In Bloomberg BNA's 12th annual Survey of State Tax Departments, we asked many questions aimed at clarifying each state's positions on the gray areas of corporate income and sales and use tax administration. Every state, except Alaska, participated in the survey.
The survey this year focuses on how the states are taxing the new technologies and transactions that have emerged as the U.S. economy continues to shift from bricks and mortar of Main Street to the web-based world, which mostly operates independent of state or local borders.
A central factor in the emerging tax policy paradigm appears to be where a corporation's server is located. Sixteen states said having a website located on a server within their jurisdiction will trigger income tax nexus.
An out-of state corporation that provides access to software via the internet to in-state customers could trigger income tax nexus with a state under several different scenarios. Twenty-five states said nexus would result from renting space on a server located in their jurisdiction.
Cloudy with a Chance of Nexus.
A cloud-based service provider that hires independent contractors to perform set-up or configuration services within their jurisdiction would be sufficient to create income tax nexus, 30 states said. Twenty-nine states said nexus would arise from having employees solicit services within their borders.
Fourteen states said a cloud-based service provider would be subject to income tax if it had a substantial number of customers with billing addresses in the state or earned a substantial amount of revenue from customers in the jurisdiction.
For purposes of sales and use tax, 13 states said sales tax would apply to fees paid by in-state customers to remotely access canned or prewritten software that is hosted on a web server.
Another new type of transaction the states are taxing is social media coupons. Nearly every state agreed that social media coupon companies, such as Groupon or LivingSocial, would not achieve taxable nexus with its jurisdiction by allowing their coupons to be redeemed at in-state retailers or restaurants. But the states were divided on the question of whether the retailer should collect tax on the full or discounted price. Sixteen states said, at the time the item is purchased and the coupon is redeemed, the retailer is required to collect tax on the full value of the item purchased (e.g., sales tax would be imposed on a full-purchase price of $100 even though the customer actually paid $50 as a result of the certificate).
Taxing the `Deal of the Day.'
Thirteen states said they would require the retailer to collect tax on only the discounted value of the item purchased (e.g., sales tax would be imposed on a discounted purchase price of $50 even though the full value of the meal was $100). Seventeen states said they require the retailer to collect sales tax on the full value of the item purchased if the certificate does not disclose the discounted price.
The survey shows that few states have adopted nexus policies aimed at fostering alternative-work arrangements such as telecommuting or facilitating hiring activities such as job fairs. Most jurisdictions said income tax nexus would result for an out-of-state employer that permits an employee telecommute from a home within their borders.
Working from Home, Hiring Activities.
The states that said telecommuting would not trigger nexus for an out-of-state employer were Indiana, Kentucky, Maryland, Mississippi, Oklahoma, and Virginia.
Twenty-three states said nexus would arise for reimbursing sales staff for the costs of maintaining an in-home office. Conducting job fairs, hiring events, 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.
By Steven Roll
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