State tax policies need to be updated to better address new business models such as cloud computing, as well as a change that began long ago--the nation’s shift toward a service-based economy, according to Bloomberg BNA’s 14th annual Survey of State Tax Departments published today.
Both of these trends have called into question the types of transactions that can be subject to a state’s tax. As the role of geographical boundaries continues to diminish as a factor in modern commerce, uncertainties appear to be multiplying for both states and businesses over basic issues such as which states are allowed to impose their corporate income tax on sales of services, intangibles or cloud-based transactions. The lack of uniformity in this area raises the likelihood that taxpayers will face unexpected results. In some cases, two or more states may end up taxing the same transaction. In other cases, the transaction may escape taxation by any state. For many states, it remains unclear how cloud-based transactions are characterized and taxed even as the use of such services is growing in popularity.
“It is clear from the results of this year’s survey that states are still trying to catch up to the digital economy of the 21st century, at least as it relates to their tax codes,” said George Farrah, Executive Editor of Bloomberg BNA’s Tax & Accounting division. “Moreover, the situation creates a great deal of uncertainty for corporations that cannot properly plan for the state tax impact of the cross-border services they provide.”
Many believe that federal legislation is necessary to bring clarity to business taxpayers in this area. The proposed federal Marketplace Fairness Act (MFA) is likely to take center stage in 2014 among state and local tax practitioners, businesses engaged in remote sales and consumers making online purchases. Another measure, the Business Activity Tax Simplification Act of 2013 (BATSA), would define what constitutes a business’s physical presence in a state for taxation purposes. It would also expand the protection provided to interstate commerce to apply to sales of intangible property and services.
In 2014 witnesses testifying before Congress in support of MFA (McDermott Will & Emery’s Steve Kranz) and BATSA (Tax Foundation’s Joe Henchman) cited the findings in Bloomberg BNA’s 2013 Survey of State Tax Departments to illustrate the inconsistent positions state tax departments are taking on a variety of emerging issues.
Businesses affected by state nexus policies need to also monitor their own cross-border activities. In this short video, Thomas Shimkin, the director of the Multistate Commission’s National Nexus Program and Fred Nicely, senior counsel for the Council On State Taxation, discuss why the annual survey has become an essential resource for gauging the nexus consequences of various business activities.
The Bloomberg BNA Survey of State Tax Departments is aimed at clarifying each state’s position on the gray areas of corporate income tax, sales and use tax and on nexus policies. This year’s survey included new portions to address sales tax nexus for cloud computing and services. To compile the data a questionnaire was sent to senior state tax officials in every state, the District of Columbia and New York City. This year, every state participated in the survey, although some states declined to answer certain questions. The states were asked to provide their positions as of Dec. 31, 2013.
Continue the discussion on Bloomberg BNA’s State Tax LinkedIn Group: do you believe federal legislation is needed to resolve some of the gray areas surrounding digital commerce and other emerging issues in state taxation? Would the states and taxpayers be better off if they states entered a multi-state compact or came up with the answers themselves?For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.
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