Multistate Corporate Taxes

[Golden Rocket]

This is another lengthy post. Consider your time and subject interest before reading.

A client (defense contractor) operates in 10 different states already, where there are military bases.

A new contract requires this contractor to purchase large dollar-volume parts for NASA, but other than the process of buying and paying for the parts, there is no operation. To allow purchase of parts, even for NASA, the buying company (e.g. the contractor) must maintain a sales tax exemption in every state where the parts are being delivered to NASA locations.

This means 9 more states plus Dist of Columbia. The NASA contract is delivery to NASA only, thus the exemption is served not by a "Sales tax" return but instead by a "Use tax" return. All the various Use Tax monthly returns are reporting gross delivery costs, but since NASA is exempt, the bottom line in every case is zero. Every month. Every state.

I'm already filing corporate tax returns for this client in 10 states. However, the new NASA contract is requiring Use Tax reporting in another 7 states in addition to the 10.

Question: Will contractor be required to file in another 7 states because these new states are now aware contractor is sending materials?

Before answering, keep in mind that some of these state returns require the distinction between "Origin" sales and "Destination" sales. It would appear that materials sold to NASA in various locations would be defined as "destination" sales.

What say ye? Any comments?

[Gary2]

This is another lengthy post. Consider your time and subject interest before reading.

The post isn't long, but the research to answer it completely would be.

Question: Will contractor be required to file in another 7 states because these new states are now aware contractor is sending materials?

Before answering, keep in mind that some of these state returns require the distinction between "Origin" sales and "Destination" sales. It would appear that materials sold to NASA in various locations would be defined as "destination" sales.

Not because they're aware of something - I've never heard of any state taking the position "if we don't know about it, you're ok." Isn't the real question whether this establishes nexus? Or am I missing something?

My gut reaction is that you ought to be charging them enough for you to subcontract the question to a firm with expertise in this area (without giving up the client), and/or pursuing specialized CE. If that's too much of a cop-out, then I suggest researching nexus on a state by state basis.

[Golden Rocket]

No Nexus

Thanks for your response, Gary, and it is a difficult question.

Let's assume nexus does not apply, under conventional thought before states started fashioning ridiculous definitions to collect Amazon sales tax.

...and reduce the question to encompass just a single state, just to keep the conversation simple.

Client has never had an operation in New Mexico, having never performed a contract at any government facility in that state. Client has never filed a corporate return for New Mexico, never having had a payroll, facility, or anything else there.

But this year, client is performing buying materials for NASA headquartered out of its home state. And client is also paying $15MM to vendors from whom stuff has been bought. Client bills NASA at cost plus a small percentage to cover its capital outlays. Among these purchases are $800,000 worth of goods from Roswell and Alamagordo vendors which have been delivered to the NASA facility at White Sands. In order to purchase this stuff free of sales tax, client obtains a resale certificate, which the vendors must have even though the sale to NASA is obviously not taxable by virtue of being a government entity. Having a resale certificate means my client has to file a monthly Use Tax return.

Over the course of the year, these Use Tax returns have shown $800,000 as "goods imported into NM from other locations on which tax has not been assessed." However, there also has been $800,000 reported as "exempt transactions" because NASA would be an exempt entity. So the result is that NM never gets paid one red cent in Sales/Use tax.

The question is: should my client be filing a corporate tax as a foreign corporation in New Mexico? There is no activity other than the shipment of $800,000 worth of parts to the NASA facility at White Sands.

There are other states as well, but if the question can be answered for New Mexico, it can form a position for filing other states, as well as the effect on various multi-state allocation formulas.

And yes, I am aware each state writes its own rules for "Who Must File" but these are overly aggressive to dragnet any conceivable wist of money for these states. The importance of a consistent position for my client also weighs heavy on whether the totality of their sales is distributed into the various formulas without leaving some sales money out.

[Nashville]

Simplify the Question

It is quite understandable that the question as posed has not brought forth a chorus of conversation. Being conversant for such a thing is a two-part process: (i)reading and digesting the question, and (ii)developing an answer. For this topic, neither of these are easily had.

Let's simplify the question. If YOU were preparing multi-state corporate tax returns for this client:

Would you prepare a corporate return for a state if the only exposure was filing monthly zero sales/use tax returns for that state?