State Income Tax Nexus: Is Your Company Protected?
"P.L. 86-272" - have you heard of it?
It is the Federal Interstate Income Tax Law (P.L. 86-272) that prohibits any state from imposing a net income tax on income derived within that state from interstate commerce if the only business activity within the state is the "solicitation of orders" for tangible personal property, provided that the orders are approved and filled outside the state. (15 U.S.C. §381)
After reading that, do you see all of the criteria your company must meet in order for P.L. 86-272 to apply to your company's situation?
In order to provide some guidance or clarity, the following is a brief tutorial on P.L. 86-272.
MAIN POINTS TO CONSIDER WHEN APPLYING P.L. 86-272
- P.L. 86-272 only applies to "income taxes" or "taxes based on income." Therefore, it does not apply to franchise taxes if they are not based on income. An example of this is Texas' Franchise Tax (Margin Tax). Also, the gross receipts tax portion of Michigan's MBT (however, P.L. 86-272 does apply to the business income tax portion of Michigan's MBT). Other examples of where P.L. 86-272 does not apply include Ohio's CAT tax and Washington's Business and Occupation (B&O) tax.
- P.L. 86-272 does NOT apply to companies that are soliciting sales of services or other business activities that are NOT selling tangible personal property. Therefore, P.L. 86-272 does not apply to service companies/providers that are only soliciting sales in a state, whether it be via its own employees or even through the use of independent contractors.
- P.L. 86-272 only applies to companies that are soliciting sales of tangible personal property in a state with their own employees or via independent contractors. With that said, "solicitation of sales" can be the only activity that these employees or independent contractors complete. Some "ancillary activities" are allowed, but BE CAREFUL.
- If your company is selling tangible personal property, you can still lose the protection of P.L. 86-272 if your company performs other activities within in a state in addition to solicitation, such as installation. The use of independent contractors to perform other activities such as installation can also lead to the loss of protection under P.L. 86-272.
- If your sales representatives, whether they be employees or independent contractors, have the right to approve sales orders in the state of solicitation, then P.L. 86-272 protection may be lost. Sales orders should be sent out of state for approval.
These are just a few of the main points to consider when applying P.L. 86-272 to your company's situation. If you are not sure whether your company has nexus or is protected under P.L. 86-272, please contact me at firstname.lastname@example.org.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at email@example.com.
Because state and local taxes are deceptively simple and endlessly complicated.