Fernway DiarySM

Aug 31, 2021

Among online sellers, Wayfair (2018) brought up a major discussion about economic nexus and interstate taxes. Although the majority of the tax regulations in question have been in place for decades, the Wayfair case drew attention to just how much interstate businesses have evolved and the extent to which tax laws have struggled to keep pace.

The Multistate Tax Commission (MTC) has released new guidance which they hope will be adopted by most states. With prior guidelines dating back to 2001, the world of online selling has clearly made significant changes.

The Basics
The issue at hand is if and when online sellers should be subject to net income tax in states where they have a minimal presence. Under current law whether or not a company is subject to state income tax is largely based on economic nexus.

Essentially, nexus determines if a seller has presence in a given state that warrants income taxes to be levied by that state. If you have physical operations in a state, the conclusion is relatively straightforward, but what if you have an online business in one state and sell to customers in another?

Interstate Income Act
Over 60 years ago, a federal law was passed known as the Interstate Income Act (or P.L. 86-272). This law was intended to protect sellers from net income taxes in states where they were soliciting orders but not conducting any other business (in other words, they had no physical presence or operations in that state). P.L.86-272 prohibits a state from imposing income tax on a business that is selling tangible personal property and only soliciting orders in that state.

Keep in mind, the problem here involves two layers of taxation. This is a federal law prohibiting state taxation, and many states may prefer to find a way around that law to maximize their tax revenue.

New MTC Guidance
A working group from the MTC has been reviewing P.L. 86-272 and the extent to which this impacts modern e-commerce businesses. New guidance has been released in the hope that states will adopt these as legislation. For online sellers, the guidance seems to eliminate much of the protection afforded by P.L. 86-272.

Below are a few examples of activities the MTC says constitutes sufficient activity within a state, beyond a minimum threshold, justifying the rationale for online businesses to be subject to income tax provisions in that state:

Interacting with customers through chat or email support
Using cookies on their website to save customer preferences for the next visit
Providing updates or patches to digital products previously purchased
Offering extended warranties on products previously purchased

Impact on Online Sellers
Majority of the above is common day-to-day business for online sellers. If these activities constitute presence in a state and eliminate the protection of P.L. 86-272, it is likely that online sellers would find themselves paying income tax to many more states than they do at present.

The MTC is an intergovernmental state tax agency that does not create the law. They research and make suggestions for their member states to consider. These guidelines do, however, show the intent and direction legislation is likely to go in the near future.

What Should Online Sellers Do Next?
When the Interstate Income Act was passed in 1959, it applied mostly to catalog sales. Since then, commerce has changed dramatically and online sales have skyrocketed. As more and more businesses have gone digital and built a national and international customer base, it is logical that tax policies will evolve as well.

In the face of changing tax policy, it is imperative that online sellers remain proactive and seek advice from an expert tax consultant that understands your business’ needs to maximize your chances of success, and ensure your business is structured in a manner that minimizes the company’s overall tax burden.

At Fernway Solutions, we provide our clients with corporate structure and tax planning advice as the tax landscape shifts. For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:
The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.