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Ruling lowers standards needed to create nexus


A ruling in the state of Texas has changed the parameters for determining a nexus. Taxand USA examines how this could affect the rest of the country.

A Texas Comptroller of Public Accounts Administrative Law Judge (ALJ) found that a Utah business (the Taxpayer) had substantial nexus with Texas because it licensed electronically delivered software and images to Texas customers. The determinative factor was not the mode of software delivery. The ALJ’s decision hinged on the logic that the taxpayer conceded having tangible personal property in Texas by retaining all property rights in its license agreements.

The Business Activity Research Team (BART) within the Comptroller’s office conducted an audit of a Utah corporation that sold computer software and digital content through the Internet. BART took the position that the Taxpayer’s licensing of computer software to Texas customers created a physical presence and substantial nexus. The Taxpayer disputed because its business activities in Texas were limited to the delivery of computer software primarily through the Internet, the occasional delivery of software via common carrier, and attendance by personnel at two conferences in Texas. In addition to disputing the merits of the state’s nexus claims, the Taxpayer requested penalty abatement and sought insolvency relief because of the magnitude of the audit adjustment. 

The ALJ reviewed the Taxpayer’s revenues and ruled that the amount of sales into Texas exceeded any reasonable de minimis threshold, thus the Taxpayer had nexus in Texas.

Discover more: Texas ruling lowers physical standards needed to create nexus

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Taxand's Take

The ALJ has established a very low bar for the bright-line physical presence standards needed to create substantial nexus. If other states latch on to the logic developed in this ruling, the ever-growing world of software, cloud computing and digital products may not have to wait for the passing of the Marketplace Fairness Act or another form of federal intervention. 

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