State Nexus questions linger despite the Internet’s tax directive

States continue to take action following guidance from the Multistate Tax Commission in August 2021 on whether a seller’s online presence creates a tie for state income taxes.

MTC’s guidelines discuss online activities that go beyond a sales order Public Law 86-272, which was enacted in 1959 to exempt out-of-state sellers from state income taxes if activities in the state are limited to soliciting the sale of personal property. Online activities beyond a sales request include the use of certain cookies, taking applications for non-sales related jobs, and having chat functions to answer post-sales questions.

States such as California, New York, New Jersey, and Oregon have begun to address these issues either through changes in law or through other administrative means. This leaves many questions unanswered, and taxpayers should watch carefully for activity related to this topic because it could increase the government’s filing obligations for many companies that sell goods.

MTC role

The MTC is an intergovernmental tax agency whose mission is to promote uniform and consistent interstate tax policy and administration and articulate activities beyond a request for bid. Over the years, it has issued guidance on existing law so that states that follow DTC can adopt these interpretations, which it did with August 2021 guidance on PL 86-272.

Some states require legislative action to change existing laws, while others may simply adopt the language of MTC without legislative action when auditing taxpayers. Some states, such as California, apply these rules retroactively without having to change state laws.

State activism towards adoption and legal challenges

California moved more quickly between states, taking executive action to adopt MTC guidelines across a Technical advice note. New York, New Jersey and Oregon have begun adopting MTC guidance through regulations, which means that the typical period for issuing drafts of new rules and receiving public comment will delay the timing of final guidance from those states. However, the Oregon legislature has reached out to relevant stakeholders for comments before taking further action.

California’s position includes applying MTC’s guidelines retroactively, meaning companies can be held liable for unprotected activities displayed on previous versions of their websites, even if the functionality no longer exists. California and other states may depend In historical versions of websites To keep track of previous versions. Other countries drafting regulations have yet to express any clear indications as to whether to apply the Directive retroactively.

Given the newness of MTC’s guidance, it’s not clear what the audit process will look like. Auditors do indeed face a steep learning curve any time they undertake an examination of a particular business. And the added complexity of an IT component, such as the technology companies use to contact customers, may make the process more difficult.

In addition, the American Catalog Mailing Association He filed a complaint in San Francisco Superior Court, challenging California’s action as wrongful expansion of access to state income taxes to out-of-state merchants who do not have a physical presence in the state. This complaint is in the early stages of working in the courts, but its outcome is sure to play a critical role in determining the validity of California’s position on this matter and could serve as a lead for other states looking to implement MTC’s guidelines.

Evaluate your business exposure to the PL 86-272 Nexus

Businesses that relied on PL 86-272 to be exempt from state income taxes should reassess these positions, considering updated MTC guidelines. It may not be time to start filing income tax returns in every state, but decision makers should create models to understand potential liabilities based on aggressive state interpretations of this guidance.

Managing these issues requires more coordination between tax, marketing, and IT departments than previously required, as well as input from website designers, sales representatives, and logistics professionals. It may be necessary to engage a third party consultant to set up a process going forward to confirm whether any current or future technological advancement has no impact on the filing footprint of the company’s case.

Documentation of website functionality will be critical, and consideration should be given to other digital channels between customers and vendors, such as applications and other properties that require periodic software updates. It may not be practical to train IT professionals in the legal nitty-gritty of this process, but training them to identify potential jobs that could cause a problem and seek advice on alternative features that might have more favorable tax outcomes could return big profits.

As technology evolves, companies will be hard-pressed to avoid the potential reach of this problem. It is very likely that all businesses that use a website or offer software or apps as part of their offering will have an interconnected presence for government income tax purposes.

next steps

Businesses affected by PL 86-272 must monitor activities in the states where they ship products and evaluate whether services offered on their websites could result in state income tax liabilities under the latest guidance. They may also want to consider crafting the tax impact of different scenarios. On the plus side, careful analysis of sales sources can lead to refund opportunities and reduce future liabilities in some states.

The biggest concern for most companies now is the high volume of unanswered questions. With only one state taking final action and three more starting the legislative process, there is a range of uncertainty around this topic that will only be addressed as more states act and court challenges are resolved. In the meantime, it is critical for businesses that may be affected by these new rules to monitor developments closely and stay in touch with tax advisors to understand their compliance obligations.

If you have questions about the impact of PL 86-272 on state and local filings, please contact your tax advisor to discuss your facts and circumstances.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc. , the publisher of Bloomberg Law and Bloomberg Tax, or their respective owners.

Author info

Tony Israel He leads the state and local tax due diligence group of the National Tax Office of Planty Moran. He has clients in the manufacturing, service industries, and private equity.

David Landwer is a state and local tax manager at Plante Moran helping clients of all sizes and industries by reducing tax exposure while maintaining compliance in a dynamic and ever-evolving domestic and international tax world.

Janet Toller He is the state and local tax team leader for the Rocky Mountain region and is responsible for identifying state and local tax risks and opportunities for clients, as well as finding solutions to reduce and manage their state and local taxes.

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