re operating, in any form, in a state other than your formation state.
WHY STATES DO THIS?
Many states have said that the requirement to obtain authority to do business exists to protect domestic organizations (those corporations & LLCs formed in that state) from unfair competition and to place domestic and foreign organizations (those formed in another state or country) on an equal footing. In fact, it is a way that states can ensure that they receive taxes from companies doing business there.
Domestic companies, they say, are required to collect taxes and pay taxes to that state. The argument is that foreign companies, who have lower costs because they are not forced to collect taxes, have an unfair competitive advantage. Additionally, if these foreign companies don?t collect taxes on sales, then wise consumers will be more inclined to purchase from the foreign company at an overall lower price.
WHAT IS NEXUS?
The law is clear; a state cannot impose a tax on an out-of-state business unless that business has a ?substantial nexus? within the taxing state. But what exactly is substantial ?nexus??
The Supreme Court, on at least two occasions, has construed this ?substantial nexus? requirement when it comes to collecting taxes, requiring that the out-of-state (foreign) business must have ?more than de minimus? physical presence in the taxing state. The key here being ?physical presence.? Many recent state level cases have used the physical presence standard when imposing taxes on foreign companies.
Previous Supreme Court precedents held that taxpayers acquired a substantial nexus with another state through continuous and systematic contacts with the state. Recently, states have been seeking to expand their right to tax foreign companies which have only an economic presence in the state. At this time though, the physical presence standard is holding and the one most companies should follow.
So, ?what exactly is physical presence?? you might ask. This is a large point of contention as it is hard to find clear nationwide standards. Many states have created their own standards for establishing physical presence and therefore nexus allowing it to, in clear conscience, tax a foreign company. These standards, when defined, vary greatly in each state. For instance, if you are a trucker who drives through Massachusetts, substantial nexus occurs if you make more than twelve pickups, deliveries or trips through Massachusetts. This standard does not exist in any other state.
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