Corporate Close-Up: Is Sourcing the New Nexus?


For years, “nexus,” which is a state’s constitutional authority to require an out-of-state corporation to pay income tax, was a gray area that yielded few clear answers. But the nexus consequences of many types of activities have become more certain over the years. That’s because most states have moved away from the traditional physical presence standard for determining if an out-of-state corporation can be required to collect tax corporate income tax. The question now is how to determine which state is owed income tax on transactions that take place in more than one jurisdiction.

That’s why Bloomberg BNA’s 2015 Survey of State Tax Departments features in-depth coverage of the issues facing corporations in jurisdictions for which nexus is established. A key area of focus in 2015 is “sourcing,” which refers to the rules a state uses to determine if it will impose its corporate income tax on an activity that is conducted in more than one jurisdiction.

About 70 percent of jurisdictions responding to the survey have adopted an economic presence standard in which substantial nexus or an obligation to collect tax can be triggered by engaging in economic activities within a jurisdiction. One result of this is that nexus is nearly a foregone conclusion for corporations selling intangibles or services. (Corporations selling tangible personal property are still protected by Federal Pub. L. No. 86-272, which limits the states’ power to impose net income taxes on an out-of-state business that sells tangible personal property in the state).

Just as the law keeps evolving, the focus of the survey is changing as well. State sourcing rules with respect to receipts from new or emerging transactions can be especially hard to decipher. This is partly because the sourcing rule that is applied is often driven by how a state characterizes a particular transaction. This year’s survey found that states are characterizing new or emerging products or business models to fall within the definitions of long-established transactions (i.e., tangible personal property, intangibles or services).

For example, the characterization of cloud computing varies among states and is often counter-intuitive. While most states characterize cloud computing transactions as the sale of intangibles or services, Utah treats these transactions as the sale, lease or license of tangible personal property.

The good news is that unlike in previous years, most states chose only one approach to characterizing these receipts. The cloud computing receipts were treated as services in 12 states, intangible property in 5 states, and tangible personal property in one state. The bad news is that most of the other states did not respond to the question.    

Regardless of the states’ positions, the Survey of State Tax Departments will be there to chronicle the evolution of key emerging policies sometimes even before it is reflected in a statute, regulation or ruling.