Google nexus and trucking and what you find is a lot of confusion and a somewhat obscure tax law that could trap trucking companies – especially smaller operations without dedicated tax accountants on staff.
Nexus is sometimes referred to as “sufficient physical presence.” According to Quickbooks, “it is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. For example, if you sell goods or services in Los Angeles, you must file and pay California state taxes.”
But carriers don’t sell goods or services in individual states, they simply deliver someone else’s product, you might say. But, the rise of Amazon has caused many states to change their laws around nexus. Traditionally, a “business that has inventory, fixed assets, rents an office, warehouse or some other type of property and/or has employees working in a state” could be subject to nexus, wrote Ralph Loggia, a senior tax manager for Mazars USA, in a recent blog post. Some states are now triggering nexus for businesses that meet simple sales/revenue thresholds.
If nexus is triggered, the business likely has to file a tax return with that state. So how does a trucking company, that may operate in 35 states, know if it has triggered nexus in all of them? As Loggia writes, “welcome to the trap.”
Loggia notes that 29 states has laws that trigger nexus when a company-owned truck either picks up or delivers goods in the state. Nexus is triggered in 20 states simply when a truck drives through the state.
Each state has different nexus laws that may be based on time in the state, miles driven in the state, or sales made within the state. Michigan provides a typical definition of when nexus would be triggered:
An “out-of-state trucking corporation would have nexus with Michigan for purposes of the CIT if the corporation either picked up or delivered product in Michigan during 2 or more days within the tax year. Furthermore, the corporation would have nexus with Michigan if it merely drives through Michigan, i.e., travels through Michigan on a trip that originates and terminates outside of Michigan, with no pick up or delivery in Michigan and with no other business activity in Michigan, during 2 or more days within the tax year.
“If nexus with Michigan is established, and if the corporation’s tax liability exceeds $100 and its apportioned or allocated gross receipts exceed the $350,000 filing threshold under MCL 206.685(1), then the taxpayer’s corporate income tax base is apportioned by multiplying the tax base by the sales factor. MCL 206.661(1). Generally, for an out-of-state transportation corporation, receipts from transportation services provided by the transportation corporation are sourced according to MCL 206.665(11), (12) based on the ratio of revenue miles in Michigan (numerator) to revenue miles everywhere (denominator). Revenue mile means the transportation for consideration of one net ton in weight or one passenger the distance of one mile. MCL 206.609(3). Receipts from transportation services are combined with other receipts or sales of the taxpayer to compute the sales factor. Note that once nexus exists in a tax year, then all revenue miles driven in Michigan, including revenue miles associated with ‘drive through’ trips made in Michigan, are included in the apportionment formula numerator.”
Filing taxes in dozens of states can be time-consuming, and it is suspected that many businesses – not just trucking companies – neglect this responsibility. However, more states are beginning to crack down and send warning letters to carriers seeking information on whether they meet the requirements and should be paying taxes.
One of the ways that many states are identifying carriers is through weigh station and other enforcement stops.
“The state will check its records to see if the company of that truck had registered to do business in that state and if the company is not registered or filing a tax return, the state could send a questionnaire that tries to determine if nexus has been created, even though in most cases the state already has reason to believe the business has nexus in that state,” Laggio wrote.
Nexus is an oft-overlooked part of state tax codes, but one that is becoming more prominent as states become more aggressive in search of revenue. Unfortunately, there is no easy way for carriers to deal with this, but they also don’t want to be facing an unexpected tax bill.