Nexus, My Nexus, Where Have You Been?

There are two concepts that tax accountants have trouble explaining to clients: basis and nexus. And this leads to two recent items that have as their basis nexus.

First, on December 31st, the New Mexico Supreme Court ruled that a corporation with no physical presence in New Mexico can be forced to pay New Mexico income tax. The case dealt with a subsidiary of Michigan based K-Mart. K-Mart put intellectual property into the subsidiary. The subsidiary had no physical presence in New Mexico. New Mexico claimed that the subsidiary was formed just to lower the corporate parent’s tax bill, and served no real business purpose; thus, the subsidiary must pay corporate income tax. (Also argued was whether New Mexico’s gross receipts tax applied to the subsidiary. The New Mexico Supreme Court held unanimously that it doesn’t.)

Now, this case is interesting, but it likely will not be the last word. I mean, do corporations really structure transactions to avoid taxes? And do states write their tax codes to force businesses to structure deals in bizarre ways just for tax purposes? Well, I should probably tone down my sarcasm….But really, until a case comes up where a corporation has no physical presence in a state, and that state attempts to force the corporation to file and pay that state’s corporate income tax, will I be worried about the impact on small companies.

Separately, Business Week recently commented about the coming of a uniform sales tax allowing all Internet transactions to be taxed. The Streamlined Sales Tax Project is a group of states working on a means for a uniform sales tax so that states can get around the famous Quill Corp v. North Dakota decision. Business Week believes that the streamlined sales tax will happen really soon.

I believe the reality, at least for Californians, is that we won’t see this for many years. Perhaps other states are working towards a streamlined tax, with few differences in rates. California, though, continues to pass sales tax rate changes for numerous special districts. Consider just Fresno County. Fresno County has one tax rate, while the City of Clovis has another. And both of those rates are different from anywhere else in the state. There are at least two sales tax increases on the June ballot in California. Thus, I don’t see sales tax uniformity coming any time soon to the Golden State.

News Story: Santa Fe New Mexican

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