There’s a growing movement amongst states to change how they define nexus for business and income tax purposes. Something called the economic substance test is quickly replacing the previous physical presence test. And it’s costing business owners in ways they hadn’t anticipated.
The economic substance test that many states are adopting says, in effect, that if you are making substantial income from our residents, and you are investing time and effort into marketing to our residents, then it doesn’t matter if you don’t have an office here, any employees here, independent contractors here, and so on. If you’re making money here, we believe we are entitled to some of it. And, if you’re providing a service, rather than a product that we can apply sales tax to, that’s okay. We’ll ask you to pay income tax instead.
One of the (many) problems with this argument is how the word substantial is being defined. Take Connecticut’s new law, for example, that came into being in late September: Any company that derives income from sources within this state, or that has a substantial economic presence within this state, evidenced by a purposeful direction of business toward this state, examined in light of the frequency, quantity and systematic nature of a company’s economic contacts with this state, without regard to physical presence, and to the extent permitted by the Constitution of the United States, shall be liable for the tax imposed under chapter 208 of the general statutes.
That’s not exactly straightforward. It’s also going to be interpreted by state government employees, who have a vested interest in making sure their state stays in business. All of this adds up to concern amongst tax professionals and business owners alike.
If you’re concerned about nexus and your business, we can help. Contact us at US TaxAid Services, or call Richard Cooley at 866-829-2368.