The emergence of factor presence nexus standards.

• Author: Weber, Neal A.

In this era of electronic commerce and record state budget deficits, several states--in an effort to increase tax revenues--have replaced traditional nexus standards with "factor presence nexus standards" to trigger taxes based upon gross receipts and income. The term "nexus" when used in connection with state taxation refers to the due process requirement that there must be some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax. Nexus is the contact that must be established with a taxing jurisdiction before it can impose a tax {Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954)).

Statutory apportionment factors imposed by states are typically used to apportion income among states where the company has nexus. Apportionment of income is required to avoid double taxation by states. Typically, the company's in-state property, payroll, and sales compared with its total property, payroll, and sales are factors that states use for apportionment of income. The methodologies vary among states. Under a factor presence nexus standard, a company's business activities or income will be subject to tax in a particular state if one of the company's apportionment factors (property, payroll, or sales) exceeds the state's statutory threshold. Since January 1, 2010, five states have instituted these nexus standards based on the company's level of sales, property, or payroll. With this recent wave of new standards, it is likely that other states will impose similar nexus standards as well.

The most controversial aspect of these new standards is that companies deriving revenue from sources within a state will be treated as having nexus with the state and thus will be subject to tax, even though they have no physical presence in the state. The recent tax determination ruling by the Ohio Tax Commission in In re L.L. Bean (discussed below) demonstrates the impact of these nexus standards on companies lacking a physical presence within a state. L.L. Bean's circumstances were such that the Interstate Tax Limitations Act, P.L. 86-272 (codified in 15 U.S.C. [section][section]381-384), did not apply. P.L. 86-272 provides that a state cannot impose a net income tax if a seller's only business activity within the state is the solicitation of orders for sales of tangible personal property. Since Ohio imposes a gross receipts tax and not an income-based tax, P.L. 86-272 was not available to exempt L.L. Bean from...