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Multistate nexus issues during a recession

On Behalf of | Oct 15, 2020 | Tax Law |

States are becoming increasingly aggressive in their tax collection efforts as potential budget shortfalls loom during the current recession. In the world of interstate commerce, this becomes problematic on several fronts, particularly in the trucking industry. Trucking companies need to be aware of potential tax issues as they cross state lines in a lean economy.

Nexus at the state border

In some states, the highway patrol is coordinating with the Division of Taxation to ensure compliance with local tax laws. The state troopers pull over trucks with out-of-state licenses as they are crossing state lines, check to see if the business is registered and paying state taxes, and detain them if there are outstanding state tax bills until payment of an estimated assessment is wired to the state.

While this method may benefit the local revenue coffers, it creates a nightmare of difficulties for trucking companies that miss deadlines and are forced to pay penalties, including overpayments that then they must fight to recover. And because fuel tax reports are filed through the International Fuel Tax Agreement (IFTA), as a truck travels through, the state is aware of its company of origin as well as its affiliates or third-party vendors. This potentially creates nexus even if the destination is in another state.

Federal protection

The federal statute 15 U.S.C. § 381, also known as Public Law 86-272, will not help service providers like truck companies, it does provides some shelter from income tax to those businesses that sell tangible property. As long as the goods are not sold in-state directly to the customer, but only solicited with orders taken and goods shipped out-of-state, no nexus will be created in the transaction. The question is often how to interpret “solicitation”.

The states are split on whether or not the delivery of goods in company-owned trucks constitutes nexus, and differing opinions are manifest in the national capital region as well. While this is considered protected activity in Virginia under the federal statute, Maryland considers even the taking of orders by a sales representative to be activity that creates nexus.

Businesses need to be aware of potential tax burdens if their commerce is across state lines, as states differ in their determination of what constitutes nexus in interstate trade. Having highly skilled representation where there may be tax disputes is crucial in navigating through a difficult economy.