This year’s recently released Bloomberg BNA Survey of State Tax Departments posed a new question on an ever-changing topic: nexus for corporate income tax. States were asked if their answer as to whether several activities create nexus would change if the corporation’s activities were protected under Federal Pub. L. No. 86-272. The answers ranged from the typical yes and no, to “depends” or “no comment,” which brings us to a bigger question – which states are protecting what activities and where does that guidance come from?
Federal Pub. L. No. 86-272 prohibits states from imposing income-based taxes on corporations whose activities do not exceed mere solicitation of sales of tangible personal property in the respective state. Since 1986, the Multistate Tax Commission (MTC) has issued three separate statements and one amendment aimed at helping states comply with the law.
Notably, it does not appear that each new version of the statement superseded the previous one, leading to situations where some states are signatories to Phase I, some are signatories to Phase II, and some also incorporate the guidelines of the 2001 Amendment. The important question is, which states are signatories to what, and what exactly have they adopted? Given the outcome of Gillette Co. v. Cal. Franchise Tax Bd., 363 P.3d 94 (Cal. 2015), holding that the Multistate Tax Compact is not a binding reciprocal agreement, does a state’s adoption of one of these statements have any legal effect?
In 1986, the Multistate Tax Commission (MTC) issued a statement of information providing guidance for states seeking to comply with immunities afforded by Pub. L. No. 86-272. In January of 1993, the MTC modified this statement and issued a “Phase I” statement. At the end of 1993, the MTC again modified the statement, releasing a “Phase II” statement. Finally, in 2001, MTC made one last modification to its guidelines, referred to as the 2001 Amendment.
The 1986 Statement
The 1986 Statement limits the immunities of Pub. L. No. 86-272 to the solicitation of sales of tangible personal property. The selling, leasing, renting, licensing, or other disposition of real estate, intangible personal property, or any other property not considered tangible personal property are not protected activities under the 1986 Statement. The 1986 Statement set forth non-exhaustive lists of activities that would cause a corporation to lose its immunity under Pub. L. No. 86-272, as well as activities that do not cause a corporation to lose its immunity. Further, the 1986 Statement extends additional protections to the activities of independent contractors, allowing them to solicit sales, make sales, and maintain a sales office in state without losing immunity.
On Jan. 22, 1993, the MTC approved modifications to the 1986 Statement known as “Phase I.” Phase I’s sole purpose was to incorporate the U.S. Supreme Court’s ruling in Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). Wrigley was a chewing gum manufacturer located in Illinois who used field representatives and regional managers to solicit sales in Wisconsin. Wrigley used these employees to replace inventory without cost, conduct “agency stock checks” to sell gum to those who agreed to install new display racks, and storing gum in their homes or rented space within Wisconsin. The court held that these activities exceeded mere solicitation and were not immune under Pub. L. No. 86-272. The court also clarified the jurisdictional standards that will apply to sales made in another state for purposes of applying the throwback rule (if applicable) with respect to such sales. Phase I specifically added the following activities to the list of immune activities:
Further, using agency stock checks or any other instrument or process by which sales are made within this state by sales personnel was added to the list of activities that would cause a business to lose immunity.
On July 29, 1994, the MTC approved modifications to Phase I known as “Phase II” and released the “Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272.” Phase II made significant modifications to the provisions of Phase I. Phase II added and removed several activities from the non-exhaustive lists of what are now referred to as “protected” and “unprotected” activities (instead of immune and non-immune). Specifically, providing shipping information and coordinating deliveries and maintaining an in-home office for soliciting orders were removed from the list of unprotected activities and entering into franchising or licensing agreement or conducting activities related thereto was added to the list of unprotected activities. Further, the following activities were added to the list of protected activities:
Further, Phase II clarifies that the throwback rule is applied on an entity-by-entity basis when a combined or consolidated report is filed. Also, Phase II allows a signatory state to apply the standards set forth in Pub. L. No. 86-272 to transactions occurring in foreign commerce.
The 2001 Amendment
In 2001, the MTC again amended its guidelines on Pub. L. No. 86-272 to remove delivery of inventory via company-owned vehicles in a state from the list of unprotected activities. This amendment was undertaken in response to two state court cases successfully challenging the classification of this activity as unprotected. See Commonwealth v. Nat’l Private Truck Council, 253 Va. 74 (1997) and Nat’l Private Truck Council, Inc. v. Mass. Comr. of Rev., 426 Mass. 324 (1997).
As noted above, some states are only signatories to the Phase I Statement governing Pub. L. No. 86-272, while others have moved forward to also adopt the Phase II Statement. Further, some follow the guidance of the 2001 Amendment. Then, of course, there are the states who have not adopted any of MTC’s guidelines or statements.
States who have not officially adopted Phase I, but have laws that adhere to Phase I’s general list of immune and non-immune activities, include Kentucky, Massachusetts, Mississippi, Missouri, New Hampshire, and Texas (pre-2008 only). None of these states were signatories to Phase II or have adjusted their statutes and regulations to conform to the lists of activities provided in Phase II.
The original signatory states to Phase II include Alabama, Arizona, Arkansas, California, Colorado, Hawaii, Idaho, Louisiana, Montana, New Jersey, New Mexico, North Dakota, Oregon, Rhode Island, and Utah. Alabama, Arizona, California, Oregon, Rhode Island, and Utah also created their own state-specific additions and exceptions to Phase II.
The lack of uniformity can create issues leading to situations where activities are protected in one state and not protected in another, exposing corporation to unknown tax liabilities. Further, the last guidance on adopting states was published in 1996, creating additional confusion as to what states have adopted which Phase or Amendment in the ensuing 20 years.
Continue the discussion on LinkedIn: What guidelines governing Public Law 86-272 does your state follow?
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