Although Rhode Island’s 2014 tax reform legislation did not change the legal requirements for when a corporation is subject to tax, recently revised Regulation CT 15-02 significantly expands the types of business activities that can create nexus for income tax. The regulation was finalized in December of 2015 and is effective as of January 12, 2016.

Regulation CT 15-02 explains in detail the business activities that result in corporate income tax nexus in Rhode Island. A focus area of the new regulation, not included in the prior version, is the concept of ‘economic nexus”. Long standing Federal law mandates that a state cannot impose an income tax unless there is a substantial nexus, or connection, between the state and the corporation. Traditionally a substantial physical presence was required to meet the substantial nexus standard.

Rhode Island’s new nexus standards provide that a significant economic presence in the state, even without any physical presence, is sufficient to meet the substantial nexus requirement of Federal law. The following statements related to economic nexus are found in Regulation CT 15-02:

• Rhode Island tax jurisdiction will apply to the fullest extent permitted by the United States constitution and the laws of the United States.
• Significant economic presence can be demonstrated through the provision of significant services and intangibles to in-state residents.
• Substantial nexus includes creating continuing obligations and relationships with State residents such that the corporation has purposefully availed itself of (RI) State markets, benefits, and/or protections.
• Substantial nexus can result when a corporation is subject to State regulation and sanctions for the consequences of its actions.

Service providers with clients and customers in Rhode Island, but with no physical presence in the state, need to carefully evaluate whether Rhode Island can assert nexus and require an income tax filing. The laws and regulations of a few other states maintain that providing services to in-state residents from an out-of-state location creates nexus. Regulation CT 15-02 does not have this exact language, but as can be seen from the statements noted above the nexus threshold can be open to very broad interpretations.

Nexus standards are an aspect of tax law that are constantly evolving, so taxpayers need to be aware of how changes may impact them and their income tax filing requirements.

Questions? Contact any member of our Tax Services Team.