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Few states have adopted nexus policies aimed at fostering alternative-work arrangements, according to a survey of state revenue agencies by Bloomberg BNA released April 23.
Thirty-five states that responded said income tax nexus would result for an out-of-state employer that allows an employee to telecommute from a site within state borders, compared with 37 in 2011 and 36 in 2010. Telecommuting would not generate nexus for an out-of-state employer in Indiana, Kentucky, Maryland, Mississippi, Oklahoma, and Virginia.
Several of the 35 jurisdictions said that their answers would remain the same even if the employer recorded no sales in the state or if the employee telecommuted for only part of the total work time.
Because state opinions vary on what triggers nexus, the survey was conducted to clarify state tax department positions on certain specific employment-related activities or relationships. Every state, except Alaska, participated in the 12th annual Survey of State Tax Departments by Bloomberg BNA's Tax Management and Accounting Division.
Nexus, or a business connection for the employer, can occur when the employer has a business location, sales transactions, or employees performing services in a state. For state tax purposes, nexus generally means a certain threshold of contact exists between an employer and a state before the state has jurisdiction to tax the employer.
In most states, a traveling sales representative calling on clients and prospects, or a telecommuter working from home, would create nexus in a state that otherwise would have too little activity to justify taxing the employer. Employees attending meetings for 14 or fewer days would cause nexus in 13 jurisdictions, and five states said that out-of-state employees attending a seminar within the state was a nexus-creating activity, the survey showed.
Conducting job fairs, hiring events, or other recruitment activities would cause income tax nexus in 21 states, the survey said. Thirty-six states said nexus would occur from having employees hire, supervise, or train other employees within their borders.
Reimbursing sales staff for the costs of maintaining an in-home office would produce nexus in 23 states, the survey said. Among the 18 states that said this would not cause nexus was Georgia, which said its response assumed that no nonsolicitation activities were performed. Soliciting services for six or fewer days would bring about nexus in every state except Hawaii, Massachusetts, Oklahoma, Rhode Island, Vermont, Virginia, and West Virginia.
Attending a trade show for 14 or fewer days is enough to cause nexus in 10 states, the survey said. California, Texas, and New York City each said they had a special exclusion for trade show participants.
Performing repair services regularly would create nexus in all the states surveyed except Vermont, which had no response, while performing repair services four or fewer times would produce it in most states, except Connecticut, Illinois, Vermont, which did not respond, and Massachusetts, which said nexus would depend on the circumstances.
The Senate Finance Committee likely will have a hearing in June on state tax issues, including the Business Activity Tax Simplification Act (H.R. 1439), said Mark Nebergall, president of Software Finance and Tax Executives Council.
The bill has support from the business community and would create a federal bright-line nexus standard for states levying business activity taxes, Nebergall said at a panel lunch hosted by the D.C. Bar Association Taxation Section's State and Local Tax Committee.
The bill, passed by the House Judiciary Committee in 2011, remains on the House calendar for floor consideration. States do not support the bill, however, because it would invite federal interference in state taxing authority and cause billions of dollars in lost revenue, sources said. They also are opposed to a section related to apportionment that they have said bolsters such preemption.
Related to payroll, but somewhat separate from the issue of nexus, is an effort to compel states to standardize when they can tax nonresident employee wages, such as those traveling on business. Regarding this issue, the Multistate Tax Commission developed a model law to make state tax laws more uniform.
The model law sets a flat 20-day work threshold before subjecting the employee to that state's income tax, regardless of the employer's tax nexus status, with several exceptions.
So far, North Dakota enacted a law (S.B. 2170) that uses the Multistate Tax Commission's model. Effective Jan. 1, 2013, workers who are present in North Dakota for fewer than 20 days and have no other North Dakota source income will be exempt from North Dakota income tax and withholding, provided their state of residence has a similar exemption or has no income tax.
A free trial of the State Nexus Tax Evaluator is available from Bloomberg BNA Tax & Accounting.
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