Nexus for state corporate income tax.

• Author: Delong, Thomas

Rarely does a week go by when a state court does not issue an opinion on state corporate income tax nexus. When a court does address the minimum connection necessary to impose a tax return filing requirement, state tax practitioners everywhere scurry to apply the holding and reasoning of the new case to their clients' facts. Despite years of searching for conformity among state and Federal laws, corporate income tax nexus remains one of the most confusing, misapplied and misunderstood of all state tax issues. At the same time, however, the search for a common standard does produce opportunities for significant overall state tax savings.

P. L. 86-272

Forty years ago, in response to cries from interstate taxpayers for multistate nexus conformity, Congress enacted Public Law 86-272. Under the law, states cannot impose a "net income tax" on "any person" if the only contact with a state is limited to the solicitation of orders for sales of tangible personal property, which are approved outside the state and are filled from a stock of goods located outside the state and delivered via common carrier or the U.S. Postal Service.

Like most simplification or conformity legislation, P.L. 86-272 necessarily led to questions, interpretation and ultimately to court. Even so, the language of P.L. 86-272 is clear in nearly all respects. Few could disagree with the meaning or intent of approval, inventory or delivery from outside a state. However, states and taxpayers spent years debating the meaning and application of the words "solicitation of orders"

It took nearly 33 years, but the U.S. Supreme Court addressed the meaning of this term in Wisconsin v. Wrigley, 505 US 214 (1992). The following is a noninclusive list of activities that will likely exceed the standard applied in Wrigley if performed in a state:

* Post-sale activities, including training, installation, consulting, etc. (activities clearly exceeding a request for orders or sales and therefore nexus-creating);

* Pre- (or post-) sale activities, including repairs to products, credit checks and investigations, customer services, inventory testing or analysis (again, activities that will likely exceed current nexus standards).

Finally, the Court in Wrigley did provide for a de minimis standard for activities that (while technically not considered solicitation of orders) do not result in a "nontrivial additional connection with the state." Therefore, like nearly all state and local tax issues...