Weekly Round-Up: States Test the Limits on Taxing Pass-Throughs, Nexus


States have become more aggressive in applying the business tax concept of nexus to pass-through entities, Bloomberg BNA State Tax Law Editor Michael Kerman writes in this week’s issue of the Weekly State Tax Report. His article provides in-depth coverage of New York University's 33rd Institute on State and Local Taxation, held Dec. 8 and 9 in New York City.

It is unclear whether a taxpayer can trigger income tax nexus in a state by owning an interest in a pass-through entity that operates within the jurisdiction's borders, said Steve Wlodychak, principal with Ernst & Young LLP in Washington. While the U.S. Supreme Court has held that merely holding stock in a corporation is not enough to create nexus, the court has never addressed the question as it applies to pass-through entities.

State court decisions haven't provided much clear guidance either. “It's like watching a pinball bounce back and forth; there's no clear answer,” said Wlodychak. For example, in Swart Enterprises Inc. v. Cal. Franchise Tax Bd., No. 13CECG02171 (Cal. Super. Ct. 2014), a California Superior Court held that an Iowa hog farmer with a 0.02 percent interest in a California pass-through did not have nexus through such a small ownership interest.

However, in another case, BIS LP Inc. v. New Jersey Div. of Taxn., 26 N.J. Tax 489 N.J. Super. Ct. App. Div. 2011), New Jersey found a U.K. company to not have nexus despite having a 99 percent ownership interest in a New Jersey company. There, the court said that despite the large ownership interest, the U.K. company was a limited partner with no management control. In another New Jersey case, Village Super Market of PA Inc. v. New Jersey Div. of Taxn., 27 N.J. Tax 394 (N.J. Tax Ct. 2013), nexus was found for a limited partner because it had the same officers and directors and shared a mailing address. Thus, decisions cannot always be predicted based solely on the level of ownership or on whether the owner is a limited or general partner, Wlodychak explained.

Other topics covered at the conference include due process, retroactive taxation and mandatory combined reporting.  Kerman’s article can be read in its entirety here.

Some notable developments from the State Tax Developments Tracker – Bloomberg BNA’s new tool for monitoring important developments in all the states:

Connecticut Governor Re-Appoints Kevin Sullivan as Commissioner of Department of Revenue Services

District of Columbia Publishes Report Containing Economic and Revenue Trends for November 2014

California Issues Publication on Application of Sales and Use Tax to Photographers, Photo Finishers, and Film Processing Laboratories

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library. 

In other developments…

New Jersey Supreme Court affirms rejection of late payment and amnesty penalty assessment, by PwC

Sunshine After the Rain: Revenue Collections Resume Growth After Declines in the First Half of 2014, by The Nelson A. Rockefeller Institute of Government

Morrison & Foerster LLP issues its December 2014 edition of New York Tax Insights, which contains a look at two Court of Appeals decisions affirming not-for-profit property tax exemptions

 Compiled by Priya D. Nair

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