The Multistate Tax Commission is recommending that states that adopt the Interstate Income Act should also adopt the Presence Nexus Standard for taxing transactions.
The MTC is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws that apply to multistate and multinational enterprises. In 2002, it approved the "Model Factor Presence Nexus Standard for Business Activity Taxes," which stipulates that a connection between a business and a state must exist for a state to impose income tax. Under the standard, a company is considered to be doing business with a state if its property, payroll or sales exceed $50,000, or 25% of its total property, payroll or sales threshold.
"The latest resolution was intended to emphasize and remind states and the world of state tax that the commission continues to embrace the views that the values expressed in the Presence Nexus Standard are important principles," said Brian Hamer, legal counsel for the MTC. "It follows some of the discussions over the course of the past years since the revised statement was adopted, notably about small businesses."
As a result of the case Northwestern States Portland Cement Co. v. Minnesota in 1959, Congress enacted that year the Interstate Income Act, also known as Public Law 86-272, to protect out-of-state retail sellers from imposition of income taxes if their in-state activities only consist of soliciting sales of tangible personal property, and if such sales were approved and shipped from locations outside the state.
In 1986, the MTC adopted its "Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272," which defines the parameters of P.L. 86-272 and lists which activities are protected by the statute. Since then, the statement has been revised three times, with its last modification adding a section, "Activities Conducted Via the Internet," discussing what constitutes business activity online.
The emergence of e-commerce significantly changed the notion of "presence," and states are now relying on an economic nexus standard rather than a physical one. Since the Supreme Court decision in South Dakota v. Wayfair in 2018, states can now tax businesses even if they do not have an office in the state, and the decision didn't come without its controversies.
"I think that it's very rich coming from the MTC to suggest that states adopting the Interstate Income Act should also adopt the Presence Nexus Standard, when so many companies are not even protected by 86-272," said Andrew Wilford, director of interstate commerce initiatives at the National Taxpayers Union. "And I think that framing this resolution as a protection for small businesses is completely inaccurate."
In July 2020, the MTC released a
However, some small businesses had no other choice but to engage in online activities that were no longer protected by P.L. 86-272. Unable to compete with retail giants such as Amazon, small sellers moved to the internet and used interactive platforms or data analysis to improve the customer experience. But after Wayfair, small sellers can only offer a static presentation of their products and lose against bigger competitors.
"We are sensitive to the possibility that burdens can be excessive on small businesses, but that's not the result of the revised statement," said Hamer. "And it is important to note that the MTC does not make laws. It only makes recommendations and ultimately, the decision remains the state's responsibility."
The 2020 report was originally meant to ensure online retail businesses could not take unfair advantage over their brick-and-mortar counterparts by offering consumers tax-free sales. However, experts such as Wilford argued that the throw-back rule already guaranteed income tax equity under P.L. 86-272. This rule means a corporation that doesn't have enough physical presence in the state where it operates to be taxed will be taxed in the state where the company has physical offices.
The report also spurred debate around the fairness of economic nexus thresholds for smaller companies. If each state sets its own laws, many follow what has been approved under South Dakota v. Wayfair, and apply a threshold of $100,000 in sales or 200 transactions. However, such a threshold has been seen as too low for states with higher population rates or GDP, and large companies selling large ticket items could remain under the threshold while generating a lot of profit.
As a result, some perceived that following the recommendations of the MTC's 2020 report would impose an unnecessary burden on small businesses and benefit large hybrid companies such as Walmart or Best Buy, which already needed to collect sales taxes on their highly successful online purchases.
"Amazon already entered into voluntary tax agreements with more than 45 states before Wayfair, and other giants like Walmart have enough staff to handle complex accounting issues," said Wilford. "Contrary to small businesses who may not have the ability to comply with taxes because they don't have the in-house capability or don't know that this rule exists, they are experienced enough to face these increased complications."
In 2018, a Reuters
Businesses that are not able to comply with sales tax obligations or did not know about them can expose themselves to a large amount of sales tax liability, which becomes a criminal offense. As a result, the state can not only go after the owner's business assets, but also their personal assets such as mortgages or savings accounts. Wilford says there has never been much consideration around these issues because states thought that software programs would be good enough resources, but the analyst says not everyone can afford those that actually work.
"The bigger problem is that businesses that are out of compliance are not going to tell their local legislators and ask for help," said Wilford. "All large businesses have lobbyists talking for them and making it seem like the situation is better than it is. But the reality is that these standards can make you lose everything you've ever worked for."
If states adopt the new MTC recommendation, it means businesses would not only need to limit themselves to sales solicitation, but also remain below the state economic nexus threshold to avoid state income tax. Wilford believes P.L. 86-272 should be reinforced and the August 12 resolution is just "another weight on a giant pile of regulations." The analyst thinks protecting businesses from compliance requirements comes with uniformity and a simplification of the tax collection system for retailers and states.
For example, the NTU
"The MTC devotes a great deal of effort to developing models to further uniformity and we believe that uniformity is an important tool to ease burdens on taxpayers," said Hamer. "But ultimately, each state needs to make a judgment about what rules are appropriate, and if we need to make tax statements as simple as possible, it can still get very complicated."
