The document discusses state and local tax nexus issues and their impact on mergers and acquisitions. It covers state income tax nexus standards such as physical presence and economic nexus thresholds. It also summarizes the Supreme Court's Wayfair decision that overturned the physical presence standard for sales tax nexus and allowed states to implement economic nexus standards. The document stresses the importance of conducting thorough due diligence on state tax issues during M&A transactions to identify potential liabilities.

1. State and Local Tax Nexus
Issues and the Impact on
Mergers and Acquisitions
Mary Jo Dolson, CPA
June 20, 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 at 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 re-examine 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 not 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 re-examined 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 states 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
prospectively 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
Impact to Businesses:
• Online retailers
• Manufacturers
• Service providers
• International businesses

31. 31
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

32. 32
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

33. 33
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

34. 34
State Tax and Due Diligence
Payroll
• Withholding returns
• Filing properly
• Required reporting forms
• Audit results
• Tax clearances
• Registration requirements

35. 35
State Tax and Due Diligence
Personal Property Tax
• Review of returns
• Assets being properly
reported
• Requirements after deal
• Accounts

36. 36
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?

37. 37
State Tax and Due Diligence
What steps should you take if you
discover issues during due
diligence process?
• Voluntary disclosure
• Amnesty programs
• Back return requirements

38. 38
State Tax and Due Diligence
Successor liability issues
• Asset deal
• Stock deal
• Escrow
• Bulk sale/casual sale
exemption

39. 39
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

40. 40
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

41. 41
Contact Us
Mary Jo Dolson, CPA
Partner
Phone – (813) 386-3881
Mobile – (216) 316-8070
Email – mdolson@skodaminotti.com