State tax nexus.

• Author: Boucher, Karen J.

The term "nexus" is used to describe the amount and degree of business activity that must be present before an entity's activities can be subject to state tax. The issue of nexus is a complex one, relying on the application of constitutional, judicial and state and Federal statutory provisions to a unique factual situation in order to determine whether an entity is subject to state taxation. The AICPA Tax Division's State and Local Taxation Committee has developed a publication, State Tax Nexus Checklist/Practice Guide, containing a brief summary of nexus and the issues involved, as well as a checklist of the most frequently asked questions that appear in states' nexus questionnaires. The checklist, intended for use as a broad reference tool and as an aid in addressing nexus issues, can also serve as a practice aid for soliciting and analyzing information from clients. It should be noted, however, that there may be different nexus standards for different types of taxes, and that the laws and policies of each state should be verified for application to specific cases. The Practice Guide also contains a compilation of specific nexus checklist questionnaires used by several states and a summary of nexus attributes unique to each of those states.

In general, a state will have the power to impose a tax or tax collection duty on a taxpayer if the taxpayer has sufficient contacts or nexus with the state. Various Federal constitutional and statutory doctrines and constraints, as well as those for individual states, must be considered in determining whether nexus exists. Because state statutes are not uniform, an uninformed taxpayer may fail to recognize when these constitutional and statutory restrictions may be invoked to make the filing of a return and remittance of taxes necessary. It has become increasingly important for corporations with multistate operations to identify the nature and extent of their contacts with the states and to verify that all filing obligations are satisfied. Not filing when required can result in taxpayers paying more than their share of taxes; the statute of limitations for claiming a refund from the state to which the income was attributed may be closed by the time the state with which the taxpayer did not file assesses tax.

Constitutional Provisions

The Due Process Clause and the Commerce Clause are generally considered to be the primary constitutional limitations on state taxation. Despite early U.S. Supreme Court decisions that placed broad constitutional restrictions on the states' powers to tax multistate operations, the Court since that time has increasingly limited these restraints, in effect expanding states' taxing jurisdiction.

Due Process. The Fourteenth Amendment prohibits states from denying any person "life, liberty, or property, without due process of law." This provision, known as the Due Process Clause, has historically encompassed two aspects--procedural due process, which guarantees fair procedures (such as notice and the right to a hearing), and substantive due process, which protects against unfair...