You are a tax manager with a public accounting firm. Two of your clients have engaged you to prepare a "nexus review" to determine if they are filingcorporate income tax returns in the appropriate states. They have provided you with certain facts, but you needadditional information to complete your analysis. Based on the facts presented, please answer the questions finshed and provide support the conclusions.

Case Studies - Corporate Income Tax Nexus

1. Dragons, Inc. (Corporation) - global manufacturer

Facts:

• Manufactures and sells dishwashers and other kitchen appliances to retail customers
• Installs and repairs kitchen appliances in customers' homes
• Incorporated in Delaware
• Corporate headquarters is located in Philadelphia, Pennsylvania
• Manufacturing facilities are located in Massachusetts, Pennsylvania, and Texas
• Sales offices are located in Massachusetts, Maryland, New Jersey, Ohio, Pennsylvania, Texas, and Wisconsin
• Maintains inventory in numerous public warehouses located in geographic areas where market concentration is greatest
• Sells product to customers in 40 states, Canada, Mexico, and Europe
• Company employees (sales representatives) visit customers throughout the U.S.
• Product is shipped from the 3 manufacturing facilities and public warehouses directly to customers via company trucks and common carriers
• All sales orders are sent to corporate headquarters (Pennsylvania) for approval or rejection
• Damaged or defective products are picked up by the company at the customer's location and returned to one of the company's manufacturing facilities
• Partial sales by state data is provided below for states with factor presence nexus standards

Questions:

1. Based on the facts and the sales information below, in what states do you think Dragons, Inc. would have substantial nexus for corporate income tax purposes?Explain.
2. What additional information would you need to determine if Dragons, Inc. has taxable nexus in any other states (in addition to those in your answer to Question A)?
3. Would employees making repairs or providing on-site maintenance to the kitchen appliances be protected under P.L. 86-272? Why? Does it matter if these are infrequent and irregular activities - occurring only a few times a year? Explain.
4. Would your answer to (C) differ if Dragons, Inc. used third-party independent contractors to perform these services instead of company employees? Why?
5. What is a "factor presence nexus standard" (bright-line nexus) for corporate income tax?Does P.L. 86-272 still apply in a state which has adopted factor presence nexus for income tax?
6. What local Philadelphia business taxes would Dragons, Inc. be subject to and what is the nexus standard used by Philadelphia for its primary business tax? Note: Please address taxes imposed on corporationsonly (research required). Department of Revenue | Homepage | City of Philadelphia

1. Lexerd Company (Corporation) - cloud computing

Facts:

• Develops prewritten computer software programs for architects and engineers
• Licenses the software on a subscription basis (Software as a Service) and provides upgrades and technical support to customers. The software is centrally hosted from the Lexerd's corporate headquarters in Cherry Hill, New Jersey and made available to customers in the cloud.
• The company's clients are located throughout the U.S, with a large concentration on the East Coast and Southwest. The company directs its digital advertising toward customers in these geographic areas.
• Customers order software online through Lexerd's website and their orders are approved by Lexerd personnel at the Cherry Hill HQ.
• Satellite offices are located in New York, Pennsylvania, and Virginia - full-time software engineers, sales representatives, and a small number of administrative personnel are employed at these offices.
• Approximately 100 full-time software engineers also have "home offices" throughout the U.S.; these are not company business locations.
• In the current year, Lexerd employees attended trade shows in Arizona, California, Florida, Georgia, Indiana, North Carolina, and Texas. The employees exhibited Lexerd's products at these trade shows and also took orders for software programs.
• Lexerd employees also occasionally conduct on-site training seminars and sometimes provide consulting services for large customers at their facilities.

Questions:

1. Based on the facts presented above, where do you think Lexerd Company would have substantial nexus for corporate income tax purposes? Explain.
2. Does a state's "doing business" statute have any relevance in your determination of substantial nexus? Why?
3. What additional information would you need to determine if Lexerd Company has taxable nexus in other states (in addition to those in your answer to Question A)?Assume that the transactions are sales of a service, sourced to where the benefit of the service is received(i.e. location of the customer).
4. Discuss the relevance of the "home offices" and how a remote employee(s) may potentially create corporate income tax nexus for Lexerd.
5. Could the license of software on a subscription basis possibly be protected under P.L. 86-272 in certain states? Under what circumstances? (hint: consider the character of software)
6. Do you think a cloud-based service provider, like Lexerd, that hires independent contractors to perform set-up or configuration services in a state would be sufficient to create corporate income tax nexus for Lexerd? Why?

Dragons, Inc.

Sales Data for States with Factor Presence (Economic Nexus) Standards - most recent calendar year

Sales by State (Over $1 million) Sales Threshold for Corp. Income Tax Nexus

New York $10,500,000 > $1,000,000

Massachusetts $ 7,200,000 > $500,000

Pennsylvania $ 6,800,000 > $500,000

Michigan $ 6,300,000 > $350,000

Ohio $ 3,500,000 > $500,000 Commercial Activity Tax (tax is based on gross receipts)

Connecticut $ 2,100,000 > $500,000

Tennessee $ 1,200,000 > $500,000

Additional states with factor presence / economic nexus standards include (sales information not provided by client):

• Alabama
• California
• Colorado
• Hawaii
• Indiana
• Maine
• New Jersey
• Oregon - Corporate Activity Tax (tax is based on gross receipts)
• Texas