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How State Adoption of the MTC’s Revised Statement of Information on the Sale of Tangible Personal Property Impacts Your Business

Thomas M. Frascella
Thomas M. Frascella Director, Tax Strategies, State & Local Tax Group Leader

This is part three of a four-part series that provides important information on State Tax Nexus. Part one of this series discussed state tax nexus and the new frontier. Part two examined whether state nexus can have a positive impact on a business.

P.L. 86-272, also known as the Interstate Income Act of 1959, generally prohibits states from imposing income taxes on a business whose only connection with the state is the solicitation of tangible goods. In November 2021, we wrote an article that discussed the Multistate Tax Commission’s (MTC) revisions to its statement regarding activities conducted over the internet. These revisions attempted to establish a physical presence in a state by out-of-state businesses engaged in the sale of tangible personal property by asserting that certain activities conducted over the internet rise to the level of a physical presence in a state.

Background on the MTC and its Revised Statement of Information

The MTC is an interstate compact formed to promote uniformity and consistency in tax laws across state borders. The revisions it published in 2021 represented an attempt to update its guidance related to the activities businesses selling tangible personal property can engage in and maintain protection from the imposition of a state income tax.

These updated guidelines were published in a revised statement which was not automatically adopted by states. When we wrote our 2021 article, the revised standard seemed poised for widespread state adoption among the members of the MTC. Fast forward to 2024, though, and there does not seem to be a clear path forward for states to adopt the revised standard due to taxpayer challenges.

The Path to State Adoption of the Revised Statement

The revised statement provides that member states will need to formally adopt the revised guidelines through statutory, regulatory, or administrative action in order to enforce them.  California was the first state to adopt the revised standard, but immediately faced legal problems due to procedural issues, which led to the guidelines being invalidated. 

Other states that have taken a similar path as California, like New Jersey and Minnesota, issued guidance without formal adoption and may face similar legal problems. Conversely, New York adopted the guidelines formally as part of wide sweeping corporate income tax reforms.

What Does this Mean for Your Business?

There are huge gains for states that successfully implement a more restrictive interpretation of P.L. 86-272. For businesses, the potentially stricter interpretation of protected activities could mean that your internet activities could create a taxable presence in states that have properly adopted the revised guidelines. 

Traditional protections from states imposing income taxes afforded to out-of-state businesses under P.L. 86-272 are clearly under attack. The uncertainty and ambiguity of these new rules creates an opportunity for businesses to successfully challenge state assertions that their internet activities constitute a physical presence in the state. As states continue to consider how or if they adopt the revised guidelines, businesses must remain vigilant in assessing how their activities conducted over the internet could inadvertently subject them to a state’s income tax.

What Your Business Can Do to Protect Itself

To navigate the complexities created by the guidelines issued by the MTC, businesses should take proactive steps to protect themselves from unexpected tax obligations. Some of these steps are as follows:

  • Monitor any updates and developments regarding state adoption of the guidelines
  • Work with your IT and marketing teams to evaluate your current and future internet activities and policies against the criteria outlined in the MTC published guidelines to determine which, if any, activities no longer qualify for protection from state income taxes under P.L. 86-272
  • Understand how your internet activities and state adoption of the revised guidelines impact your tax reporting responsibilities and assess your potential exposure. Armed with this information, revisit and revise your tax planning strategies to minimize your exposure
  • Engage in regular discussions with your tax advisors about the status of state adoption of the revised guidelines and any changes in the manner in which you conduct your business activity on the internet to determine any state income tax implications it may trigger

Staying informed and understanding the new guidelines and how they could impact your business will help you mitigate the risks of your business being subjected to additional state income taxes.

Stay tuned for part four in our series which will cover additional information on state tax nexus. If you have any questions, please contact your Kreischer Miller relationship professional or any member of our State and Local Tax Group.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

Contact the Author

Thomas M. Frascella

Thomas M. Frascella

Director, Tax Strategies, State & Local Tax Group Leader

State and Local Tax Services Specialist

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