The state corporate income tax implications of e-commerce are largely uncertain for multistate corporations making sales without a physical footprint. "Pure" e-commerce transactions constitute an ever-growing segment of the economy and include, for example, sales of cloud computing services; access to streaming content; music, video, and software downloads; online educational services; and online research services. Amid all the focus on the sales and use tax implications of pure e-commerce sales, few states have addressed the treatment of these transactions for corporate income tax purposes. The trend continues in 2017. Here we discuss some recent developments affecting the unique nexus and apportionment challenges that sales of digital goods and services present for multistate taxpayers, along with the results of a detailed survey on these issues that we sent to state taxing agencies.
Increasingly, states have codified "economic nexus" laws asserting jurisdiction to impose corporate income tax based on the amount of sales, property, or payroll in the state. These laws, being tied in part to an amount or percentage of sales, could sweep in sales of pure e-commerce goods and services to customers or end users in the state. The constitutionality of economic nexus claims is uncertain, but so far the Supreme Court has denied certiorari in cases involving challenges to the concept.
In early 2017, a Colorado district court held that physical presence is "not required to create a substantial nexus for state income tax purposes." (1) Conversely, in 2016 the South Carolina Department of Revenue issued a Revenue Ruling establishing its position that nexus does not arise merely because an out-of-state corporation sells access to its software to a South Carolina customer and has, at the same time, a substantial number of customers with billing addresses in the state or a substantial amount of revenue from customers in the state or owns an internet server in the state. (2) The Virginia Department of Taxation also ruled in 2016 that an out-of-state corporation's purchase of cloud computing services for resale would not, in and of itself, create nexus, but noted that the corporation's relationship with a Virginia software developer could create nexus and reminded the corporation to examine its apportionment factors carefully. (3)
States continued to embrace market-based sourcing for sales other than sales of tangible personal property...