For decades, retailers and wholesalers of tangible personal property (i.e., merchandise) have been protected from paying net income taxes to states. The protection is afforded under federal Public Law 86-272 (“PL 86-272”). The principal beneficiaries of PL 86-272 are middle market and smaller businesses that have a physical presence in one or several states but sell to customers in many states.
Protection applies to businesses that meet ALL the following requirements in the state where customers are located.
- The business has no or very limited physical presence in the state,
- The business limits activity in the customer’s state to soliciting orders,
- All orders are approved outside the customer’s state, and
- All goods are shipped to the customer from outside of the customer’s state.
The Multistate Tax Commission (MTC) has recently approved guidelines to limit protection under PL 86-272 for online retailers and wholesalers by defining online solicitation very narrowly (meaning that many online activities will subject a business to net income taxes). New York, New Jersey, and California have essentially adopted the MTC guidelines, and many other states will surely follow.
The following are examples of online activities that could subject a business to net income taxes even when it has no physical presence in a state.
- Post-sale electronic chat with customers
- Remotely fixing or upgrading products
- Selling extended warranty plans
- Streaming videos and music to electronic devices for a charge
- Placing “cookies” on computers and other devices that gather customer information to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale
Retailers and wholesalers should review their online activities to avoid a net income tax trap. Consider what adjustments may be necessary. For additional guidance, reach out to SAX’s State and Local Tax Leader, Richard Goldstein, at rgoldstein@saxllp.com.