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Businesses to Face Expansion of Income Tax Nexus

On August 4, 2021, the Multistate Tax Commission (MTC) voted to adopt a revision to its “Statement of Information”, whereby a business could lose P.L. 86-272 protection, by solely engaging with customers through the internet. The loss of P.L. 86-272 protection, may result in income tax filing impositions for many businesses.

Overview

As we previously discussed, the MTC soon after Wayfair was decided launched a Work Group to examine the application of P.L. 86-272 in the modern internet age. The federal law known as P.L. 86-272, prohibits a state from imposing income tax on businesses that only sell tangible personal property (“TPP”) AND its activities in a respective state do not exceed the solicitation of orders.

In a 20–0 vote, the MTC adopted the revised “Statement of Information.” The intent of the revision is to provide guidance of how the MTC and adopting states interpret and apply P.L 86-272 with respect to internet activities.

Although almost all states are members of the MTC, there are different levels of membership, and its policies and directives are not always adopted by the states. As such, even with the MTC adoption of this revised interpretation, not all states would automatically implement these new directives. That being said, from a practical standpoint, states that don’t automatically adopt the MTC guidance for P.L. 86-272, in most cases indirectly codify significant components of the guidance into its provisions. For example, New York may not adopt the MTC statement, but its provisions still generally conform to the substance of the statement.

Let’s Talk

The adoption of the proposed revised statement could result in significant income tax liabilities for many remote businesses, as many of these businesses use a website or app to interact with its customers.

Given the MTC’s recent adoption vote, many states that are members of the MTC will likely adopt the interpretation, and many states that are not compact member states could still separately adopt the guidance in the months and years to come. As such, it will be equally important for businesses to monitor how states individually adopt this guidance into their nexus policies.

If you would like to discuss how the MTC P.L. 86-272 revised statement may impact your business, contact Withum’s State and Local Tax Group for a deeper discussion to your specific circumstances.

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