E-commerce companies that have affiliates doing business as (or even just investment interests in) partnerships or other pass-through entities in states in which the e-commerce company has no direct presence should be aware that such partnership interests may be deemed to create income tax nexus for the company. A number of state laws and regulations provide that ownership in a pass-through entity establishes nexus for the owner. See, e.g., 34 TAC Sec. 3.586(c)(13) [Texas]; 830 CMR 63.39.1(8) [Massachusetts]. To date, state tax tribunals have agreed. See, e.g., Shell Gas Gathering Corp. #2, N.Y. Tax Appeals Tribunal, DTA Nos. 821569 and 921570 (Sept. 23, 2010).
Furthermore, on January 25, 2011, the United States Supreme Court declined a petition asking the Court to review a Kentucky Appeals Court decision that an out-of-state corporation was properly required to pay Kentucky state income tax, despite the fact that its only connection to Kentucky was its interest in a partnership that was engaged in business in the state. Asworth, LLC v. Kentucky Department of Revenue, 2009 WL 3877518 (Ky. App. Ct. Feb. 10, 2010), review denied (Ky. 2010) and cert denied, U.S. Supreme Court Dkt. 10-662 (Jan. 25, 2011). While mere passive ownership in a partnership that generates revenue from activities in a state would not, by itself, be enough to subject the partner-owner to nexus for sales and use tax purposes, the Supreme Court’s refusal to review the Kentucky decision leaves undisturbed the position taken by many states that owners of an interest in a pass-though entity can be compelled to report state income tax.