As use of the internet and other forms of technology continue to proliferate, state income tax nexus policies regarding the location of web servers seem to becoming more relevant. Commonplace activities, such as renting space on an internet server could result in an income tax assessment in a state in which a company otherwise lacks any contacts.

Arguing that these types of contacts do not create nexus based on a de minimis theory is difficult because most jurisdictions do not believe that the physical presence requirement applies to income tax nexus determinations.

An initial challenge is finding state guidance on the issue. The Bloomberg BNA 2013 Survey of State Tax Departments, which will be published on April 26, seeks to remedy this by asking state tax agency officials if income tax nexus would result from:

•  owning an internet server located in the state;
•  owning an internet server located in the state and hiring third-party technicians located in the state to keep the server functioning;
•  leasing a third-party's internet server located in the state for the corporation's exclusive use;  
•  leasing space on a third-party's internet server located in the state-to be shared with other unrelated corporations;
•  leasing space on a third-party's network of internet servers, some of which are located in the state, and the corporation's data is on the server for less than six months during the year;
•  leasing space on a third-party's network of internet servers, some of which are located in the state and the corporation's data is on the third-party's internet server for more than six months during the year; or
•  paying a web-hosting provider with a server located in the state to provide the corporation with web services to sell products over the internet.

The preliminary results show that income tax nexus would result in Arizona and Arkansas from each of the above listed activities, except paying an in-state web-hosting provider for services. Iowa said that all of the above activities would create nexus, explaining that "physical presence is not required for corporation income tax nexus per Iowa Supreme Court decision in KFC Corporation." But other states, such as California take a more nuanced approach.

By Steven Roll

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