The Impact of FIN 48 and Economic Nexus on Multistate Tax Settlements

Abstract

This study examines whether the adoption and enactment of Financial Interpretation No. 48 (hereafter “the FIN 48 period”) and the extension of nexus to include economic nexus rather than only physical presence impacts the number of settlements and the dollar amounts of settlements using data from the National Nexus Program (NNP) of the Multistate Tax Commission. The NNP provides a unique setting for public and private firms to voluntarily settle both income and sales and use tax liabilities. Using a panel from 1994 to 2008, I find that the FIN 48 period is associated with a 44 percent increase in the number of NNP settlements for the average stateyear when nexus is defined as physical presence. For the average state-year where nexus is defined as economic nexus, the FIN 48 period is associated with a 137 percent increase in the number of settlements. However, the FIN 48 period and economic nexus have no overall impact on the dollar amount of settlement in the NNP. Further analysis reveals that the combination of the FIN 48 period and economic nexus is associated with a larger number of settlements for private firms and a larger average dollar amount of settlement for public firms.