In analyzing the results of the 2013 Survey of State Tax Departments, Bloomberg BNA looked to prominent state tax experts across the country for their perspectives. This Expert Insight showcases some of the commentary. Free access to the key issues and analysis from the survey (but not all of the states’ responses) is here.
Fred Nicely, senior tax counsel for the Council On State Taxation (COST), on why Quill’s physical presence standard should apply to income taxes:
‘‘Quill’s physical-presence standard for substantial nexus provides clearer guidance on when a person is subject to a state’s tax, transactional or income, than a subjective economic-presence standard. There is no logical reason to justify limiting Quill’s physical-presence requirement for substantial nexus to transactional taxes. Income taxes imposed at the state and local levels, especially with state and local tax laws increasingly requiring taxpayers to make adjustments to its federal income and the state and local governments using differing apportionment methodologies, are just as complicated for taxpayers to comply with. [However], even states indicating they use Quill’s physical presence standard will often stretch what constitutes an ‘agency relationship’ to assert an out-of-state taxpayer has a physical presence in the state.’’
Matthew Hedstrom, senior associate at Alston & Bird, on whether nexus could be triggered by purchasing cloud computing services:
‘‘Since most cloud computing services involve software, and hosting of such software on servers, the question becomes whether purchasing cloud-based services results in taxable presence. Under Quill, the issue would be whether the purchaser would be deemed to own or lease tangible personal property. The states’ positions may not withstand challenge by taxpayers when you consider that any nexus inquiry is highly fact-intensive, and despite the various state responses in this regard, taxpayers would have a number of arguments that merely purchasing cloud services does not create substantial nexus. For one, even assuming that the ownership or lease of a server would constitute a taxable presence, whether a purchaser owns/controls/possesses an interest in the software or the server simply by purchasing cloud services is a gray area, subject to considerable debate, and likely, again, a fact-intensive inquiry. Some states have formally acknowledged this.”
David Fruchtman, of counsel at Horwood Marcus & Berk, on the state tax treatment of non-U.S. entities:
‘‘Even more than their domestic counterparts, foreign companies have a steep learning curve when it comes to state taxes. When a foreign company enters the U.S. market, its U.S. sales volume is small, its state tax liability insignificant and its knowledge of U.S. sub-national taxes essentially nonexistent. At this point, a foreign company’s failure to comply with state tax obligations often will go undetected by state tax agencies. Unfortunately, even after generating meaningful amounts of U.S. sales and state tax liabilities, foreign businesses often remain unaware of their state tax obligations. As a result, these companies may have significant multistate tax exposures before they are genuinely aware of their liability for these taxes. The survey demonstrates the state income tax hazards confronting foreign-based businesses, too many of which are neither complying with nor planning for state income taxes. The states have long sought to shift the burden of their income taxes to out-of-state businesses. Now, as borders of all kinds become less significant to both commerce and taxation, the states’ interest in taxing foreign businesses is continually increasing.’’
Upcoming Webinar Analysis of the 2013 Survey of State Tax Departments
Experts Fred Nicely, tax counsel for the Council On State Taxation (COST), and Thomas Shimkin, director of the Multistate Tax Commission's National Nexus Program will discuss the survey in more depth in a webinar on Thursday, May 9, from 12:30 to 2:00 p.m., ET. Register online to secure your space now. Or, please call 1-800-372-1033, option 6, then sub-menu option 1, and refer to the date and title of the conference. Lines are open Monday through Friday from 8:30 to 7:00 p.m., excluding most federal holidays.
By Melissa Fernley
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