In a bid to adjust to an economy mostly characterized by online commerce, businesses are being faced with the task of understanding a host of emerging and proposed changes relating to new tax obligations. These developments arise from recent guidance and modifications of state laws associated with Public Law 86-272, a statute that shields enterprises from interstate commerce income taxes imposed by states.
Effectively navigating these rules necessitates keeping close tabs on ongoing legislative changes, with focus on the Multistate Tax Commission’s guidance. Notably, some states have started modifying their interpretation of what activities warrant protection based on these suggestions. In a groundbreaking move, California’s judiciary in December 2023, opposed the implementation of the proposed MTC guidance according to the Franchise Tax Board’s Technical Advice Memorandum 2022-01.
It bears noting that the court didn’t express the pros and cons of the changes. Instead, the issue was the board’s decision to implement the updates through technical guidance rather than applying the statute or regulations of California. This method was found to violate the state’s Administrative Procedure Act. Subsequently, the FTB filed an appeal to amend the judgment.
Turning to New Jersey, the rules were implemented using a technical bulletin, accompanied by an extensive list detailing both defended and undefended activities. This effort was more thorough than the Multistate Tax Commission’s. Cryptocurrency transactions, either buying or selling, within the state were among the activities that lacked protection. New York also issued final regulations toward the end of 2023, providing examples of unprotected online activities.
As a result of these legal perturbations and with the imminent acceptance of MTC’s guidance by some states, it’s of utmost importance for businesses to comprehend how various operations, such as the online job application process, post-sale chats or email support, could subsequently incur state income taxes. These activities, though traditionally harmless, could fall into the unprotected category. In addition, states now have the capacity to trace past website versions, thus necessitating the compulsory maintenance of records pertaining to earlier website reproductions. This strategy serves as a preventive measure against potential retroactive application of rules under auditing circumstances.
Interestingly, the unequal adoption of the MTC’s rules across states may work in favor of taxpayers. Taking California as an example, it maintains that if a business ships from a California-based storage facility to a destination where the enterprise isn’t taxable, the sale is credited to California when determining the sales factor numerator. However, if the guidance sees the light of day and such sales are taxable in other states, taxpayers could reduce their California income, thereby qualifying for prior year refunds due to California’s stand on retroactive application of the guidance.
Given the uncertainty associated with which states will follow suit and enact the MTC’s guidance, businesses are advised to closely monitor new developments in the months to come. Moreover, the varying practices across states further underscore the need for businesses to fully understand and keep records of their ongoing internet activities.
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