State Income Tax Changes for Businesses

By Terry Barrett, CPA, Tax Senior Manager | State and Local Tax Team

Summary of New Requirements for State Income and Income-Like Taxes

Recent activity by several states’ taxing jurisdictions may affect business income/franchise tax filing requirements for 2019 or prospectively. The following summarizes such changes.

Economic Nexus and Income/Franchise Tax

The Wayfair decision by the US Supreme Court rocked the sales tax world in June 2018.  Since then, all states with a state level sales tax except for Missouri and Florida have adopted economic nexus rules for sales/use tax purposes – meaning remote sellers are now required to collect sales tax to the extent they meet the states’ threshold requirements.

A majority of state previously have adopted the economic nexus standard for income tax purposes. However, with the Wayfair decision, some states that had not formally adopted such economic nexus standards now have. The following summarizes recent state adoptions of economic nexus for income tax purposes:

• Hawaii: For taxable years beginning January 1, 2020, a business that has no physical presence in Hawaii but engages in 200 or more business transactions in the state or has gross income attributable to sources in Hawaii which equals or exceeds $100,000 in the current or preceding calendar year is presumed to be regularly engaged in business in the state and subject to Hawaii income tax.   This standard is the same as for registration and collection of Hawaii’s general excise tax (the state’s equivalent of a sales tax).  Remote sellers, however, may be protected from Hawaii’s income tax if their activity in the state is limited to the solicitation of sales and no more.  Federal law, specifically, Public Law 86-272, prohibits a state from imposing a net income tax on a business if the only activity in the state is the solicitation of sales. Activity beyond that, however, likely creates tax reporting requirements.
• Pennsylvania: Effective January 1, 2020, Pennsylvania adopted an economic nexus standard applicable to its corporation net income tax. Corporations with no physical presence in the state but having $500,000 or more of direct or indirect gross receipts from sales to Pennsylvania customers are required to file the Corporate Net Income Tax Return.  Taxpayers who only solicit sales of tangible personal property in the state and qualify for exemption from Pennsylvania corporate income tax because of Public Law 86-272, are still required to file a Pennsylvania Corporate Tax Report and complete the necessary schedules to claim exemption from the tax.
• Massachusetts: Effective October 23, 2019, Massachusetts adopted an economic nexus standard for business corporations, financial institutions, and insurance companies.  Where a corporation’s Massachusetts sales for the taxable year exceed $500,000, it is presumed to meet the economic nexus standard.  Businesses who only solicit sales of tangible personal property and qualify for exemption from state income taxation pursuant to Public Law 96-272 may be exempt from the income measure of the corporate tax but not from the non-income measure (minimum excise tax) and thus will have a filing requirement if they meet the $500,000 threshold. While the regulation did not include an effective date for the change, we understand that the Massachusetts Department of Revenue has indicated the provisions are effective for tax years beginning January 1, 2019.
• Texas: Foreign entities that have no physical presence in the state but meet an economic nexus threshold of $500,000 (gross receipts from business done in Texas) must file Texas Franchise Tax Reports due on or after January 1, 2020. A foreign taxable entity is considered to begin doing business in Texas on the earliest of: (i) the date the entity has physical nexus; (ii) the date the entity obtains a Texas use tax permit; or (iii) the first day of the federal income tax accounting period in which the entity had gross receipts from business done in Texas in excess of $500,000.  Public Law 86-272 protections do not apply to the Texas Franchise tax, thus the mere solicitation of sales in the state will not prevent a business from being subject to the franchise tax if it exceeds the $500,000 threshold.

As noted under each of the above, a business that only solicits sales of tangible personal property in one of the above states may not be required to file returns (depending upon the state), however, if a business goes beyond the solicitation of sales of tangible goods and sells/provides services or sells intangibles to in-state residents they will be subject to the new economic nexus requirements.

State Gross Receipts Taxes

A few states impose gross receipts type taxes in lieu of income taxes upon businesses for the privilege of doing business in the state. The following summarizes recent activity:

• Washington State: Beginning January 1, 2020, an out-of-state business with no physical presence in the state must register to report the Washington B&O (Business and Occupation) Tax if it has more than $100,000 in combined gross receipts sourced or attributed to Washington. This is regardless of whether the gross receipts are from retail sales or wholesale sales. For 2018 and 2019, Washington’s economic nexus requirement for both its retailing and wholesaling B&O taxes was $285,000 in sales, or at least 25 percent of the total yearly gross receipts sourced or attributed to Washington.
• Oregon: Also beginning January 1, 2020, Oregon imposed a new tax (Commercial Activity Tax or “CAT”) on businesses for the privilege of doing business in the state. The tax is an annual calendar year tax and applies to all entities including those located inside and outside of the state, and is measured on a business’ commercial activity in Oregon. Businesses with commercial activity in Oregon of $750,000 or more must register for the tax with the state; those with activity of $1 million must file a return. The tax generally is $250.00 plus 0.57 percent of gross receipts greater than $1 million after certain deductions.  Penalties of $100 per month may be assessed for failing to register for the tax (with a $1,000 cap per year).

Sourcing of Receipts

For taxable years beginning January 1, 2020, North Carolina adopted market-based sourcing for purposes of calculating the sales factor for its corporation income tax, applicable to multi-state businesses. This means that receipts are deemed to be sourced to North Carolina if a taxpayer’s market for the receipts is in the state. For sales, leases, licenses of real or tangible personal property, the market is in North Carolina if the property is located in North Carolina or delivered to a location in North Carolina; for the sale of a service, if the service is delivered to a location in the state; for sales of intangible property, to the extent the property is used in the state.

North Carolina previously used cost of performance in determining the sourcing of receipts from the provision of services and intangibles.

While some of the above do not affect filing requirements for 2019, it’s important to be aware of the changes for tax planning purposes for 2020.

Questions on state income tax changes that may impact your business? We can help. Contact your Keiter representative or our State and Local tax team. Email | 804.747.0000

Additional Resources

• New Virginia Taxpayer Changes
• Local Tax Time
• It is that time of year: BPOL renewals
• 2020 Tax Planning Guide