Wayfair has, for now, answered the question (at least, in part) of whether economic activity creates substantial nexus under the Commerce Clause for purposes of sales and use taxes. However, questions remain regarding whether and to what extent business activity tax nexus standards could be impacted. While states had boldly asserted economic nexus in the business activity tax context pre-Wayfair, the response since has been somewhat muted, until recently. Three states, Pennsylvania, Texas, and Wisconsin, have recently sought to fill in the blanks with regard to business activity tax nexus, with varied and inconsistent results that may raise more questions and concerns than answers.
On September 30, Pennsylvania issued Bulletin No. 2019-04 proclaiming an economic nexus threshold for purposes of determining whether corporate taxpayers are subject to its corporate net income tax (“CNIT”), effective January 1, 2020.
After a recitation of U.S. constitutional nexus standards and a summary of Wayfair, the bulletin states that “the decision in Wayfair has confirmed that out of state corporations are considered to be doing business in the Commonwealth . . . to the extent they are taking advantage of the economic marketplace of the Commonwealth . . . .” Thereafter the bulletin creates a rebuttable presumption that corporations without a physical presence in the state, but having $500,000 or more of direct or indirect gross receipts sourced to Pennsylvania under the sales factor sourcing rules, would have nexus and thus a CNIT filing obligation. The Bulletin goes on to acknowledge the existence of Public Law 86-272, noting that taxpayers claiming such an “exemption” should file CNIT reports and “complete the necessary schedules to claim this exemption from tax.” Following this guidance, taxpayers lacking a physical presence in Pennsylvania should take a close look at Pennsylvania’s CNIT sourcing rules. Pennsylvania currently adopts market-based sourcing for receipts from services and interprets its cost-of-performance sourcing statute for receipts from intangibles as requiring a market-based sourcing result. See Pennsylvania Bulletin No. 2014-01 (Dec. 12, 2014). The interplay of these sourcing rules, along with the recent Bulletin’s reference to “indirect” receipts sourced to Pennsylvania, may raise Due Process nexus questions that may be used to rebut the nexus presumption. See, e.g., Scioto v. Oklahoma Tax Commission, 279 P.3d 782 (2012) and Griffith v. ConAgra Brands, Inc. 728 S.E.2d 74 (2012).
In August, the Texas Comptroller issued proposed amendments to Administrative Code section 3.586 that are similar to Pennsylvania’s guidance. The proposed changes conclude that a taxpayer with no physical presence, but with gross receipts from business conducted in Texas of $500,000 or more (as determined under the franchise tax apportionment sourcing rules), has nexus in the state for purposes of its franchise tax. The taxpayer would be deemed to be “doing business” in the state on “the first day of the accounting period in which the entity has gross receipts from business concluded in Texas in excess of $500,000.” Like Pennsylvania, the proposed amendment would take effect January 1, 2020. Note that the Texas proposal does not create a “rebuttable presumption” like Pennsylvania, but simply “deems” taxpayers to be doing business in Texas if they exceed the threshold.
Notably, the proposed regulation would also provide that an out-of-state entity is “presumed” to have nexus in Texas for franchise tax purposes if the entity has a use tax permit, effectively incorporating the state’s use tax economic nexus standard, which is tied to $500,000 or more of total Texas revenue from the sale of tangible personal property and services for storage, use, or other consumption in this state (including taxable, nontaxable, and tax-exempt sales). As with Pennsylvania, taxpayers should closely examine the Texas sourcing rules to evaluate their nexus risk, and must look at both the franchise tax and sales and use tax sourcing rules, which may employ different standards for similar receipts. For example, while Texas generally employs a place of performance-based approach for sourcing service receipts, the use tax nexus rules provide that a service is “used” within the state for purposes of the economic nexus threshold if there is “derivation in Texas of a direct or indirect benefit from the service.” Tex. Admin. Code 3.286(b)(2)(C). Similar to Pennsylvania, the reference to “indirect” raises Due Process concerns.
Finally, Wisconsin has taken a different approach from Pennsylvania and Texas in its pre-Wayfair nexus clarification rules that go into effect on September 30, 2019. Instead of creating a bright-line economic nexus threshold, Wisconsin focused its update on the types of activities conducted in the state that are considered nexus-creating activities and/or to exceed the protections of P.L. 86-272. See Wisconsin Dep’t of Revenue, Rule Text CR 18-081 (9/30/2019), effective Nov. 1, 2019. While most of the amendments focus on Wisconsin’s physical presence nexus standard, for example, by clarifying that “regular” activity within the state means 15 or more days of the specified activity, the list of nexus-creating activities continues to includes certain economic activities that may result in economic nexus for out-of-state taxpayers, including (among other items):
- Licensing of intangible rights for use in Wisconsin.
- The performance of services in Wisconsin by employees or representatives, the services of which are unrelated to the sale of tangible personal property.
- Engaging in substantial activities that help to establish and maintain a market in Wisconsin.
Unlike Pennsylvania and Texas, and in contrast to Wisconsin’s own establishment of a clear 15-day threshold for the enumerated activities creating nexus based on a physical presence, the lack of a bright-line threshold for the enumerated economic activities leaves some uncertainty and confusion for taxpayers trying to determine whether they have nexus based on these economic activities.
Consistent with the varied approaches states have taken to business activity nexus pre-Wayfair, each state seems to be forging its own nexus path in the post-Wayfair era. States are likely to follow similarly varied approaches to those described in Pennsylvania, Texas and Wisconsin as they try to explore and potentially expand the boundaries of their respective business activity tax jurisdiction. As more and more states issue guidance, taxpayers will need to be vigilant of their economic activities across the U.S., and will need to carefully evaluate and consider each state’s approach to business activity nexus. However, while states have been emboldened by Wayfair even beyond the sales and use tax context, the complete erosion of Due Process and Commerce Clause nexus standards was most certainly not contemplated by the U.S. Supreme Court. Thus, certain taxpayers may have compelling and novel arguments to avoid assertions of economic nexus in the business activity tax context as more and more states articulate or modify their economic nexus rules.