As use of the internet and other forms of technology continue to proliferate, state income tax nexus policies regarding the location of web servers seem to becoming more relevant. Commonplace activities, such as renting space on an internet server could result in an income tax assessment in a state in which a company otherwise lacks any contacts.
Arguing that these types of contacts do not create nexus based on a de minimis theory is difficult because most jurisdictions do not believe that the physical presence requirement applies to income tax nexus determinations.
An initial challenge is finding state guidance on the issue. The Bloomberg BNA 2013 Survey of State Tax Departments, which will be published on April 26, seeks to remedy this by asking state tax agency officials if income tax nexus would result from:
The preliminary results show that income tax nexus would result in Arizona and Arkansas from each of the above listed activities, except paying an in-state web-hosting provider for services. Iowa said that all of the above activities would create nexus, explaining that "physical presence is not required for corporation income tax nexus per Iowa Supreme Court decision in KFC Corporation." But other states, such as California take a more nuanced approach.
By Steven Roll
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