This course will lay out some of the important aspects of state income tax and sales tax nexus concerns, then address the importance of performing detailed state and local tax due diligence. It will also discuss the importance of performing due diligence to address the potential sins of the past before actually entering the M&A market.

1. State and Local Tax Nexus
Issues and the Impact on
Mergers and Acquisitions
Mary Jo Dolson, CPA
January 17, 2019

2. 2
State and Local Tax
• State and Local Income Tax Nexus Issues/Concerns
• State and Local Sales/Use Tax Nexus in Light of Wayfair
• Importance of State and Local Tax Issues in Relation to
Mergers and Acquisitions
• Conclusion

3. 3
State and Local Tax
Importance of State and Local Taxes
• As states continue to rebound from the recession, they
look to different means to raise revenue
• States are expanding their discovery of efforts to pull in
more taxpayers
 States more aggressive in sending out nexus questionnaires
 Conducting audits of out-of-state businesses operating in state

4. 4
Nexus: What Is It?
The connection between a taxpayer and a taxing jurisdiction
that is constitutionally and statutorily sufficient enough for the
taxing jurisdiction to impose a tax.

5. 5
Nexus
Nexus standards are different for state income tax and sales
tax:
• State income tax – public law protection
• Sales tax – no public law protection

6. 6
State Income Tax Nexus
Complete Auto Transit
• The Supreme Court developed a four-prong test to
determine if a state can impose a state income tax:
 For a tax to be viewed as constitutional the tax is applied to an
activity with substantial nexus
 Must be fairly apportioned
 Doesn’t discriminate against interstate commerce
 Fairly related to the services provided by the state

7. 7
Nexus: How to Determine
• Each state has its own nexus standards
• Common measures for nexus:
 Physical presence
 Remote employees
 Mobile employees
 Employee activity
 Registered to do business
 Economic threshold standards
 Affiliated nexus

8. 8
Nexus: How to Determine
• Physical presence:
 Property
 Payroll
 Inventory – consigned
 Inventory at manufacturers
 Inventory at printers

9. 9
Nexus: How to Determine
• Remote employees
 Temporarily located outside state
 Permanently located outside state
• Mobile employees
 Traveling for different projects

10. 10
Nexus: How to Determine
• Affiliated nexus
 Nexus position new to states

11. 11
State Income Tax Nexus
• Public Law 86-272 protection
 Tangible personal property
 Services
• Operations in the state
• Assets located in the state
• Employees traveling into state
• Economic nexus
 Set amount of property, payroll and sales in the state
‒ Generally enacted by statute

12. 12
Public Law 86-272
• Federal public law to protect certain activities against
income tax across state lines
• Protected activities:
 Solicitation of sales of tangible personal property
 Services that are ancillary to solicitation of sales
 De Minimis activities as compared to protected activities
• Exempts entities from net income tax
 Does not exempt entity from sales tax, franchise tax, gross receipts
tax, minimum taxes, etc.

13. 13
Public Law 86-272
• Need to look to what activities are being performed by
employees to determine if protected by Public Law
• Each state might have its own take on protected and
unprotected activities for employees

14. 14
Public Law 86-272
• Can a taxpayer still claim Public Law protection if taxpayer
exceeds an economic nexus threshold?
• What if taxpayer is providing a service in the state – is
there Public Law protection?
• What if a taxpayer has inventory located in a state – can
they claim Public Law protection?

15. 15
Public Law Example
Company B sells computer systems to customers in New
York. It has no property or full-time employees in New York.
At the request of its customers, a part of the sale price of the
system includes installation. Now sales staff must install and
service the computer systems as a part of their job.
Does Company B fall under Public Law protection?

16. 16
Public Law Exemption
Company B sells computer systems to customers in New
York. It has no property or full-time employees in New York.
At the request of its customers a part of the sale price of the
system includes installation. Now sales staff must install and
service the computer systems as a part of their job.
Does Company B fall under Public Law protection?
• No

17. 17
Public Law Protection
Does Public Law 86-272 apply to the performance of a
service?
• What if performing a mixture of service and sale of
product?
• What if in the state one year and no activity the next year?

18. 18
Sales Tax Nexus
• No Public Law protection
• Has been turned upside down this year
• Physical presence
• Economic nexus threshold

19. 19
Wayfair Decision
Physical Presence Standard
• National Belles Hess
 First case addressing physical presence standard
 Decided during the 1960s
• Quill v. North Dakota
 Case most referred to when discussing physical presence for sales
tax
 Decided early 1990s

20. 20
Wayfair Decision
Direct Marketing
• Case decided by the Supreme Court in 2015
• In deciding the case, Justice Kennedy’s concurring opinion
indicated that the states should find a case for the court to
reexamine Quill
• The states started plotting just such a case

21. 21
Wayfair Decision
South Dakota
• March 2016 – South Dakota enacted the “economic
nexus” standard that the Supreme Court examined in
Wayfair
 The standard is $100,000 in South Dakota sales or 200
transactions.
• South Dakota went after Wayfair, Overstock and NewEgg
for now complying with the new “economic nexus”
standard
• Unique about South Dakota – the way the court system
works a case can quickly work its way through the South
Dakota system and get to the Supreme Court

22. 22
Wayfair Decision
South Dakota’s Arguments:
• States, local brick-and-mortar stores and interstate
commerce are harmed (i.e., lost revenue)
• Brick-and-mortar stores are discriminated against (i.e.,
higher price than online retailers)
• The physical presence standard is obsolete in the internet
economy
• There is little burden on vendors

23. 23
Wayfair Decision
Wayfair’s Arguments:
• States receive 75% – 80% of all remote sales tax, and
uncollected amount is declining;
 19 of top 20 internet retailers collect tax on most or all states
• Overturning Quill would be a huge burden on businesses
• Retroactive liability would be crippling
• States need to simplify before Quill is reexamined or
overturned
 SSUTA: 23 signatory states but only 1/3 of population

24. 24
Wayfair Decision
Supreme Court Action:
• Granted cert January 2018
• Oral arguments heard April 17, 2018
• Decision rendered June 21, 2018
• The decision went 5-4 in favor of South Dakota
 “Isn’t the problem not Quill, but the fact that you don’t have a
mechanism to collect from consumers?”
Justice Sotomayor
 In dissenting opinion, Justice Roberts indicated “Yes, we got Quill
wrong, but it is up to Congress to enact a fix to the physical nexus
standard.”

25. 25
Wayfair Decision
Supreme Court Action:
• Decided South Dakota’s “economic nexus” standard was
sufficient.
 Prior to Wayfair, business was required to have a physical
presence
‒ Employee
‒ Employee visits
‒ Attend trade shows
‒ Property and/or inventory in state
 Post Wayfair “economic nexus”
‒ Sufficient amount of sales or
‒ Number of transactions

26. 26
Wayfair Decision
What Happens Now:
• South Dakota case was remanded to South Dakota
Supreme Court
• Numerous state have similar “economic nexus’ standards
in place – $100,000 in sales or 200 transactions
• The question is, “Where do we go from here?”
 Are the changes retroactive?
 What about use tax reporting?
 Will Congress do anything?

27. 27
Wayfair Decision
• Numerous states already have an “economic nexus” standard
as part of their state statute
• Some states enacted before South Dakota and some since
anticipating the Supreme Court decision
• Questions that need to be addressed:
 If part of state statute prior to Wayfair, how will the states handle
prospective or retroactively?
 How do you determine sales for the economic nexus standard?
 What is meant by a transaction?
– Entire invoice or each line item?
– Is it taxable sales or all sales?
– What if everything I sell is exempt?

28. 28
Wayfair Decision
Prospective or Retroactive Treatment
• State’s submitted briefs during the Wayfair case indicating
they would enforce prospectively
• Supreme Court in rendering its decision noted South
Dakota’s prospective treatment

29. 29
Wayfair Decision
Economic Nexus Threshold
• South Dakota’s is $100,000 in sales or 200 transactions
• The majority of the states with an economic nexus
standard have a similar or higher standard
• It is believed the standards would hold up and can be
enforced
• States are moving forward with enforcement
• We are still awaiting guidance on effective dates

30. 30
Wayfair Decision
Economic Nexus Threshold
• What is meant by sales?
 $100,000 in sales or $250,000 in sales
– This is all sales into a particular state
– States are utilizing the following standards:
• Previous calendar year
• Current calendar year
• Rolling 12 months

31. 31
Wayfair Decision
Economic Nexus Threshold
• What is meant by transactions?
 Commonly it is 200 transactions
– Generally this is all transactions into a state
– It is generally not line items on an invoice, but the entire invoice counts
as one transaction
– Does not matter if the transaction is taxable or non-taxable

32. 32
Wayfair Decision
Economic Nexus Threshold
• States currently with an economic nexus standard:
 AL, CT, GA, HI, IL, IN, IA, KY, LA, ME, MA, MI, MN, MS, NJ, NM,
ND, OH, OK, PA, RI, SD, TN, VT, WA, WI, WY

33. 33
Wayfair Decision
Impact to Businesses:
• Online retailers
• Manufacturers
• Service provider
• International businesses

34. 34
Wayfair Decision
Sales Tax
• “Click-through nexus”
• Affiliated nexus

35. 35
Wayfair Decision
Other Concerns
• State Income Tax Nexus
 Will more states adopt economic nexus standards?
 Will states try and stretch standards already in place?

36. 36
State Tax and Due Diligence
• State tax issues increasingly more important
• Many aspects need to be examined:
 State income tax
 Sales tax
 Payroll
 Personal property
 Unclaimed funds
 Casual sales issues
 Pre due diligence

37. 37
State Tax and Due Diligence
State Income Tax
• Nexus concerns
• State income tax returns
• Apportionment information
• Cost of performance / market-based sales
• Audit results
• State tax issues increasingly more important
• Tax clearances
• Required registrations

38. 38
State Tax and Due Diligence
Sales/Use Tax
• Nexus concerns
• Sales/use tax returns
• Use tax filings
• Audit results
• Exemption certificates
• Casual sales / bulk sale exemption
• Audit results
• Tax clearances
• Asset purchase / entity purchase
• Required registrations

39. 39
State Tax and Due Diligence
Payroll
• Withholding returns
• Filing properly
• Required reporting forms
• Audit results
• Tax clearances
• Registration requirements

40. 40
State Tax and Due Diligence
Personal Property Tax
• Review of returns
• Assets being properly reported
• Requirements after deal
• Accounts

41. 41
State Tax and Due Diligence
Unclaimed Funds
• Are returns being filed?
• Is there an exposure for unreported funds?
• Any procedures to determine if unreported funds?
• Procedures if funds discovered?

42. 42
State Tax and Due Diligence
Pre-Due Diligence
• Get the house in order before the sale
• Review all filings
• Enter into VDAs to fix issues
• Help reduce due diligence in future

43. 43
Conclusion
• State Income Tax Nexus
 Public Law Protection
 Physical Presence – Economic Nexus
• Sales/Use Tax Nexus
 Wayfair Impact
 Compliance Issues
• Due Diligence
 Pre-Due Diligence Review
 Cautious Even With Asset Sale

44. 44
Contact Us
Mary Jo Dolson, CPA
Partner
Phone – (813) 386-3881
Mobile – (216) 316-8070
Email – mdolson@skodaminotti.com