Nexus Based on Economic Presence

This is a relatively new nexus standard that has caught on like wildfire with the states. Essentially, the trigger here is strictly income. States are looking at how much money a business earns within their borders, based either on a flat threshold amount, or a certain percentage of overall sales. If your business triggers an economic nexus finding, you can expect to begin reporting and paying income tax and ‘other’ taxes on that money.

With the economic presence standard, you don’t have to meet any of the other nexus triggers for physical presence, in-state property, inventory storage, or employees. It is simply based on the amount of income your business earns from state residents. Today, over half of the states have enacted some kind of economic presence law.

Economic presence nexus relates to both income tax and ‘other’ tax. Probably the most famous case (and the one usually credited with starting the ball rolling) was a fight between MBNA, the credit card giant, and the state of West Virginia. The state’s claim was that the company regularly and continuously blanketed residents with credit card solicitations, and earned millions from doing so. In addition, the company took advantage of state-funded resources, like roads for the mail service to travel on to deliver the credit card offers. Because the company was making a concentrated effort to target West Virginia customers, it was reasonable to ask it to pay state income tax on that money. The MBNA court case was appealed all the way up to the U.S. Supreme Court, who declined to hear it.

There have been some major court battles over economic nexus legislation. So far, the states are winning. And, although the Supreme Court has been asked to rule on economic nexus legislation on a few occasions, it has declined to do so. In turning down the appeals, the Supreme Court essentially stated that it is up to Congress to fix the issue.

The difficulty with the economic presence test is that it’s completely subjective. We have some states, like California and Washington State, who have a bright line test: meet these tangible dollar thresholds, and you have nexus. But we’ve got other states that say things like “businesses earning significant income,” are subject to income tax nexus, yet don’t define what is or isn’t significant.

To protect yourself, take a look at where your income is coming from. If you find that you’ve got more than $50,000, or over 25% of your overall income coming from any one state, talk to your CPA or advisor to make sure that state doesn’t have an economic presence standard you have to deal with.

Nexus is a shifting, slippery target. If you’re concerned that you may possibly have a nexus issue, we’ve got a number of products to help. Our Design Your Own Nexus Strategy product is a 140+ page eBook that talks about all aspects of Nexus, and provides handy checklists and other information to help you determine what may or may not apply to you. We’re also offering a Nexus Evaluation Program where you answer some questions and get a fully customized, detailed report on your specific nexus situation.