In recent weeks, the 4A’s (Advertising Agencies Association of America) has noted a significant increase in the number of calls from member agencies concerning changes in the nexus standards in various states. The purpose of this bulletin is to bring these changes and their implications to your attention. If you have not yet done so, you may want to discuss state nexus questions with your tax counsel.
A Changing Standard; Aggressive Enforcement :
A new 2010 nexus change in Washington State, and aggressive new enforcement of current laws in Ohio, Connecticut, Minnesota, North Carolina and Michigan, among other states, appear to be critical indicators of change in the way cash-hungry states are approaching nexus rules.
The Washington State ordinance, effective June 1, 2010, is of particular interest in that it is one of the most far-reaching enacted to date and is similar in approach to a model law on nexus endorsed by, and currently being circulated by, the Multistate Tax Commission, an intergovernmental state tax group formed by the states.
As per a “Special Notice,” issued by the Washington State Department of Revenue on July 9, 2010, “Under the new economic nexus standard, advertising income, and other ‘apportionable’ income you may receive from Washington, could become subject to Washington’s business and occupation (B&O) tax on an apportioned basis.”
Economic Nexus :
The key to these changes are new rules defining “economic nexus.”
Rather than requiring a company to simply have a physical presence in the state, the economic nexus standards recently added and adopted by Washington State, apply to businesses that earn significant income within the state and “enjoy benefits from doing business there.”
The Washington State nexus standard applies to “apportionable income” from various service activities and royalty income.
Under the new tax law, a business has substantial nexus with Washington State if in a tax year it has at least one of the following “factors” in the state:
It is commercially domiciled in Washington;
It owns property with an average value exceeding $50,000;
It provides a payroll exceeding $50,000 (including certain third-party costs);
It collects receipts exceeding $250,000; or
At least 25% of its worldwide property, payroll, or gross receipts are collected in the state.
State tax analysts believe that the early success of the Washington State model and the widespread marketing of the model law will almost certainly result in even greater interest in nexus change in the states. Several state tax consultants are predicting that the tightening of nexus standards for state income tax will expand to almost all states in the next three to five years.
While many business groups have sought to prevent the changes in nexus regulations, the new rules have been adopted in every state where they have been proposed. A number of larger states such as New York have indicated that they may consider the new definitions during the next legislative session.
Ohio Commercial Activity Tax :
As another example, the regulations of the Ohio Commercial Activity Tax (CAT), originally implemented in 2005, have a similar focus and raise a number of questions for advertising agencies in particular. The Ohio rules consider nexus in terms of the purchaser’s “principal place of business.”
According to the Ohio Department of Taxation, Commercial Activity Tax Division “Generally, if taxable gross receipts exceed $150,000 at any point during a calendar year beginning July 1, 2005, (businesses) may be subject to a CAT tax.” The CAT only applies to those gross receipts that are sitused (i.e., sourced) to Ohio.
Persons with no physical presence in Ohio may still be subject to the CAT provided “bright-line” presence exists with the state. Whether or not bright-line presence exists is determined entirely by the quantitative data of the person. As provided by information release CAT 2005-02, a person has a bright-line nexus with Ohio for purpose of the CAT if that person has any of the following in this state at any time during the calendar year:
$50,000 of their property;
$50,000 of their payroll;
$500,000 of their gross receipts;
25% of their total property, total payroll, or total gross receipts; or
The Ohio regulations and those of other states use “gross receipts” as a criteria in establishing the nexus standard and calculating the income tax, a definition of continuing concern to advertising agencies that process large amounts of pass-through funds.
In recent weeks, both Ohio and Washington have begun an aggressive campaign to contact out-of-state advertising agencies with local clients, asking questions about the agency’s tax status. To date, however, neither state has issued guidance on the definition of gross receipts.
Sal Conte (firstname.lastname@example.org) in the 4A’s New York office and Linda Dove (email@example.com) in the 4A’s Washington office are collecting information about member experiences with state nexus standards. Please share any insights and information about your agency’s experience with them.
Source: Advertising Agencies Association of America