California attempts to modernize safe harbor guidelines for state income tax
The Revolutionary Sales Tax Case South Dakota vs. Wayfair may have been decided by the U.S. Supreme Court four years ago, but the ripple effect of the case for multistate income taxes is likely to continue long into the future .
What began with the adoption by the Multistate Tax Commission (MTC) of a revised information statement on the application of Public law 86-272 in today’s digital age recently resulted in the California Franchise Tax Board issuing a Technical Advisory Memorandum, TAM 2022-01. The TAM assesses PL 86-272’s protection of certain patterns of facts “common in today’s economy due to advances in technology” for California income tax and franchise purposes.
California is the first state to provide PL 86-272 guidelines following the MTC’s revised statement, but it likely won’t be the last. The MTC’s revised return and the FTB’s TAM further limit the applicability of PL 86-272, widening the net for out-of-state taxpayers to be subject to tax on the income of a State.
What is PL 86-272?
In 1959, business owners lobbied hard to limit states’ ability to impose income taxes on out-of-state sellers of tangible personal property who have little or no physical connection to the state. tax statement. Therefore, PL 86-272 was enacted federally to provide tax immunity to out-of-state sellers of tangible personal property whose sole business in a state is the solicitation of a sale or activities incidental to the solicitation of a sale.
Due to the relatively quick passage of PL 86-272, federal law fails to define key terms such as “solicitation,” “tangible personal property,” and “business activities.” Nor does the law assign responsibility to an administrative board to provide advice to taxpayers. In 1986, the MTC stepped forward and developed the first version of its information statement to address these issues. Since then, it has been updated several times.
Information Statement Updates
Over the years, the MTC has updated its information statement for PL 86-272 in an effort to modernize the guidelines as the economy has changed. Lawmakers in 1959 couldn’t have predicted what business would look like in 2022, with business owners now using websites, mobile apps and a remote workforce to sell their tangible goods.
The MTC’s latest revised information statement was released on August 4, 2021 and states: “Generally, when a Company interacts with a Customer through the Company’s website or application, the Company exercises a business activity in the customer’s state. ” However, the presentation of “text or static photos on [a business’s] […]does not itself constitute a commercial activity in the states where the company’s customers are located. »
The leveraged MTC language discussed in Wayfair around Internet sellers to reinforce the idea that while a business may not have a physical presence in a state in the traditional sense, it can maintain a presence through the Internet. Technically, Wayfair does not interpret PL 86-272, but the connection between the two is relevant.
In 1986, at the time of the initial information statement, the number of MTC member states—those with agreements to uniformly adopt the positions and interpretations of the commission—was growing, hoping to unify state taxes. Today, only 16 states remain full members, with most states now viewing MTC positions as general guidance rather than law.
California takes the first step
California, a non-MTC member, issued TAM 2022-01 on February 14, 2022, which updated the state’s interpretation of PL 86-272 activities to include Internet-based activities, similar to the latest version of the MTC information statement. While California is the first state to address PL 86-272 and internet-based activities, other non-states will likely follow California’s lead and seek to tax out-of-state taxpayers. whose only link with the State is through the Internet.
Specifically, TAM 2022-01 provides 12 different business scenarios and explains whether the scenarios disqualify an out-of-state business from PL 86-272 protection.
Activities that void PL 86-272 protection:
- 1. Provide online after-sales support to California customers via chat or email that customers initiate by clicking an icon on the company’s website.
- 2. Solicit and receive online applications for the company’s branded credit card through the taxpayer’s website.
- 3. Posting on the company’s website that invites viewers in California to apply for non-commercial positions via an electronic application.
- 4. Placing Internet cookies on California customers’ electronic devices that collect information to be used to adjust production schedules, inventory quantities, develop new products, or identify new items to offer for sale.
- 5. Provide remote upgrades or fixes to products previously purchased by California customers via code or other instructions via the Internet.
- 6. Sale of Extended Warranty Plans through the Company’s website to California customers.
- 7. Contract with a Marketplace Facilitator to sell the Company’s products in the Facilitator’s online marketplace, but maintain Company inventory in distribution centers where Company customers are located .
- 8. Provide online video and/or music streaming services to California customers.
- 9. Telecommuting employees (even temporary) whose role and activities within the State are not related to commercial solicitation.
Activities that do not void PL 86-272 protection
- 1. Provide after-sales support by posting an online static list of FAQs with answers on the company’s website.
- 2. Placing Internet cookies on the electronic devices of California customers, which collect information that should be used only for purposes entirely incidental to soliciting sales of orders of tangible personal property. Examples include: saving customers’ items to their shopping cart, storing customers’ personal information that has been provided to avoid having to re-enter information when revisiting the company’s website.
- 3. Offer for sale through the Company’s website only tangible personal property. This includes the ability for customers to search for items, read product descriptions, select delivery options, and pay for items.
What does this mean for businesses?
It should be noted that the MTC’s updated information statement and California TAM 2022-01 are recommendations and are intended to be used as a guide. States have continually made efforts to erode PL 86-272 protection, especially in light of Wayfair and the need to increase state revenue due to the pandemic.
However, these new interpretations have not yet been challenged in court. If California’s TAM 2022-01 is ultimately upheld, it will dramatically increase the number of out-of-state businesses that will be deemed to have exceeded the protections of PL 86-272 and will then be subject to income tax. income from California.
Out-of-state businesses must assess their California electronic business and document their PL 86-272 position to address potential California income tax exposure. California businesses should also consider California’s rollback rule. They will need to assess their electronic business and consider their PL 86-272 protective positions and the application of California TAM 2022-01 to determine how many rollback sales could result in a favorable position for taxpayers.
There’s still a lot we don’t know about both the MTC’s statement and California’s TAM 2022-01. Therefore, while these updates provide clarification, it is important to consider the facts and circumstances specific to your business when evaluating your PL 86-272 position. both in California and other states.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Kaylyn Kleinhans is the national and local tax practice leader for Sensiba San Filippo LLP. She specializes in multi-state corporate income tax, business activity tax, nexus analysis, revenue source analysis, local taxes, and unitary/consolidated US tax compliance. State.
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