibility in how states conform to the law

28. CONTACT SARAH DENTON
Sarah Denton
sarahdenton@decosimo.com
423-756-7100
DISCLAIMER: The contents and opinions contained in this presentation are for informational purposes
only. The information is not intended to be a substitute for professional accounting counsel. Always seek
the advice of your accountant or other financial planner with any questions you may have regarding your
financial goals.

29. A Global Reach with a Local Perspective
www.decosimo.com
QUESTIONS?