Hawaii enacted a new income tax nexus standard for tax years beginning after 2019. Businesses with no physical presence in Hawaii will owe state income tax if they meet certain economic thresholds. Hawaii will presume they engage in business in the state if they meet the thresholds. The thresholds are generally the same as the thresholds for Hawaii general excise tax nexus.
The Nexus Standard
A business will be subject to tax if, during the current or preceding calendar year:
- it engages in 200 or more business transactions with persons in Hawaii;
- its gross income from Hawaii sources is $100,000 or more; or
- it does business in and outside Hawaii and its apportionment formula sales factor numerator is $100,000 or more.
This provides a bright line test for determining income tax nexus. It adds to the Hawaii law that subjects businesses to tax if they derive income in the state from:
- carrying on a trade or business;
- owning property; or
- any other source.
In testimony on the new law, the Department of Taxation recommended that the income tax standard be kept as close as possible to the general excise tax standard.
Wayfair Standard for Income Taxes
In South Dakota v. Wayfair, the U.S. Supreme Court held that physical presence was not required for sales and use tax nexus. This cleared the way for South Dakota to require remote sellers to collect and remit the state’s sale tax if they have:
- over $100,000 in South Dakota sales of personal property, products transferred electronically, or services; or
- at least 200 of such sales transactions.
Most states have now enacted sales tax nexus thresholds like those in Wayfair.
Many states have economic nexus standards for their income taxes that are like Hawaii’s “doing business” standard. A handful of states have adopted apportionment factor-based nexus thresholds. Hawaii is the first state to enact the same thresholds for income taxes and sales taxes following the Wayfair decision.
Other states may soon follow and adopt a Wayfair standard for their income-based taxes. Texas has revealed plans to incorporate Wayfair and establish an economic nexus threshold for its franchise tax.
Similar Thresholds for Local Taxes
A pair of cities have enacted similar nexus thresholds for their local business taxes. San Francisco adopted a $500,000 gross receipts threshold for several city taxes. Philadelphia adopted a $100,000 gross receipts threshold for its business income and receipts tax.
Extension to Other State Taxes
Will states consider extending the same nexus standard to other tax types? Some have suggested that they should. In testimony on the Hawaii law, the Tax Foundation of Hawaii encouraged the state to apply the same nexus standard to all Hawaii taxes. They said that nexus is a concept that applies to all taxes.
By Carolyn Kwock, J.D.