As states continue to broaden their definition of economic nexus in their quest to increase state tax revenues, it is more important than ever for corporations operating in the U.S. to be aware of these continuing changes, according to findings from Bloomberg BNA's 15th annual exclusive Survey of State Tax Departments.  A full copy of the report can be obtained here.    

Previously, states used physical presence as the determining factor of whether or not an out-of-state business is liable for tax in the state. In response to the digital economy, states are increasingly looking at economic presence, not just physical presence, in determining nexus and tax status.  They are also adopting new rules aimed at taxing out-of-state companies' receipts from services and intangibles that are attributable to in-state customers.

"Corporations and businesses need guidance on where they are subject to tax based on evolving business trends," said George Farrah, editorial director, Bloomberg BNA Tax & Accounting.  "The Bloomberg BNA Survey of State Tax Departments is designed to do just that, enabling companies and tax practitioners to evaluate their tax exposure and help ensure they are complying with ever-changing state tax rules."  

The Bloomberg BNA Survey of State Tax Departments is designed to clarify each state's position on the gray areas of state tax policy and has been a reliable source of state tax information for practitioners. The survey has also been cited in congressional testimony.

Among the trends highlighted in this year's survey include:

Nexus: State tax codes were originally created to  tax the sale of tangible goods, but they are now evolving to  tax the sale of digital services and intangible goods such as software downloads, Web hosting and Software as a Service (SaaS) transactions.  

State registration:  Many states now interpret registering a business with the state as sufficient for establishing nexus, lowering the threshold of activity that renders a corporation subject to tax.  

Web servers: States are taking an aggressive stance on the tax consequences of owning or leasing web servers located within their borders.  Forty states indicated that owning an Internet server in-state establishes a sufficient connection, or a nexus, to create a potential income tax collection requirement in the state. Thirty-six states indicated that this would also result in sales tax nexus in the state.

Sourcing: There is little uniformity across states from sourcing the income on services, intangibles and cloud computing, resulting in compliance confusion.   Despite the shift towards a service-based economy decades ago, states are still unable to reach a consensus on how to source these transactions.  

New portions of the survey address the nexus consequences of registering your business with state agencies versus actually doing business in the state, drop shipment transactions, and trailing nexus for state tax purposes.  It also provides insight into state sourcing policies used to determine if the state will impose income taxes on cloud computing transactions.  

"We sincerely appreciate the continuing support from our nation's state tax departments," continued Farrah. "Their invaluable contributions are a tremendous benefit to Bloomberg BNA subscribers and the larger tax community."   

A full copy of the report can be obtained here.