Speaker: Even in Age of Economic Nexus, Local Partnerships Still Bound by Decades-Old Rules

By:
Chris Gaetano
Published Date:
Nov 8, 2018
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While states have increasingly been adopting economic nexus tax standards, which the Supreme Court recently ruled were constitutional, a speaker at the New York and Tri-State Taxation Conference on Nov. 7 noted that partnership-style entities, including sole proprietors—at least those in the tri-state area—remain bound by the older "doing business" standard. 

Speaking at the conference, presented by the Foundation for Accounting Education at the NYSSCPA's Manhattan headquarters, Brian Gordon, CEO of State Audit Tax Representation Inc., noted that while corporate tax laws have evolved further away from requiring a physical presence in the state, partnerships in New York, New Jersey and Connecticut have largely been left out of these changes, meaning that physical presence remains a vital factor. 

"This is a decades-old law, and for some reason New York and the surrounding states just haven't put the time into—or don't have the desire to change—these laws. Other laws, corporation tax laws, have evolved over the years, especially with economic nexus, also with allocation; the three-factor formula was phased out and moved into a single-receipts factor. None of that happened here; it's all dusty laws, the same books that have been around since I don't even know when. When I say decades, I mean decades," he said. 

So in contrast to economic nexus rules, which are concerned with where one's customers are located, partnerships establish nexus based on where they and their assets are located. Gordon brought up the example of someone in New Jersey who provides remote technical support services. Right now, under economic nexus rules, if that person has over $1 million worth of receipts from New York customers, then that person has established nexus in that state and therefore owes tax to its government. But things change if that person's company is a partnership. 

"Again, partnerships in New York and the tri-state area do not have that. ... In that case, the income would be allocated to where the service provider is sitting—in his basement or wherever [he is] doing that service," he said. 

So when an out-of-state partnership does business in New York, this means it is not subject to economic nexus rules. Instead, it is subject to the old "doing business" standard. Gordon noted, however, that because these rules are old, they can be a little confusing and sometimes even contradictory. That being said, generally, a partnership is considered to be doing business in New York if there is a physical presence within the state, such as a desk space, office, shop, warehouse or factory, within which a nonresident's affairs are systematically and regularly carried on, not withstanding the occasional consummation of isolated transactions within another state. But he added that this list is not exhaustive. Overall, he said, a business is considered carrying on in a state if there is a fair degree of permanency and continuity there, and if the firm continuously relies on the profits from within the state. So, the occasional visit will not create nexus; it needs to be regular and continuous. 

He conceded that "these laws are kind of vague, a little confusing, misleading. I've had conversations with the New York state audit division, and they do agree that the law is confusing and maybe even a little contradictory, so they do take a fair and open-minded approach to this." 

Yet, despite the focus on physical presence, someone who has established nexus in one state can still be liable for tax even if a service is performed outside the state. He brought up as an example an attorney who worked on a case while in Florida, for a Florida-based client. If the attorney was not licensed to practice in Florida, only New York, and if he maintained an office in New York, Albany could claim that his business was wholly within New York and therefore he owed tax to the New York government. Yet in one particular case, the attorney did not maintain a physical office in New York, so the state wound up losing. Gordon said that the case underscored how important physical presence is for situations like this.

While this ruling might seem advantageous to some, it also puts partnerships in an all-or-nothing situation when it comes to nexus. Corporations, Gordon noted, can allocate based on amount of time spent in each individual jurisdiction. If a New York company does 75 percent of its business in New York but 25 percent in California, if this creates a tax nexus in California, then the company can get a resident credit to make up for it. But, he said, a resident partner cannot allocate. 

"If I am a partner and a New York resident, I will be paying on 100 percent of my income somewhere," he said. 

Gordon said that partnerships would do well to remember that they are essentially operating on two different sets of rules because of the situation in New York. He noted that "many just assume [the partnership laws changed] with corporate law, but they didn't." This means that a partnership in New York City will need to file both a unincorporated business tax return, which is subject to economic nexus, and a partnership return, which is not. Overall, he said that partnerships in this area right now operate on rules that would seem to be the opposite of what's currently changing for corporations. 

"Allocation, it's like the Big Bang, where everything [goes] out," he said. "For New York partnership income tax laws, it's a black hole, and they bring everything in: origin, not destination, but origin. Everything is coming in and they're saying we're not letting you allocate outside the state. You're a New York business." 

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