taxation/presence issue in LLC formation

[b]

(This has been posted to alt.lawyers, also. This is not a solicitation for
legal advice, just help with a conceptual issue.)

Hi,

I live in NY, my friend lives in PA. We are finishing development of an
internet product that is sold on a subscription basis and includes nothing
tangible (but no, it's not dirty!). We want to form an LLC to limit our
liability (is there any better reason?) and so forth. The question is where
to form, and how taxes will be imposed on us based on that decision. I
welcome all insights. We both develop our halves of the product from our own
PC's in our own homes. We plan on distributing most income of the LLC to
ourselves, electing pass-through taxation (partnership style).

I know that NY has strict tax rules for telecommuters, so if we form in NY,
and regularly spend a few hours on the phone talking about our product and
future plans for our company, then my PA friend would be paying NY tax on
all income from our LLC -AND- taxes for where he lives (PA). At least,
that's how I've come to understand it. And if we form the company in PA,
would we both just be taxed once? As in, just by our locations?

Now, there's a lot of buzz about forming in DE or NV for the pro-business
bodies of law there, and we've considered that, but don't think that we're
at a point where that can be an asset to us. In fact, if we formed as a DE
company, for example, would we not be paying DE taxes to run our DE
business -AND- taxes in each of our respective states? And if NV has no
state-imposed taxes for business, would forming in NV be the same as forming
in NY or PA?

I have been looking for weeks on the internet and on Westlaw but have yet to
find a good definition of presence for an internet company with 0 tangible
goods. How is "doing business" defined for a company that does its business
100% through a website that can be hosted in any 50 states, or even in
another country? Is it just by whatever is most "real" - as in, where the
company's bank account was? Bank accounts and phonelines were the only
things I was able to find that could constitute a business presence in
certain situations - like for fly-by-night phone-scam businesses. That's
hardly the kind of example I want to use to demonstrate our reasoning for
formation (in whatever state it ends up being).

Thanks,

b