We all know how hard state and local governments are working to generate revenues. One of the techniques used by the states is to establish nexus for a business, however tenuous it may be since, if there is nexus, the state can impose income tax on that business. Of course, every state has its own view of what constitutes nexus, so there are numerous factors to consider and monitor. In my own experience, some of these rules seem as goofy as taxing your business because you drove through the state on vacation. Many of the states, however, base their nexus determination on a 1992 Supreme Court decision that requires a business to have substantial nexus in a state before it can be subjected to tax.
Congress currently is considering a law to bring some uniformity to the determination of nexus. This legislation would establish a physical presence test to determine when an out-of-state business can be required to pay taxes due to ‘substantial nexus.’ The Business Activity Tax Simplification Act (H.R. 1956, S2721) is designed to bring predictability to what is seen as an unpredictable tax environment brought about by different state interpretations of the Supreme Court's 1992 decision. BATSA would adopt the position of those states using the physical presence test as a bright line test for determining nexus.
Under BATSA, a business has a physical presence in a state only if it conducts certain business activities in the state, collectively, on more than 21 days during the year. One of these activities is equipment leasing. However, the following are excluded in determining whether the 21-day limit for equipment leasing has been exceeded:
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Tangible personal property located in the state for purposes of being assembled, manufactured, processed, or tested by another person for the benefit of the owner or lessee, or used to furnish a service to the owner or lessee by another person.
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Marketing or promotional materials distributed in the state.
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Any property to the extent it is used ancillary to an activity that is excluded from the computation of the 21-day period.
In addition to establishing federal nexus standards, the Act would expand current law (PL 86-272), which currently provides that a state may not tax the income of an out-of-state company when its only contact with the state is the solicitation of orders for tangible personal property in that state. BATSA amends the current law to include not only the solicitation of orders for tangible personal property, but also to the solicitation of intangible property, as well as all types of services.
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