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Addressing State Nexus Issues of Manufacturers

Taxes are often at the forefront for manufacturing concerns. A case in point is the growing potential for multistate taxation. In brief, your company's liability generally depends on whether or not you have established a “nexus” in those particular states.

Background: Nexus is a fundamental principle covered under the Due Process and Commerce Clauses of the United States Constitution. Essentially, these clauses require that a definite “link “or some minimal connection exists between the state and the person, property or transaction it is seeking to tax. The nexus requirement must be satisfied under both clauses for a state to exert its taxing authority over out-of-state sellers.

Due Process Clause: Case law has established that it's not necessary for a taxpayer to be physically present in the state in order for the state to establish nexus. For instance, soliciting customers through the mail or other means may be enough to create the link. It is only necessary for the business to reap the economic benefits in the state regardless of any physical presence.

On the other hand, the Due Process Clause may actually preclude a state from asserting jurisdiction over a business, even if it is physically present in the state. This could occur when the presence is inadvertent (e.g., the property is under the control of another entity).

Commerce Clause: The Commerce Clause is primarily directed at national economic unity and the effects of state regulation on the economy. Earlier landmark court decisions created a “bright line test” of physical presence. However, recent cases have retreated from this test in favor of a more substantive approach.

To eliminate the confusion for a manufacturing concern, you may arrange to conduct a “nexus study.” This type of study identifies normal business activities as they relate to the standards of various states. If nexus is found to exist and you have not been filing tax returns for those states, you may choose to enroll in a disclosure program.

As with most other business aspects, your management team has control over activities creating nexus. If the objective is to avoid nexus for a particular state, certain activities may have to be curtailed, or even eliminated, to reduce nexus risk. If nexus simply can't be avoided but the tax is unreasonably high, it may be advantageous to restructure your business operations.

It is difficult to control use tax nexus in a particular state, although the tax may be passed on to customers. Sellers generally retain liability for any tax collected from customers unless proper documentation of a valid exemption has been obtained. Satisfying this requirement generally can't be accomplished after the fact.

In summary: New technology has given the states more resources for collecting tax. When it is appropriate, you can have a state nexus study prepared for your situation.

This can help clarify the issues facing your company.

Taxes are often at the forefront for manufacturing concerns. A case in point is the growing potential for multistate taxation. In brief, your company's liability generally depends on whether or not you have established a “nexus” in those particular states.

Background: Nexus is a fundamental principle covered under the Due Process and Commerce Clauses of the United States Constitution. Essentially, these clauses require that a definite “link “or some minimal connection exists between the state and the person, property or transaction it is seeking to tax. The nexus requirement must be satisfied under both clauses for a state to exert its taxing authority over out-of-state sellers.

Due Process Clause: Case law has established that it's not necessary for a taxpayer to be physically present in the state in order for the state to establish nexus. For instance, soliciting customers through the mail or other means may be enough to create the link. It is only necessary for the business to reap the economic benefits in the state regardless of any physical presence.

On the other hand, the Due Process Clause may actually preclude a state from asserting jurisdiction over a business, even if it is physically present in the state. This could occur when the presence is inadvertent (e.g., the property is under the control of another entity).

Commerce Clause: The Commerce Clause is primarily directed at national economic unity and the effects of state regulation on the economy. Earlier landmark court decisions created a “bright line test” of physical presence. However, recent cases have retreated from this test in favor of a more substantive approach.

To eliminate the confusion for a manufacturing concern, you may arrange to conduct a “nexus study.” This type of study identifies normal business activities as they relate to the standards of various states. If nexus is found to exist and you have not been filing tax returns for those states, you may choose to enroll in a disclosure program.

As with most other business aspects, your management team has control over activities creating nexus. If the objective is to avoid nexus for a particular state, certain activities may have to be curtailed, or even eliminated, to reduce nexus risk. If nexus simply can't be avoided but the tax is unreasonably high, it may be advantageous to restructure your business operations.

It is difficult to control use tax nexus in a particular state, although the tax may be passed on to customers. Sellers generally retain liability for any tax collected from customers unless proper documentation of a valid exemption has been obtained. Satisfying this requirement generally can't be accomplished after the fact.

In summary: New technology has given the states more resources for collecting tax. When it is appropriate, you can have a state nexus study prepared for your situation.

This can help clarify the issues facing your company.

 

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