State Tax Snapshot: Factor Presence Nexus Standards Fail to Provide Clarity, Practitioners Say

The New York budget bill, signed into law on March 31, includes an economic nexus standard effective for tax years beginning on or after Jan. 1, 2015, which is based on a specified annual dollar threshold of receipts derived from the state. In adopting this approach, New York joined a minority of other states such as California, Connecticut, and Michigan.

Previously, New York required physical presence in the state to be subject to its corporate income tax, but the new economic nexus standard will expose many more corporations to the state’s corporate income tax.

Under New York’s new economic nexus standard, a corporation is subject to New York corporate income tax if it is deriving receipts from activity within the state. “Deriving receipts” is defined as having $1 million or more of New York receipts included in the numerator of the corporation’s sales factor.

While specifying a dollar threshold for triggering nexus is intended to clarify the level of in-state activity that constitutes “economic nexus,” some practitioners questioned whether this type of approach would raise more questions than it would answer. “If you have an economic nexus standard that is based on solely receipts, you really could have strange situations where a business has no real purposeful activity/direction in the state, yet is nonetheless deemed to be ‘doing business’ under the statute,” said Matthew Hedstrom of Alston & Bird LLP in a recent interview with Bloomberg BNA.

Questions raised by this approach will likely be further exacerbated by emerging business practices, Hedstrom said. “If you think about it in the context of the ‘new economy’ where there is a significant number of internet-based cloud service businesses, you really can envision a scenario where you've got a company that is deriving easily over $1 million of receipts from New York, but would have very little ‘presence’ otherwise.”

The adoption of a factor presence standard by New York and other states could spur additional support for federal legislative proposals such as the Business Activity Tax Simplification Act of 2013 (H.R. 2992). “If a state like New York is going to premise nexus on $1 million of sales and potentially no other contacts, will that invigorate the interest in securing federal preemptive legislation to restrain the state from some of these extreme applications of its proposed statutory standard?” asked Alston & Bird LLP’s Kendall Houghton in a recent interview with Bloomberg BNA.

Continue the discussion on Bloomberg BNA's State Tax LinkedIn Group: do you think the Business Activity Tax Simplification Act of 2013 would solve taxpayers’ issues with economic nexus?

By Melissa Fernley and Steven Roll

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