"Substantial nexus," "economic nexus," "physical presence nexus" - who will win?
Federalism and state sovereignty - are they in conflict or can they work in concert?
"Substantial nexus" used to mean a seller had to have a physical presence in a state before they were subject to taxation. Now, more and more states are leaning on economic nexus standards which essentially say a seller can be subject to tax simply if they have customers in a state or direct some type of activity towards the state to create or maintain a market (vague, I know). Some states have taken it a step further (to make it less vague), and have instituted "factor presence" nexus standards which simply provide 'bright-line' thresholds. Meaning, these states maintain that a seller is subject to tax in their states if the seller has a specific amount of sales, property or payroll in their state. For example, the thresholds may be $50,000 of property, $50,000 of payroll or $500,000 of sales. Some state thresholds are lower for sales, such as $350,000 in Michigan or $250,000 in Washington. Regardless of the threshold limit, factor presence nexus standards and economic nexus is the trend as states look to maintain services and their budgets while imposing tax on non-voters (out-of-state taxpayers).
This discussion regarding nexus standards and the ability of the federal government to create legislation to 'big brother' the states was the subject of the June 2, 2015 Hearing before the U.S. House Subcommittee on Regulatory Reform, Commercial and Antitrust Law. Several government officials and interested parties presented testimony either for or against the 3 pieces of federal legislation currently under review:
- The Mobile Workforce State Income Tax Simplification Act of 2015 (HR 2315)
- The Digital Goods and Services Tax Fairness Act of 2015 (HR 1643)
- The Business Activity Tax Simplification Act of 2015 (HR 2584)
The title to this post insinuates that states are using economic nexus to reach (or overreach) beyond their borders and tax out of state companies based on standards that are arguably unconstitutional. Regardless of that debate and regardless of which side of the fence you stand, states do have the right to determine 'how' and 'who' they tax inside their state as long as they stay with the boundaries of the U.S. Constitution and other applicable federal laws, such as P.L. 86-272. Companies and individuals have the right to conduct business across state lines without concern that they will be subject to tax when their activities are de minimus or do not reach significant (substantial) levels. Otherwise, the burden on interstate commerce is unnecessary and misplaced.
States argue that taxpayers will avoid (evade) paying taxes if the nexus standard or threshold is too high. However, states should only be able to tax what they legally can tax. Then they should seek to adjust their rules to tax who they can tax. Consequently, avoiding taxes that taxpayers shouldn't have to pay in the first place, really isn't evasion.
The states keep wanting to change their rules so they can tax more taxpayers because the economy changes (i.e., impact of Internet, remote sellers, service companies). Fine, change your rules, just don't exceed your authority and taxpayers will comply. Taxpayers deserve clarity, and to be treated within the boundaries of the law (both federal and state), so they can function and operate effectively in what is already a multi-jurisdictional, non-uniform, complex playing field.