States are struggling to keep up with business innovations. The process of doing business has changed in recent years. Over the last few decades more and more business transactions are occurring online, causing the states to question when a business operates within its borders and is subject to state taxes.
One early case addressing these types of issues involves a Supreme Court of the United States (SCOTUS) decision from 1992. The case, Quill Corp. v. North Dakota, prohibited the state’s ability to collect taxes on a business that lacked a physical presence within the state. States are attempting to circumvent this precedent in two main ways. Essentially, states are proposing legislation that would both directly address the problem or circumvent the issue.
Proposals to directly address the issue of taxing businesses without a physical presence in the state
The direct approach involves passing laws that would allow for the imposition of a sales tax upon transactions conducted online even if the business does not operate directly in the state that the item is purchased.
These proposals, referred to as marketplace provider bills, were recently discussed in a publication by Bloomberg BNA. Such proposals are under consideration in Minnesota, New York, Rhode Island, Texas and Washington.
Proposals to circumvent the issue and still collect taxes from businesses
States are also considering proposals that allow the state to establish a business nexus with minimal contact in the state. A recent piece in Accounting Today discussed this attempt.
Essentially, the term business nexus is a legal one that refers to the amount of presence a business must have within a state before the state can collect taxes on that business. 22 states have legislation that establishes this business nexus if an employee of the business enters the state one to four times annually.
Impact of proposals on your business
The Texas legislature has two marketplace provider bills under consideration. One would hold marketplace providers responsible for state sales taxes while the other would result in an “economic nexus” that would hold businesses that make over $1 million on items delivered in the state or make 2,000 sales within the state subject to state taxes. Both bills are still under revision. If passed, these laws could result in higher tax rates for businesses operating in states impacted by these or similar proposals.
These legal issues bring attention to the importance of businesses to seek legal counsel to ensure their dealings are in compliance with tax laws. Navigating these issues is not an easy task, but an experienced attorney can help you preserve your business interests by addressing everything from the threat of an audit to basic tax disputes.