Operating across state lines brings a unique set of tax challenges for manufacturers. It’s essential to grasp your multistate tax liability to ensure compliance and avoid penalties. State governments determine tax liability based on whether a company has “nexus” in their state, meaning the company’s presence is significant enough to warrant taxation.
Let’s delve into what activities establish nexus and explore the impact of the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., along with the updated guidance from the Multistate Tax Commission (MTC).
Defining Nexus
For a state to impose taxes on an out-of-state manufacturer, the business must have a substantial nexus, or connection, with the state. Traditionally, nexus required a physical presence, such as offices, factories, warehouses, retail stores, employees, or sales representatives. However, with the rise of e-commerce, states have started applying sales tax laws to out-of-state businesses based on economic presence alone.
In the Wayfair decision, the Supreme Court supported this approach, upholding economic nexus statutes that impose sales tax obligations on out-of-state businesses exceeding certain sales thresholds in each state, regardless of physical presence.
Nexus also applies to income taxes, but federal law protects certain activities by out-of-state businesses from triggering those taxes. Public Law (PL) 86-272, enacted in 1959, prohibits a state from imposing income tax on a business if its only activities in the state involve soliciting orders for tangible personal property and if those orders are accepted and filled from outside the state. These activities are protected even if conducted by sales reps or other personnel located in the state.
Insights from the MTC Guidance
In 1986, the MTC issued a “Statement of Information” on the application of PL 86-272. Due to limited federal guidance on this law, most states and taxpayers have adhered to the MTC’s guidance. The statement has been revised several times, most recently in 2021, to provide guidelines on internet activities protected or unprotected under PL 86-272.
Protected in-state activities include:
- Advertising
- Soliciting orders by in-state resident employees or representatives, provided they maintain no office other than a home office
- Providing samples or promotional materials free of charge
- Providing cars for sales personnel to conduct protected activities
- Passing orders, inquiries, or complaints along to headquarters
- Coordinating shipment or delivery without payment
- Selling products to in-state customers via a company’s website
- Providing post-sale assistance to customers by posting a list of static FAQs
Unprotected activities include:
- Approving or accepting orders
- Collecting current or delinquent accounts
- Providing maintenance or repair services
- Picking up or replacing damaged or returned property
- Carrying samples for sale
- Conducting credit checks
- Maintaining an office or other place of business (other than a home office)
- Providing post-sale assistance to in-state customers via electronic chat or email
- Offering or selling extended warranty plans via the company’s website
There is some uncertainty about whether a business loses its PL 86-272 protection by delivering products in-state using its own vehicles. Once considered unprotected, the MTC removed this activity from its unprotected list but did not add it to its protected list. Therefore, some states may treat deliveries via company-owned vehicles as an unprotected activity.
Conducting a Nexus Study
Manufacturers should assess their activities in each state to determine where they are subject to state and local taxes. A nexus study can help identify the taxes your manufacturing company’s activities may expose you to and evaluate the impact of state and local taxes on your bottom line.
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