Issues in Interstate Taxation

Tax Professionals' Resource
November 8, 2012 — 1,153 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

Issues in Interstate Taxation

Play between federal and state taxation is already complicated if a company or individual is only doing business in one state. But when state borders are crossed, the complexities increase tenfold. Interstate taxation remains one of the grayest issues in tax law, with governments and corporations constantly squabbling over who is due taxes and when.

Historically, multistate taxation has been determined by the concept of “nexus.” While the exact definition differs state to state, it is a law or set of laws that sets an activity threshold for business activity in the state, after which the company in question owes state taxes on business activity. Most often this is determined by having a physical presence somewhere in the state, whether from property or employment.

As Internet sales have grown, more states are growing increasingly dissatisfied with this definition. Companies such as Amazon have a physical presence in only a handful of states, and only collect sales tax in those few states (though some states make special deals with large retailers like Amazon, allowing them to continue not collecting sales tax for several years after nexus is established). Customers who order products from Amazon elsewhere are not charged state sales tax, and while these customers technically still owe a Use tax on the items, enforcement of Use taxes is incredibly difficult and so almost universally ignored.

The Supreme Court case Quill v. North Dakota has upheld this current state of affairs, affirming that an attempt to collect sales tax on retailers without a physical presence violates the Commerce Clause of the Constitution. States are pushing against this decision with the concept of “economic” or “substantial nexus,” using backdoor tactics such as business dealings with in-state online advertisers counting as physical nexus. While these laws are likely unconstitutional, they have yet to be formally challenged, and have resulted in many business who used to contract with larger corporations going out of business as those corporations restrict the states they work with.

Income taxes are not spared these efforts. About half of all states have weakened their physical nexus requirement for income tax collection, attempting to collect money from out-of-state businesses. The Business Activity Tax Simplification Act, currently working through Congress, seeks to put an end to these efforts by solidifying the traditional concept of physical nexus required to collect income taxes. Until such a law is passed, there will continue to be great unconformity and confusion over multistate taxation.

 

Tax Professionals' Resource