State taxation: nexus first
Nexus is the connection that permits a state to tax a business. Physical presence (property, employees, inventory) has always created nexus; following South Dakota v. Wayfair, states may also assert economic nexus based on sales or transaction thresholds without any physical presence.
IMPORTANT — Public Law 86-272: A narrow federal protection preventing a state from imposing a net income tax when the only in-state activity is soliciting orders for tangible personal property that are approved and shipped from outside the state. It does not protect services, intangibles, or sales/use tax obligations — a heavily tested limitation.
Apportionment
Multistate income is divided among states using apportionment factors. The traditional three-factor formula weighted property, payroll, and sales; most states have moved to a single sales factor, often with market-based sourcing (sales sourced to where the customer receives the benefit) rather than cost-of-performance sourcing.
US international fundamentals
- US persons are taxed on worldwide income; the foreign tax credit mitigates double taxation, limited to the US tax attributable to foreign-source income, with excess credits carried back one year and forward ten
- Subpart F currently taxes US shareholders on certain passive and mobile income of a controlled foreign corporation (CFC)
- GILTI subjects US shareholders to current tax on a CFC's income exceeding a routine return on tangible assets
- Sourcing rules matter: services are generally sourced where performed; interest and dividends generally by the payer's residence
- Transfer pricing requires related-party cross-border transactions to be priced at arm's length, with documentation to support it
EXAMPLE: A company with employees only in State A ships goods into State B where salespeople merely solicit orders that are approved and fulfilled from State A. P.L. 86-272 likely shields it from State B's income tax — but it may still owe State B sales tax collection obligations under economic nexus rules.
EXAM TIP: Read carefully for what kind of tax is at issue. P.L. 86-272 protection applies to net income taxes only — never to gross receipts taxes, franchise taxes, or sales and use tax.