Assessing sales and state income tax liabilities since Wayfair has gotten a whole lot more difficult. All but two states (Missouri and Florida) assess sales tax, and the District of Columbia, have expanded their sales tax nexus requirements on out-of-state sellers since the Wayfair ruling. Missouri and Florida have Wayfair legislation being promulgated, which should be enacted soon.
Federal law PL 86-272, however, remains intact to protect solicitation activities (sales representative activities) and potentially a way for some remote sellers to sidestep Wayfair requirements and avoid remote seller income taxation in various states. PL 86-272 prohibits a state from taxing net income of an out-of-state company if its only activity is the solicitation of orders for the sale of tangible personal property within the state.
In California, taxpayers protected by Public Law 86-272 will not be required to pay the franchise tax or the corporate income tax, as both are measured by net income. However, even if an out-of-state entity is protected by Public Law 86-272 in California, the taxpayer is still obligated to file a tax return and pay taxes that are not measured upon net income, unless certain exceptions apply, such as:
- The minimum franchise tax
- Annual limited liability company tax
- The limited liability company fee
Protection under Public Law 86-272 does not apply to businesses that derive in-state income from the solicitation or sale of:
- Intangible property
- Any combination of goods and services
California’s Technical Advice Memorandum: 2018-03 addresses the application and interpretation of Public Law 86-272 in the context of delivering goods by company owned delivery vehicles. This memorandum concluded the delivery via a private delivery truck is protected activity under Public Law 86-272. However, any activity that goes beyond the scope of delivery, such as backhauling, is not a protected activity. The Memorandum includes two examples.
Example 1: Corporation C, an out-of-state corporation that does not file a combined return, sells tangible goods over the internet and qualifies for protection under Public Law 86-272. For the 2019 taxable year, Corporation C has $1,000,000 of California sales but no property or payroll in California. Corporation C, though considered doing business in California because it has $1,000,000 in California sales, will not be subject to California?s franchise tax as it is protected under Public Law 86-272. This is true even if the tangible goods are delivered using Corporation C?s vehicles. However, Corporation C must still file a California return and pay the minimum franchise tax of $800. If Corporation C?s vehicles are used for any other business activity along with the delivery, such as backhaul of goods (like hauling off the customer?s old items), this activity would go beyond the solicitation of orders and would no longer be protected.
Example 2: LLC Z, an out-of-state LLC that engaged in activities that are protected under Public Law 86-272 and considered to be doing business in California for the tax year 2019. LLC Z?s total income from sources derived from or attributable to the state of California was $300,000.Therefore, LLC Z must file a California tax return, pay the annual LLC tax of $800, and pay the LLC fee of $900. Public Law 86-272 does not protect qualified out-of-state business entities from the annual LLC tax or the LLC fee.
Still have questions? Give your TaxOps advisor a call.
- When can a business rely on PL 86-272?
- What conflicts exist between PL 86-272 and economic nexus?
- How are states interpreting PL 86-272 in light of Wayfair?
- What steps should be taken when determining state nexus considering Wayfair and PL 86-272?
- What financial statement adjustments are required?