Policy letter; nexus; May30,2006
Topic Code: N076Nexus Document Reference: 06240045
May 30, 2006
Your letter dated May 15, 2006 has been referred to me for reply. Your letter asks six questions regarding whether corporation income tax nexus would exist under various scenarios regarding software and application service providers.Your first five questions involve the use of software. Your scenarios assume that the software developer does not have an office in Iowa or a permanent sales staff in Iowa. The software is not sold, but the developer licenses the right to use software to an end user. As part of the transaction, the software developer may or may not send someone to the user’s office for installing the software and training the user on the software. The developer also contracts to provide continuous support and maintenance to each customer, and the contract typically breaks out a separate fee for each service.Iowa Code section 422.33(1) imposes the Iowa corporation income tax upon corporations doing business in Iowa, or deriving income from sources within Iowa. Income from sources within Iowa means income from real, tangible, or intangible property located or having a situs in Iowa.Iowa Rules 701—52.1(2) and 52.1(3) provide a list of various activities which either do or do not create Iowa corporation income tax nexus.As noted in rule 52.1(2), Public Law 86-272 prohibits states from imposing corporation income tax on foreign corporations if their only activity is the solicitation of orders of tangible personal property by its employees or representatives, if such orders are sent outside the state for approval and are filled from shipment or delivery outside the state. Public Law 86-272 also provides a de minimus exception for non-solicitation activities. However, rule 52.1(2) also states that the protection of Public Law 86-272 does not extend to corporations which sell services or intangibles. In this case, the software developer is licensing the right to use the software, and is not selling tangible personal property. Therefore, the protection of Public Law 86-272 does not apply to these software developers.With this background information, here is the Department’s response to your first five questions: 1) The mere grant of the right to use the developer’s software does not, by itself, create Iowa corporation income tax nexus. 2) Sending an employee into Iowa to install and/or train the use does create Iowa corporation income tax nexus. As noted previously, the protection of Public Law 86-272 does not apply in this instance, so any physical presence in Iowa by an employee of the software developer is sufficient to create corporation income tax nexus. 3) There is no minimum period of time needed to be in Iowa to create corporation income tax nexus. As noted previously, the de minimus exception in Public Law 86-272 does not apply in this instance, so any period of time spent in Iowa is sufficient to create nexus. 4) The entire contract with an Iowa customer will be considered an Iowa receipt for corporation income tax purposes. Once nexus is established, the entire amount of income received from an Iowa customer will be considered Iowa receipts. Iowa Rule 701—54.6 states that income derived from other than the sale of tangible personal property is attributable to Iowa to the extent that the recipient of the service receives benefit of the service in Iowa. 5) Nexus for corporation income tax is determined on a year-to-year basis, and if a nexus activity occurs during the year, then the corporation has nexus for the entire year. For example, if on-going service and maintenance is performed by employees in Iowa, then the software developer has nexus in Iowa for that year. Also, if the service and maintenance occurred outside Iowa for a particular year, but nexus was created in that year due to installation, any income received from the on-going service and maintenance would be considered an Iowa receipt.Your final question involved an application service provider that provides computer-based services to customers over a network, such as Hotmail or Ebay. Similar to the answer to question 1) above, the grant of the right to use its software for a fee does not, by itself, create Iowa corporation income tax nexus. If you have any questions on this matter, please contact me at (515) 281-6183.Sincerely,Jim McNultyPolicy SectionCompliance Division