State Tax Nexus

Steven Singer's Profile

 My client is a broker of data searches.  His company is located in FL, his client is located in Washington, DC, and the supplier of the data is located outside of the US.  By way of example DC engages FL to perform data searches.  FL sends the request to Non-US, who provides a response to FL, who provides his client (DC) with the response.
DC pays FL a fee for the service, and FL pays Non-US for the information provided.  In what state does FL have to pay state tax on this income?
Additionally if FL was setting up a new entity, would it behoove him to do so in FL or any other state in particular?
 

Answers

Member's Profile

We also provide services to clients from across the country using providers located internationally. The choice of nexus is not always yours.....I am not sure if either Florida or Washington DC is one of them.

For states like California, it doesn't matter where the service provider is located. If the client requesting the service is located in California - congratulations - that's your nexus. We have the same issue in a few other states.

To make things consistent and enable us to pass any potential audit by any state, we apply the client location as how to identify nexus for the service. For my clients who have offices in multiple states, we consider where each request comes from. (i.e. a national staffing firm with offices in all 50 states would have their revenue counted by state for our individual tax returns.)

I would add that a state like California is a real nightmare to deal with as they have a huge number of taxes, fees, licenses, etc to pay for annually. If you are doing business there, I think it is worth it to create a separate entity that only deals there. The last I saw, California counted all revenue in the estimate of your franchise tax due - even if less than 5% originated or came through the state. At my prior employer we ended up paying $11K in taxes instead of the minimum because they required us to include it all. That was also the first and last time we chose to invest in a show out of California.

In the end, I think you need to look at where all of your business originates and be prepared to make a business decision as to how you are going to move forward, or if you are interested in growing into certain states. All the states are becomming hungry for revenue and they are scanning everything to see who might have missed the opportunity to file.

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Member's Profile

It sounds like this work is performed over the internet and not actually on location in DC, so nexus is in FL where the work is performed. I am assuming there is no other physical connection, such as employees or assets in DC for the FL company.

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Member's Profile

The work is performed by individuals in FL, connecting the buyer (DC) and data provider (non-US entity). There is no other physical connection.
Thanks Wray - this is consistent with my assessment.
Thanks to Sara for your input.

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Member's Profile

Steve,
I am going through the very same matter on an all 50 state basis currently and you need to look at the nexus rules for each state as they differ. In your case you need to look at DC and FL. However if you have any physical presence in any other state (employees, office, etc.) then you also need to look at those. A second issue for consideration is where are the contacts signed and executed. Third, where are your servers located. I am in an internet only business and we require all of our contracts to be executed in VA even though we have clients all across the US, also our serves are located in VA. Based on this our position is that all services are performed and the "benefit to the customer" is in VA. This is an issue for many states, they are looking and trying to assert where the service or benefit takes place. As Sara mentioned CA has established rules based on where the client is so if the end client is in CA they will tax it there. Others are following suit.

After you determine the nexus question, you have to look at how income is apportioned to the state. Most common is the payroll, revenue, and property factor, whereby you determine your factor of each for each state and that is how you apportion the income. Some states though look at where your cost is and others on revenue. It is possible to have double taxation at the state level due to this.

SALT (state and local tax) is a growing area of concern as most states are getting aggressive on taxes as they face deficits.

Hope this helps.

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