| John, I think your client attorney has nexus in any state where he, or a partner or employee of his, performs services on behalf of a client -- whether the service is a court appearance, a pre- or post-trial conference, a meeting with the client, or whatever. I don't think the nature of the claim or dispute has much, if anything, to do with the nexus issue. Anybody who performs professional services -- accountant, attorney, business consultant, software engineer, whatever -- has income from a source in the state where he or she performs those services; and the firm or company who employs that person has nexus wherever its principals or employees do so. Some states have de minimis exceptions based on time or dollars, but often these are provisions governing the employer's requirement to withhold state income tax; they don't excuse the employee or partner from individual liability for the tax, they just excuse the employer from registering and withholding the tax.
Whether the attorney is a sole practitioner or a partner or employee of an LLP or professional LLC, each state generally will require the entire net income from the professional practice, and not just the income from the particular client or case, to be apportioned to the state by its statutory formula. So some states will apply a three-factor formula, equally weighted or with additional weight on the sales factor; some states will apply a single factor of sales (gross receipts). No matter what the state's particular formula may be, the sales factor will be the most important if not the only factor that is significant; the attorney or firm probably won't have any property or payroll assignable to the state.
The assignment of receipts to the numerator of the sales factor varies among states. Many states still use the traditional UDITPA Sec. 17 approach, whereby receipts from a particular service (e.g., a particular client or case) are assigned to the numerator of the state where the greatest proportion of the income-producing activity (IPA) takes place. In those states, even though nexus exists there may be no taxable income apportioned to the state because most of the IPA takes place in the taxpayer's home state. However, even some of those states have adopted the MTC regulation (IV.17(B)(c), which considers the portion of the service performed in each state to be a separate IPA. In that case, there would be a numerator in the state where the trial or other out-of-state activity took place.
The recent trend is for states to move to a more "market-based" approach to assigning sales of services to the numerator. The language varies from state to state but in general, sales are assigned to the state where the benefit of the service is received by the client or customer, rather than to the state where the service is performed. Most of these rules have been recently adopted by the states and there is not a lot of case law or guidance as to their application, which can be a puzzle. For example, if the attorney's client is a multistate or multinational business enterprise, or a class of consumers in many locations, where does the client receive the benefit of the service? There may be some help available in regulations or administrative publications.
No doubt a lot of this activity is slipping under the radar. While the national and regional law, accounting, and consulting firms have figured out that they have to report to every state where their principals or employees perform services, many smaller firms and, probably, most sole practitioners have no clue.
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