Economic Nexus

Income Tax

Many businesses are utilizing current technology to increase sales and market share without having to leave their buildings. Most tax accountants would reason that no new state tax liabilities have been created by these businesses because they have not left the state. However, some states may not agree.

Companies have relied on the “substantial physical presence” requirement established by U.S. Supreme Court rulings in Complete Auto Transit, Inc. v. Brady (1977) and Quill Corp. v. North Dakota (1992) as the bright line test for determining nexus. States have since recognized that companies no longer need to be physically present to derive revenue in their states and are asserting that “economic presence” rather than physical presence is sufficient to create nexus for state tax purposes.

Early challenges to the physical presence requirement focused on passive investment companies. South Carolina successfully argued that economic presence was sufficient for establishing nexus for income tax in Geoffrey, Inc. v. S.C. Tax Commission (1993). The South Carolina Supreme Court stated that Quill’s physical presence test did not extend to taxes beyond sales tax. The U.S. Supreme Court declined certiorari, reaffirming their position that nexus should be resolved by the Congress and the states.

Recent cases such as MBNA America Bank v. Indiana Department of Revenue (Indiana 2008), Capital One Bank and Capital One F.S.B. v. Commissioner of Revenue (Massachusetts 2007), and Tax Commissioner v. MBNA America Bank, N.A. (West Virginia 2006) have resulted in nexus for out-of-state companies with no physical presence in these states. States have successfully argued that these businesses conduct systematic and continuous activities within their states that generate gross receipts from state residents. In each of these rulings the courts stated that the physical presence requirement of Quill only applied to sales and use taxes.

For the time being, physical presence continues to apply to sales and use taxes. However, it is now clear that many states believe that physical presence should no longer be the measuring stick to determine nexus for other taxes. Following South Carolina’s lead, over 20 other states have formally adopted an economic nexus standard. Businesses should take a hard look at their current sales and marketing efforts to determine if they have unknowingly created economic nexus in jurisdictions in which they have sales and marketing activities.

Until Congress passes new nexus legislation or the U. S. Supreme Court steps in, it is likely that states will continue to pursue out-of-state companies based on their perceived economic presence.

If you have any questions about this or SALT issues, please email Andy Toth at atoth@tsacpa.comor Bob Lamb at  For additional State and Local Tax insights and resources, or to subscribe to our quarterly newsletter, visit


Related Blogs

Mark A. Ferm, CPA, partner with Tronconi Segarra & Associates LLP, has been selected…
Tronconi Segarra & Associates tax partner Mark A. Tronconi, CPA, MBA, will participate in…
Tronconi Segarra & Associates’ partner David Werth, JD, CPA, will be the luncheon speaker…