State Corporation Tax and Nexus

Author: Michael Holland, Partner Blick Rothenberg

The net profits of a US corporation are subject to federal Corporation Tax annually, but these profits may also be subject to state Corporation Tax.

A state tax authority is only able to impose Corporation Tax on corporations with a physical or economic connection to the state – this connection to the state is commonly referred to as ’nexus’.

Nexus considers the presence of a corporation’s employees, staff and contractors, physical property and assets, and customers that are located within the state. The level at which each of these considerations create nexus can vary from state to state as each state tax authority imposes different thresholds when determining whether nexus exists.

Once a business has determined it has nexus with a state, it must then calculate the proportion of its profits that relate to its activities in the state. The profits attributed to a state are calculated using the states apportionment formula, which can vary from state to state.

Traditionally a three-factor apportionment formula was used by many states, and this considered a corporation’s payroll, property, and sales in a state equally. However, in recent years many states have adopted an apportionment formula based solely on a business’ sales within the state.

The application of the apportionment formula allows a corporation to determine the proportion of its total profits which are subject to a state’s Corporation Tax.

State Corporation Tax rates vary from state to state, ranging from 0% to >9%. Most states apply this rate to the state’s proportion of net profits. However, some states impose the tax on the gross receipt’s basis. A list of the current State Corporation Tax rates is available here.

A corporation with state nexus is generally required to file a Corporation Tax return in that state which includes details of total net profits, the application of the state’s apportionment formula and the states proportion of total profits. These filings are generally due by the 15th day of the fourth month following the end of the tax year but vary from state to state.

To summarise, the key actions to be taken are:

• Determine which state a business has nexus in by reviewing gross revenue, payroll, and balance sheet assets per state.
• For each state with which the business has nexus, apply the state’s apportion formula to determine the state’s net taxable income proportion.
• File a state Corporation Tax return and pay any tax due.