At issue: North Carolina boat manufacturers have had trucks of new boats stopped and impounded in pass-through states on the way to destination sales states. Example: One NC company had a truck of boats, on way to Maine, stopped in New Jersey. The truck was detained and the company was charged with a $750,000 back-tax bill by New Jersey - which claimed nexus status reasoning that the NC company sold boats in their state, regardless of whether these boats were the ones sold. The NC company paid a reduced, but still excessive amount of over $250,000 to free the boats and started legal efforts to reverse the nexus finding and recoup the money paid. In ensuing weeks, the NC company ran up over $125,000 in legal fees and was able to "settle" so that NJ kept over $40,000 and set up an ongoing annual fee for the nexus charge. The legal battle continues, but at least now our builder can travel through NJ without seizure of boats.
Nexus is a legal term meaning that a company has met the minimum amount of business activity a state requires in order to tax revenue derived in the state by out-of-state businesses. These are often demand payments on net income, sales and/or franchise taxes from companies that have established a "business presence"- whether or not the companies have actual "bricks and mortar" in that state. If tax authorities catch a business not complying with the state's tax laws - even if it was done unknowingly - the company will likely face a bill for seven years of back taxes, interest and fines. Most engine, boat and marine accessory manufacturers sell their products either using full-time employees, under contract with companies that sell multiple product lines (such as dealers) or, in rare cases, directly to the consumer. In each case, some activities are clearly protected from state taxation by federal law, others specifically are not. In between these parameters are many nuances and judgment calls that can allow a state to claim nexus.
What the boating industry is doing about this problem: Leading the charge for solutions to this concern is the NMMA (National Marine Manufactures' Association) which has a team of lawyers, assisted by dozens of boating company representatives, all trying to assess and come up with recommendations and solutions.
NMMA and its members are urging Congress to pass national legislation, the Business Activity Tax Simplification Act (BATSA), to modernize state business activity tax laws. BATSA would clarify the circumstances under which states could impose business activity taxes on companies based in other states, ensuring fairness, minimizing litigation, and creating a legally certain and stable business climate necessary to encourage industry to make investments, expand interstate commerce, grow the economy, and create new jobs. NMMA believes that its members should continue to pay business activity taxes in those states where they have established physical, "bricks and mortar" presence and where they receive direct benefits and protections, such as police, fire, sanitation, public schools, and roads from the state government.
In the meanwhile, a special arrangement negotiated by NMMA with the Multistate Tax Commission, NMMA members can apply through the MTC National Nexus Voluntary Disclosure Program for forgiveness of back taxes, fines and interest. Back taxes, however, would still have to be paid if the in-state business activity was deemed to be substantial.
What NC boat manufacturers might do: If your company has sales in several states and transport your boats by truck, you should be sure to follow this closely. Because NMMA is calling upon Congress to introduce and pass legislation that will require a physical presence, better known as a "bricks and mortar" standard, to clarify when a business has to pay state income or business use tax, NC business owners can contact David Dickerson, Director, State Government Relations, 202-737-9761 (ddickerson@nmma.org) or Mike Bradley of the SBTDC NC Boating Industry Services at 252-728-2144 (mbradley@sbtdc.org). We will also keep you up to date on this topic in future newsletters and selected focused business emails.
The above comments and summaries are provided by Mike Bradley, director of the SBTDC Boating Industry Services and are derived from information gained at a forum on this topic held at the NMMA American Boating Congress in DC, May 7th, 2007. Presenters were Tom Shimkin, of the Multistate Tax Commission, Mike Quickel of Idaho's Senator Crapo's office, and Jeff Friedman, of Sutherland, Asbill & Brennan law firm. These comments also include direct quotes and summarized compilations from correspondence and phone calls with NMMA's David Dickerson, Director of State Government Relations, and through conversations with NC boating manufacturers.
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