Congress Introduces Physical Presence Nexus Legislation

The No Regulation Without Representation Act of 2017 establishes that a state may only tax businesses engaged in interstate commerce based on physical presence and sets a bright-line 15-day threshold before specific activities create physical presence.

By Jeff Glickman, SALT partner

In an article in last month’s SALT Newsletter, we summarized recently enacted state legislation and regulation imposing sales and use tax nexus based solely on an economic presence in the state; in prior articles, we discussed the trend among states to impose state tax nexus on taxpayers without a physical presence. [1] However, not all activity in the area of state tax nexus is focused on economic presence. On June 12, 2017, several congressmen introduced H.R. 2887, the No Regulation Without Representation Act of 2017 (the “Act”).

The Act establishes that a state may tax a person’s activity in interstate commerce only if that person is physically present in the state. Physical presence is established only by the following activities in the state: (1) being commercially or legally domiciled; (2) owning, renting or maintaining real property; (3) leasing or owning tangible personal property (excluding software) of more than a de minimis value; (4) having one or more employees, agents or independent contractors who provide on-site design, installation or repair services on behalf of a remote seller; (5) having one or more employees, exclusive agents or exclusive independent contractors who engage in activities that substantially assist the person to establish or maintain a market; or (6) regularly employing three or more employees for any purpose.

The Act also identifies activities that do not constitute physical presence. Several important ones are as follows: (a) click-through referral agreements with in-state residents; (b) conducting any of the activities described in (1)-(6) above for less than 15 days in the taxable year; and (c) owning an interest in a limited liability company or similar entity that has a physical presence in the state.

There are several items worth noting in this Act. First, for purposes of the Act, the term “tax” includes not just sales, use and similar taxes, but also the reporting of information with respect to such taxes. Therefore, laws such as Colorado’s use tax disclosure and similar laws enacted in other states would likely be covered under this Act. [2] The term “tax” also includes income and other business activity taxes. A business activity tax is any tax which is measured by the economic results of a business, such as gross receipts or margin, and would likely include taxes such as the Texas Franchise Tax, the Ohio Commercial Activity Tax, and Washington’s Business & Occupation Tax.

Second, the Act sets a bright-line 15-day threshold (during the taxable year) before any of the activities listed in (1)-(6) above establishes physical presence. For example, having an independent contractor providing repair services in a state won’t establish physical presence in that state unless the independent contractor is performing such repair services for at least 15 days during the taxable year. Of course, a state would be free to enact legislation that sets a longer (but not shorter) period before physical presence is established.

Finally, under current sales tax nexus standards, states generally take the positon that having an independent contractor in the state that solicits sales on behalf of a remote seller establishes sales tax nexus for the remote seller. Under this Act, that activity would only establish physical presence if the independent contractor is “exclusive.” While not defined under the Act, is it unlikely that an independent contractor that is soliciting sales on behalf of several unrelated parties would qualify as “exclusive.”

It is unclear at this point what the legislation’s chances are of becoming law. Similar legislation was introduced last year, and it did not make much progress. However, as states continue to be more aggressive with economic presence rules, perhaps Congress, if it believes that states are over-stepping, will give this legislation some serious consideration. Any such federal legislation would immediately trump any state legislation as well as any Supreme Court nexus ruling that are contrary to the legislation.

State tax nexus issues continue to be one of the most complex and controversial issues facing taxpayers. In order for a multi-state taxpayer to ensure that it is compliant with its state tax obligations, it must first understand where those obligations may exist. Aprio’s SALT team has extensive experience with nexus issues and can assist businesses by conducting a nexus study in order to determine where potential state tax exposure exists. This information will ensure that the business is in compliance with its state tax obligations and does not incur unexpected exposure. We constantly monitor these and other important state tax issues and will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the June 2017 SALT Newsletter. You can view the full newsletter here.

[1] See this article in our May 2017 SALT Newsletter and the other articles referenced in footnote one for more information about economic presence nexus.

[2] See this article from our January 2017 SALT Newsletter for more information about state use tax disclosure laws.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.