Do States’ Interpretations of Nexus Activities Align with States’ Policy Adoptions of Economic Nexus?
Posted: 14 Feb 2013 Last revised: 28 Feb 2013
Date Written: February 13, 2013
Abstract
While the 1992 Supreme Court case Quill vs. North Dakota, 112 S.Ct. 1904 (1992), re-affirmed a bright-line, physical presence nexus standard for sales and use tax purposes, the court case explicitly left open the question of whether the same nexus standard applied to state corporate income taxes. The state taxation literature has extensively examined state corporate income tax characteristics and revenue implications; however, little research has focused on which types of corporate activities result in a state asserting nexus. Using data from the BNA Survey of State Tax Departments, this study investigates 95 nexus-creating activities as reported by states from 2002-2010 and their association with states’ adoption of economic nexus. In other words, we seek to better understand which nexus-creating activities of businesses drive the corporate income tax economic nexus adoption by states. Through a unique use of both behavioral survey data and archival data, we provide a rich picture of how state policy adoptions of economic nexus align with state interpretations or perceptions. Results show that economic nexus adoptions are more common in states that perceive investment in pass-through entities, licensing intangibles, engaging in financial activities, or inspecting installation as creating nexus within the state, and are less likely in states that view attending trade shows or checking customer inventories as creating nexus. These results contribute to the state taxation literature by providing evidence of the primary activities that contribute to the economic nexus standard, which have implications for state tax researchers and policymakers alike.
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