Multistate Income Tax

Chapter 1Interstate Activity and Nexus

Learning objectives

• Identify nexus issues.
• Distinguish between income tax and sales tax nexus.
• Recognize the constitutional issues that drive nexus decisions.
• Identify the limitations of Public Law 86-272.

Introduction

Nexus is the beginning issue in any multistate activity. Unless you are doing business in, or have nexus with, a political jurisdiction, there is no obligation to file a return with that jurisdiction.

The word nexus comes from the Latin word nexum referring to obligations between contracting parties. More simply, in the state and local tax context it refers to both the quantity and quality of contacts, links, or connections between a taxpayer and a political jurisdiction sufficient enough to subject the taxpayer to the jurisdiction of the state. Or to put it even more simply, are you doing business in ____________ (fill in the blank: town, county, or state)?

The nexus issue is becoming increasingly volatile and complex in light of the states’ attempts to broaden their tax base and increase their tax collections. States are pressing out-of-state companies, with the most slender of connections to the state, to file returns and pay sales tax and income tax. The rapid growth of e-commerce and the internet has added to this complexity, making proper tax planning in this area more critical than ever. Even though this is a class on multistate corporate income tax, we discuss both sales tax nexus and income tax nexus in this ...