411 ON BRIGHT-LINE NEXUS
HINT: It’s not going away anytime soon
Maybe it’s not the next wave of high
fashion or the latest pop culture fad, but
some trends have the privilege of calling
the Buckeye State home – take state
and local taxation, for example. While
taxes are probably not the most widely
enjoyed (or understood) topic, Ohio has
paved the way for “bright-line nexus.”
Read on to find out how this particular
trend is shaping the way all states look
at taxes.
Defining Nexus
In its simplest form, nexus is a sufficient
connection between a taxpayer and a
state that allows the state to impose its
taxing jurisdiction on the taxpayer. Nex-
us is generally created if your company
has a temporary or permanent presence
of people or property.
Historically, most states have derived
income tax nexus laws around the re-
sults of Quill Corp. v. North Dakota
(1992), a state sales and use tax nexus
case that made its way to the U.S. Su-
preme Court. The ruling was that Quill
Corp. did not have substantial nexus in
the state because Quill lacked a physi-
cal presence.
But times (and nexus requirements) are
a-changin’…
The Evolution of Nexus
Since that ruling in 1992, technology has
changed the game, opening up borders
and making it easier to do business
nationwide – and even worldwide.
Furthermore, because many states
are facing budget deficits, lawmakers
are actively turning over every stone
in the hopes of finding and collecting
additional revenue – and thanks to its
broad definition, states are looking more
closely at nexus.
In 2005, the Ohio Commercial Activity
Tax (CAT) was enacted in House Bill 66,
and with that came an unprecedented
nexus standard known as “bright-line
nexus.” This meant if an out-of-state
entity had more than $500,000 of gross
receipts sourced to Ohio, the entity had
a CAT filing requirement, even if the
entity totally lacked a physical presence
in the state.
Since then, at least eight other states
have followed suit and enacted their
own bright-line nexus laws. Most follow
the $500,000 threshold used by Ohio,
but some are less.
Controversy Surrounding
Bright-Line Nexus
In 2016, Ohio’s bright-line nexus stan-
dard was litigated in Crutchfield Corp.
v. Testa. In the first time a state’s high-
est court addressed “factor-presence”
nexus standards, the Ohio Supreme
Court determined physical presence is
not a necessary condition for imposing
the CAT. The primary focal point of dis-
cussion was the Quill case. The basis
for the Ohio Supreme Court’s decision
was that the Quill ruling did not apply
to business income or gross receipts
taxes, but only to sales and use taxes.
A precedent has seemingly been set as
a result of Crutchfield Corp. v. Testa.
To date, there are no other related U.S.
Supreme Court hearings scheduled
By Luke Lucas, CPA,
SALT manager,
[email protected]
(Medina office)
that will address the constitutionality
of bright-line nexus from an income or
gross receipts tax perspective.
That being said, there are industry ex-
perts who question the constitutionality
of these bright-line nexus standards.
And then there are those who argue
that Quill isn’t relevant in today’s world.
In fact, in January, the U.S. Supreme
Court agreed to hear South Dakota v.
Wayfair, a sales and use tax case that
directly challenges Quill. If Quill is over-
ruled, there will likely be a widespread
and rapid enactment of bright-line nex-
us across the country.
Clearly, nexus standards are not going
away anytime soon. The number of
states that have bright-line nexus
standards is expected to increase. Even
if a case is heard by the U.S. Supreme
Court, there are doubts that we would
see a ruling in favor of the taxpayer.
Is your company satisfying your state
income tax obligations? Give me a call
at 330.722.6229 to learn more about
these cases and how they impact your
tax liability.
Check out episode 121 of unsuitable on Rea Radio, “The State Response to Federal Tax
Reform,” to hear Joe Popp, JD, LLM, director of SALT services, break down current nexus
considerations. Find it at www.reacpa.com/SALTpodcast.
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