How to respond to a nexus questionnaire—why are carriers being targeted?

States are continuing to request information from transportation companies via nexus questionnaires, which are used as a tool to determine the business activities that are being conducted in that state. The questionnaire ultimately identifies whether nexus has been created, which would then subject a carrier to an income tax filing requirement in that state. Each state sets its own nexus standards and they can vary significantly.

Why are states like Indiana, Nebraska and Pennsylvania sending nexus questionnaires to trucking companies? What is a nexus questionnaire and how do you complete it?

Nexus is a connection or series of connections allowing a state or taxing jurisdiction to tax a business. There are three main factors which cause a carrier to have nexus in a state. These factors include:

  • Property location in a state (inventory, equipment—home location and real estate—own or rent)
  • Compensation paid to an employee or independent contractor in a state
  • Sales or “doing business” standard—for the transportation industry this factor is determined by:
    • Company-owned trucks used to deliver or pick up goods in a state
    • Company-owned trucks used to backhaul goods originating in a state
    • Company-owned trucks pass through states without pickup or delivery
    • Hired unrelated carriers to pick up or deliver in a state

When you receive a nexus questionnaire, questions on nexus may run through your mind or may even become office water cooler conversation. While it may only be a questionnaire, income tax nexus should be a point of concern—and state inquires of nexus should not be ignored.

In today’s world of ever-increasing budget cuts, state governments have been significantly affected by reduced funding sources. As a result, state government agencies have become more aggressive in targeting key taxpayers to bridge this shortfall in funding. One group being targeted is businesses performing operations outside their home state.

In recent years, states have targeted the transportation industry, especially interstate carriers, based on how easily they can obtain carrier information, ranging from quarterly fuel tax records through the International Fuel Tax Agreement (IFTA) to simply having agents sit at truck stops and write down all names and DOT information printed across the sides of tractors and trailers sitting idle. Nexus questionnaires are sent to numerous carriers annually. As a result, you need to keep current on the issue of income tax nexus.

How do you know if you have nexus in another state?

For most carriers, the rules for determining income tax nexus seem straightforward; however, confusion sets in from each state having different parameters and variations of the standards listed above.

Examples:

  • Indiana: nexus is created if a carrier drives through the state more than six times in a year, no pickup or deliveries are required.
  • Pennsylvania: nexus is created if one pickup or delivery is made, plus 50,000 Pennsylvania miles or 12 pickups or deliveries made and Pennsylvania miles exceed 5% of total miles traveled.

These examples show the true variation among state standards. Also evident is nexus in other states could be created quickly for even a small- to mid-sized carrier depending on their weekly or monthly hauling lanes.

Obviously nexus means more tax…right?

The most common question related to income tax nexus…“So we have nexus, how much more tax do we have to pay?” The answer really depends on the state. Just as each state has the authority to determine the rules for nexus in their state, they also have the authority to determine how income is allocated or apportioned to their state when a carrier has nexus. For an interstate carrier, a majority of the states use some type of mileage-based calculation to determine the amount of taxable income.

As a general rule, if a carrier has nexus in a state, then they also have a tax return filing requirement. However, there are situations where even though nexus is established and an income tax return required, there is minimal or potentially no tax due to the state.

The key takeaway with nexus-related filing requirements in multiple states is that your income is only taxed once at the state level (for example, taxable income allocated to Indiana is not again taxable to you in Wisconsin should a carrier have income tax nexus in both states). The result is that your total income is now divided across more states instead of potentially just your home state. It is important to make sure the correct income apportionment methods are being used on an annual basis.

What is your game plan for state nexus?

No matter if you currently have income tax nexus in other states or there is the potential to have it in the future, be proactive in knowing your options. Implement a strategic plan for how you will handle these concerns as they arise.

Your strategy should be aimed at being proactive and knowledgeable of your current risks when it comes to income tax nexus. Evaluate your current hauling lanes noting major pickup and delivery points, travel routes and whether a company driver and equipment is making these trips or a hired agent. Also, note rented or owned drop yards or terminals in other states along these lanes that are used for logistic purposes. Finally note any drivers who use these terminals, if applicable, as their home base location.

After you complete this lane evaluation, discuss the results with your tax advisor to determine if there are nexus concerns you need to address. As the lane evaluation information changes with your business model and customer demands, revise your nexus strategy to tackle the current risk areas. As a best practice, review your nexus strategy both annually and during all major business decisions dealing with strategies outside of your home state.

If and when you receive a nexus questionnaire, it is vastly important to complete it. Your tax advisor can assist in the preparation of the nexus questionnaires based on their knowledge of the state’s nexus rules and your company’s facts and circumstances. The goal is to complete the necessary nexus questionnaire and work with the state prospectively versus retrospectively.

Accuracy is essential

States will take advantage of nexus questionnaires haphazardly completed along with non-response questionnaires. In doing so, a state could potentially send an income tax notice based on the information they have in their possession. These notices normally request tax returns for the prior three to five years; however, certain states can and will go back as far as their statutes and laws allow them. Pennsylvania has been one of the most aggressive states as they will request you file the last 15 years of tax returns with their notice requests. Even if your annual tax exposure in Pennsylvania is minimal, multiplying that by 15 years and then compounding interest and penalties for that amount of time can result in a significant tax liability.

Income tax nexus has always been around. However with the current state budget shortfalls, there has been an increase in the active pursuit of non-compliant taxpayers. Unfortunately, interstate carriers and other transportation industry taxpayers are top of the list due to the visibility and vast amount of available information. Your goal should be to have an active nexus process in place to monitor your current nexus situations. Then, work with your tax advisor to proactively handle any high-risk nexus areas discovered.

Remember, these topics can and will change based on your company’s specific facts and situations. If you have any questions on nexus and how it might relate to your potential tax strategy situations, please contact Paul Westberg, manager, Tiffany Piper, manager, or another member of Schenck’s Trucking & Logistics team at 800-236-2246.


Paul Westberg, CPA, is a manager and member of Schenck’s Trucking & Logistics team. He has nearly 10 years of experience providing tax planning, consulting and compliance services to privately held businesses and individuals, including pass-through entities, multi-state returns and consolidated filings.

Tiffany Piper, CPA, is a manager with nearly 20 years of public accounting experience, including tax planning, compliance and business consulting for closely held businesses and individuals. Tiffany also has a strong background in the preparation of corporate and individual tax returns, including multi-state returns. She is a member of Schenck’s Trucking & Logistics team.