Remember the good old days when compliance with state and local taxes used to be easy and uncomplicated? Unfortunately, those days are gone. Amid social spending initiatives, including infrastructure costs, and the cost to provide services by state and local governments, states and local jurisdictions need money – and lots of it.
Taxes, who pays them, and how much they pay, has never been a popular topic. Today, the appetite for higher taxes is less popular than ever among taxpayers and it has required states and localities to become more creative in the way that they enforce their tax regimes.
In the advent of new nexus standards such as economic nexus, there is yet another assault on the traditional protections afforded to businesses that sell tangible goods. This assault is coming from the Multistate Tax Commission (MTC). The MTC has recently issued updated guidance on what constitutes protected and unprotected activity for businesses engaged in the sale of tangible goods in this digital age.
Businesses engaged in the sale of tangible goods have enjoyed the protection of P.L. 86-272, which preempts a state from imposing an income tax on a business whose only connection with the state is the solicitation of tangible goods.
It is important to note that P.L. 86-272 was enacted in 1959. Over the years, courts have been asked to be the arbiter of the term “solicitation.” The question of what constituted solicitation was thought to have finally been decided in 1992 by the US Supreme Court in Wisconsin Department of Revenue v. William J. Wrigley, Jr., Co. Unfortunately, the court’s decision defined one ambiguous term with an equally ambiguous phrase. The court held that activities that do not constitute an independent business function when performed in connection with the sales activity are protected under the scope of P.L. 86-272. In its decision, the court also listed protected and unprotected activity.
The court’s decision prompted the MTC to update its “Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272” originally drafted in 1986. The MTC revised it in 1993, 1994, 2001, and most recently in 2021. The most recent amendment to its Statement stems from the U.S. Supreme Court decision in South Dakota v. Wayfair. Although the Court’s decision in Wayfair related to sales tax and not the interpretation of P.L. 86-272, the MTC believed it was necessary to update its Statement to account for the impact of virtual contacts within a state to determine whether the activity exceeds the historical protection of the statute.
Activities that can result in unprotected activities for a business include:
- Fixing or repairing merchandise purchased by a customer through remote means such as transmitting code or other electronic instructions over the internet
- Video streaming services
- Using a marketplace facilitator to offer products for sale on the facilitator’s online store
Performing unprotected activities in a state can result in income tax nexus for businesses in these states.
Although the revised Statement has been approved by the MTC, it is not automatically adopted by the member states (currently, there are 17 states that are full Compact members of the MTC). The member states will need to expressly adopt the revised standard through statutory, regulatory, or administrative actions.
While there are many open questions about the new guidance, such as constitutionality, federal intervention, and state interpretation, businesses should take the time to reevaluate their in-state business activities to determine whether they continue to fall within the protected activities contained in the MTC Statement. Particular attention should be given to business conducted over the internet and through arrangements with marketplace facilitators. Examining current in-state business activities will allow businesses to possibly make adjustments to minimize exposure.
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