Income Tax Nexus: No Physical Presence Necessary

October 13, 2017 | Jay Forester and Mike Drumm

In Income Tax Nexus: No Physical Presence Necessary Jay Forester, senior manager at EKS&H, and Mike Drumm, attorney with Drumm Law, examine the issue of income tax nexus, a primary concern for multistate businesses and franchisors that is becoming increasingly more troublesome and complex to navigate.

Nexus is the minimum contact a jurisdiction must establish before subjecting a business to its taxing authority. States are progressively challenging longstanding federal law in an effort to gain more revenue from more businesses with minimal connection to a state.

The authors explore many key topics related to income tax nexus, including:
  • Boundaries of the states’ taxing authority: Due Process Clause and the Commerce Clause.
  • The safe haven provided by Public Law 86-272 (P.L. 86-272).
  • The expansion of the “minimum connection” nexus requirement to include intangibles (e.g., trademarks), thus allowing a state to tax any entity with an intangible in its state.
  • The uniform Factor Presence proposal by the Multistate Tax Commission (MTC).
Once nexus is determined, a franchisor may be faced with either the choice of compliance, which can be unmanageable, or playing the audit lottery, which can entangle a franchise in costly and lengthy litigation.

Being aware of what state taxing authorities consider when determining nexus provides a franchisor the ability to recognize when out-of-state activity may require professional tax guidance.

To learn more, read the full EKS&H White Paper: Income Tax Nexus: No Physical Presence Necessary.