New Bill Redefines Nexus

On April 28, 2005, the Business Activity Tax Simplification Act of 2005 (BATSA) (HR 1956) was introduced into the House of Representatives. Its purpose is to expand and update P.L. 86-272, which was enacted in 1959.

Overview

Under P.L. 86-272, a corporation cannot be subjected to state corporate income tax if its only activity in that state is soliciting orders for tangible goods, followed by delivery of such goods from an origination point deemed to be outside of that state. Solicitation includes activities such as advertising or the use of traveling salespersons.

The new bill would extend P.L. 86-272s reach to include solicitations for services, not just tangible goods, and would apply to all business activity taxes (BATs), not just income taxes. A BAT is any tax imposed on or measured by gross receipts, gross income or gross profits; a business license tax; a stock tax; a franchise tax; and any other tax imposed on the right to do business in a state or measured by the amount or results of business activity conducted therein (including such broad-based taxes as the Michigan Single Business Tax and the Washington Business and Occupations Tax). The BATSA does not affect nexus as it applies to taxes on transactions (i.e., sales tax).

Nexus

The BATSA shines a brighter light on the question of nexus. For a business to have nexus (presence), it must have a physical presence in the state before a BAT can be imposed. This invalidates several state laws that imply that nonphysical presence establishes nexus with a state, such as Pennsylvanias net worth tax and Californias franchise tax.

Physical presence: For BATSA purposes, physical presence in a state is defined as being physically present in the state, or assigning one or more employees to be in the state, for more than 21 days during the tax year. The following activities are disregarded with respect to the 21-day limit:

• Those connected with the possible purchase of goods or services for the business;

• Gathering news and covering events for print or broadcast;

• Meeting with government officials for purposes other than selling goods or services;

• Attending training or educational conferences; and

• Participating in charitable activities.

Physical presence will also be established by:

1. Using a person (other than an employee) in a state for more than 21 days during the year to establish or maintain a market, unless that person performs the same function for at least one other business; or

2. Leasing or owning tangible personal property or real property in the state for more than 21 days during the tax year.

Exclusions: The presence of property in the state does not count if it is:

1. Assembled, manufactured, processed or tested by another person, or used to furnish a service to the owner or lessee by another person;

2. Distributed by mail or common carrier for marketing or promotional purposes;

3. Used ancillary to any otherwise protected activity.

The BATSA excludes a business incorporated or formed under the laws of the taxing state or domiciled in that state.

One-day rule: The more-than-21-day requirement for physical presence is replaced by a one-day requirement for a:

• Sale of tangible personal property in the state, which originates and is completed in that state;

• Performance of services that physically affects real property in the state;

• Live performance in a state, when the audience exceeds 100; or

• Live sporting event in the state, when the audience exceeds 100.

Conclusion

If enacted, the BATSA would have a significant effect on P.L. 86-272, by broadening application of the law from mere solicitation of orders for tangible personal property to include services. After 45 years, the BATSA (or an equivalent) is necessaryto address the 21st-century business environment.

From Dan Gibson, CPA, MST, EA, Amper, Politziner & Mattia, P.C., Bridgewater, NJ