States Taxing New Technologies, At-Home Work Arrangements, Social Coupon Transactions, As U.S. Economy Continues Shift to the Web-based World

Arlington, Va. (May 4, 2012) - An annual Bloomberg BNA survey of state tax departments released this month asks senior state tax officials in all 50 states how their jurisdictions are taxing the new technologies and types of transactions that continue to emerge as the U.S. economy shifts from the bricks and mortar of Main Street to the web-based world, which operates mostly independent of state or local borders.

States once believed that a corporation needed a physical presence within their borders before it could be subject to an income-based tax. But new technologies, such as cloud computing, and new transactions such as Groupon and LivingSocial, are challenging the parameters of most states' tax codes, which either have not addressed how these technologies and transactions will be taxed, or do so under outdated provisions.

At issue is how states are applying the legal doctrine known as "nexus," the level of contact that must exist between a taxpayer and a state before the state has the authority under the U.S. Constitution to assess a tax. Now, most states have shifted to a nexus standard based on "economic presence" within their borders, upon which an income tax can be imposed.

What constitutes a taxable "economic presence?"

The Bloomberg BNA 2012 State Tax Department Survey  identifies a number of different scenarios that can trigger income tax nexus in different states:

• Sixteen states said having a website on a server physically located within their jurisdiction will trigger income tax nexus.
• Having a substantial number of customers with billing addresses in the state? Fourteen states said yes. That would trigger nexus for the firm.
• Thirteen states would apply sales and use tax to fees paid by in-state customers to remotely access canned or prewritten software that is hosted on a web server.
• Nearly every state agreed that social media coupon companies, such as Groupon or LivingSocial, are not liable for taxes when their coupons are redeemed at in-state retailers or restaurants. But the states were very much divided on the question of whether sales taxes, paid by the end user, should be assessed on the full or the discounted price of the product or service.
• All but six jurisdictions tax an out-of-state employer that permits an employee to telecommute from a home within their borders.
• Twenty-three states said nexus would arise for reimbursing sales staff for the costs of maintaining an in-home office.
• Job fairs or other recruitment activities would trigger income tax nexus in 21 states.
• Thirty-six states said nexus would arise from having employees hire, supervise, or train other employees within their borders.

The Bloomberg BNA 2012 State Tax Department Survey  offers insights for practitioners who must gauge whether a corporation's activities within a state could result in a tax assessment. It is published annually.

For detailed survey results, please contact Tom Ehart at tehart@bna.com or (703) 341-5949. Press copies of the survey  are available to the working press.

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