States have become increasingly aggressive in enforcing their tax codes as they seek to increase revenue and close budget shortfalls. As competition across sectors increases, it is more crucial than ever to consider the importance of multistate nexus issues in order to protect narrowing profit margins, prevent noncompliance and be fully prepared for your business's tax burden.
New Jersey is just one of many states getting creative in their efforts to enforce nexus on out-of-state companies. It is common for New Jersey State Troopers to pull over trucks with out-of-state addresses on the cab at truck rest stops, weigh stations, and highways crossing the border to a neighboring state. The state police coordinate with the Division of Taxation in determining whether the business is registered and properly paying New Jersey taxes. Detaining a truck driver working for a company that may have outstanding tax liabilities causes a lot of pain for businesses of all sizes. Trucks may be seized, cargo detained and customers may not receive their delivery. The New Jersey Division of Taxation requires vehicles or goods to be held once it determines that a delinquent tax liability may exist. An estimated assessment is then issued and the release of the vehicle is only allowed once funds are wired to the state. The company’s only recourse is to challenge the assessment in the event of overpayment. Penalties can be significant, with the state’s taxing methodology dictating the amount of potential liability. If you operate an independent trucking company, or your own captive trucking company, you should be aware that fuel tax reports are filed under the International Fuel Tax Agreement to all the states your truck drives and passes through, making the state aware of your presence and, potentially, that of the affiliate of the captive selling its goods. The establishment of nexus is not necessarily created where your customer is located or the shipment’s final destination. Depending on the state, merely passing through may create nexus. If nexus has been established, your company should consider filing state tax returns.
Public Law 86-272 is of key importance, particularly where manufacturing and sales of tangible property are concerned. This federal statute limits a state’s ability to impose income taxes on out-of-state entities. Although it does not protect service business, such as trucking companies, understanding this restriction is crucial to companies selling tangible personal property. Under this law, states, and their political jurisdictions, cannot impose a net income tax on the income derived from interstate commerce provided the only business activities within such state are the solicitation of orders by such person, or his representatives for sales of tangible personal property. In addition, the orders must be sent outside the state for approval or rejection, and fulfilled by shipment or delivery from a point outside the state. Although there is no definition of “solicitation” provided in P.L. 86-272, solicitation generally includes speech and conduct intended to induce a sale. Companies that exceed the protection outlined above are said to have “nexus” in a state. Examples of unprotected P.L. 86-272 activities include a salesman approving orders, making repairs and investigating credit worthiness. States are split on the issue of whether delivery in company owned trucks creates nexus, with some states, such as California, Massachusetts, New York and Virginia, treating this as a protected activity while other states, such as Florida, New Jersey and Pennsylvania do not. States are also split on whether other transportation-related activities, such as delivery in returnable containers and backhauling constitute protected activities.
It is important to note that P.L. 86-272 only protects a taxpayer from net income tax nexus. For example, California, similar to New Jersey, levies an income tax with a minimum tax requirement. California and New Jersey taxpayers are protected by P.L. 86-272, but are still required to file a return and pay the minimum tax. Gross receipts taxes and other taxes not based upon net income, such as those levied in Ohio, Texas and Washington, and sales and use taxes, are similarly not protected.
State and local tax complexities sometimes cause even the most sophisticated taxpayer to overlook filing state tax returns. Many states offer voluntary disclosure or tax amnesty programs that allow companies to enter into an agreement to file past due tax returns. Such programs often require the company to pay the outstanding tax liability with interest, and the state agrees to waive non-filing penalties. Qualification for tax amnesty or voluntary disclosure requires applying to a state before they identify you as a non-filer.
Nexus issues are complicated and highly fact specific. Similar situations yield different results in different states. Please contact one of our tax professionals or a member of our transportation and logistics sector to discuss your specific situation.
By Harold Hecht, Michael Rofman and Seth Rabe, WeiserMazars LLP.
Hecht leads WeiserMazars’ State and Local Tax Group, offering focused insight to a diverse group of multistate public companies, financial services organizations, closely-held corporations, partnerships and individuals. His specialty extends to all areas of state and local taxation, including tax planning, tax minimization, FAS 109, FIN48, and tax controversy. Prior to joining WeiserMazars he was the practice leader of Grant Thornton’s State and Local Tax Group for the New York area, state & local tax practice leader for a New York CPA firm, as well as having spent five years with the New York State Department of Taxation and Finance, Audit Division. Hecht received his B.B.A. from Baruch College. He is a Certified Public Accountant in New York State, and has been a member of the NYU State & Local Tax Study Group, the Wall Street Tax Association’s State & Local Tax Committee, and the Cornell State and Local Tax Group, and the New York State Society of Certified Public Accountants' New York State Municipal and Local Tax Committee.
Rofman has over 10 years of experience in public accounting. He specializes in providing auditing, tax and consulting services to family-owned and owner-operated businesses in the manufacturing and distribution, transportation and logistics, commercial construction, and various service industries. Rofman is a CPA licensed in both New York and New Jersey. He received his B.S. cum laude in accounting from Kean University. Rofman is a member of the New Jersey State Society of Certified Public Accountants, the American Institute of Certified Public Accountants, the NY/NJ Foreign Freight Forwarders & Brokers Association, Associated Construction Contractors of New Jersey, and the Northern New Jersey Chapter of National Electrical Contractors Association. He is also a former board of director of the Edison Chamber of Commerce.
Rabe’s experience encompasses all aspects of state and local taxation, including income and franchise tax, sales and use tax, and unclaimed property. He has substantial expertise delivering tax advisory and compliance services for large national and multinational companies. Additionally, Seth advises clients in areas such as nexus issues, proper state apportionment methodologies and helps clients with Voluntary Disclosure Applications, if proper tax returns have not been filed. Prior to joining WeiserMazars, Rabe worked in similar roles at “Big 4” accounting firms. He holds a J.D. from Cardozo School of Law and an LLM in taxation from University of Miami.