Nexus in Montana
Who must file? With few exceptions, Montana law requires that an entity engaged in business or having income from a Montana source must file a return and pay tax on that income.
A company is “engaged in business” in Montana if it is actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. In addition, Montana source income is income or gain from property in Montana or from transactions or activities that take place in Montana. The applicable law in Montana provides that an economic presence is sufficient to establish nexus for income tax purposes, and a physical presence is not required.
So, if your company has business activities in Montana, taking advantage of the economy to produce income, generally, you will need to file a Montana tax return. Public Law 86-272 provides exceptions to this requirement.
What is nexus? Nexus is defined as the minimum business activity or connection that an out-of-state company must have with a taxing state. Nexus means a business entity has established a direct, economic or representational presence within a state. This presence gives the state the right to require a taxpayer to pay income taxes.
In general, nexus is created for income tax purposes if an entity derives income from sources within the state, owns or leases property in the state, employs personnel in the state in activities that exceed "mere solicitation," or has capital or property in the state.
Two provisions of the U.S. Constitution limit a state’s ability to tax an out-of-state business: the Due Process Clause and the Commerce Clause.
The Due Process Clause requires some definite link, some minimum connection between a state and the person, property, or transaction it seeks to tax. The Due Process Clause also requires that the taxing state provide some benefit to that person.
The Commerce Clause gives to congress the power to regulate commerce among the states. Under the Commerce Clause, (1) a taxpayer is required to have “substantial nexus” with a state for the state to have taxing jurisdiction over the taxpayer, (2) the tax must be fairly apportioned among the states, (3) the tax must not discriminate against interstate commerce, and (4) the tax must be fairly related to the services provided by the taxing state.
What is Public Law 86-272? The federal Interstate Income Act of 1959, also known as Public Law 86-272, prevents a state from imposing an income tax on income derived within the state from interstate commerce if the only business activity within the state is the solicitation of orders for tangible personal property. If your business activities in Montana go beyond the mere solicitation of sales of tangible personal property, you are not afforded the protection of P.L. 86-272. Only the solicitation to sell tangible personal property is afforded immunity under P.L. 86-272. If your activities in Montana consist of the use of intangible property or the sale of services to Montana customers, the provisions of P.L. 86-272 do not apply.
Please note that any sales that are made into Montana that are under the protection of Public Law 86-272 remain subject to throwback rules to the appropriate state that does have jurisdiction to impose its net income tax upon the income derived from those sales.
For additional information regarding Public Law 86-272, please refer to the Administrative Rules of Montana 42.26.501 through 42.26.511.
How do I determine if I have nexus in Montana? This link will take you to Form NEXUS. This form is designed to help us determine whether your business needs to file a tax return in Montana.
Please do not simply assert the lack of nexus under Public Law 86-272 when completing the questionnaire. We ask that those who are most familiar with the activities associated with each question complete and sign the questionnaire. The questions regarding employees refer only to those employees, sales representatives, and/or independent contractors who perform activities within Montana, regardless of each employee’s domicile or office location. Our questions pertain to the employee’s physical presence in Montana; they do not pertain to activities performed outside the state.
If you have communicated with a representative from the Department of Revenue, enter the representative’s name on line 1.
Upon completing the questionnaire, mail it to the address listed below. We will review the questionnaire and notify you of our nexus determination for your business in Montana. We also may request additional information or have questions before making our determination.
Mail your completed questionnaire to:
Montana Department of Revenue
Business Tax & Valuation
P.O. Box 5805
Helena, MT 59604-5805
Voluntary Disclosure Agreement
If you have not been contacted by the Montana Department of Revenue or the Multistate Tax Commission (MTC) regarding taxes in Montana, you may ask to enter into a voluntary disclosure agreement. For further information on Voluntary Disclosure Agreements with the Montana Department of Revenue, please visit www.revenue.mt.gov/forindividuals/voluntary_disclosure_program
If you have nexus in more than one state where you have not filed tax returns, the MTC can help through the National Nexus Program. For more information, visit www.mtc.gov/Nexus
Questions? Please call us toll free at (866) 859-2254 (in Helena, 444-6900).
Last updated 6/29/2011 8:35:19 AM