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Spotlight on SALT: States Extending Income Tax Reach Over Service Providers


Through recent legislation, a number of states have extended their respective income tax reach over service providers that have no physical presence in the taxing state (i.e., no owned or leased property, no resident employees or representatives, or no employees or representatives regularly traveling into the state to solicit business or maintain a market for services in the state). Examples of such providers are numerous, including testing, businesses which provide laboratory functions, advertising, call center functions, engineering and design, logistics and inventory management, financial planning, web hosting, telecommunications, and even legal, accounting and other professional services. The states of Kentucky, Minnesota, Oregon, Washington (for Washington's Business & Occupation Tax), and Wisconsin will assert income taxing jurisdiction over out-of-state service providers who only provide services to in-state residents or customers, again even though having no traditional physical presence. Further, other states are tying their assertion of income tax jurisdiction to their income apportionment formulas using so-called "factor presence" statutes. Thus, Colorado, Michigan and Ohio (for Ohio's Commercial Activity Tax) will assert income taxing jurisdiction if a service provider has a certain dollar amount of gross receipts from services sourced to that state by such state's apportionment formula, even though such service providers do not have the traditional physical presence in that state. Beginning in 2011, California joins this group. These expansions of taxing jurisdiction go beyond the "economic nexus" case law and regulations applicable to licensors of intangibles, such as patents and trademarks, and financial institutions that apply in 16 other states. We anticipate that more states will use the rationale of the "economic nexus" court decisions to extend taxing jurisdiction over service providers. Indeed, a series of Utah private letter rulings have done just that.

As a result of these developments, service providers are now being pressed to confront a new paradigm of state income taxation not only with respect to the apportionment of their income, but also with respect to their income tax return filing obligations.

If you have questions or concerns regarding these developments, please contact one of the following attorneys in our Tax Department:

Washington, D.C.
Scott D. Smith 202.508.3430 sdsmith@bakerdonelson.com
James W. McBride 202.508.3467 jmcbride@bakerdonelson.com

Atlanta, Georgia
Nedom A. Haley 404.221.6505 nhaley@bakerdonelson.com
Michael M. Smith 404.589.3419 mmsmith@bakerdonelson.com
Michael S. Evans 404.221.6517 mevans@bakerdonelson.com

Birmingham, Alabama
Thomas J. Mahoney Jr. 205.250.8346 tmahoney@bakerdonelson.com
William Rembert Sylvester 205.250.8372 bsylvester@bakerdonelson.com
Vincent J. Schilleci 205.244.3827 vschilleci@bakerdonelson.com

New Orleans, Louisiana
Robert W. Nuzum 504.566.5209 rnuzum@bakerdonelson.com

Baton Rouge, Louisiana
Alton E. "Biff" Bayard III 225.381.7019 abayard@bakerdonelson.com

Jackson, Mississippi
Stacy E. Thomas 601.351.2484 sthomas@bakerdonelson.com
Jon D. Seawright 601.351.8921 jseawright@bakerdonelson.com
David P. Webb 601.969.4678 dwebb@bakerdonelson.com

Memphis, Tennessee
William H.D. Fones Jr. 901.577.2247 wfones@bakerdonelson.com
Adam C. Flock 901.577.8167 aflock@bakerdonelson.com

East Memphis, Tennessee
James R. "Josh" Hall Jr. 901.579.3126 joshhall@bakerdonelson.com
Christopher J. Coats 901.579.3127 ccoats@bakerdonelson.com

Nashville, Tennessee
Carolyn W. Schott 615.726.7312 cschott@bakerdonelson.com
John B. Burns 615.726.5599 jburns@bakerdonelson.com

Chattanooga, Tennessee
Carl E. Hartley 423.756.2010 chartley@bakerdonelson.com
Virginia C. Love 423.209.4118 vlove@bakerdonelson.com

Knoxville, Tennessee
Angelia M. Nystrom 865.971.5170 anystrom@bakerdonelson.com

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