Navigating Multistate Tax Obligations: A Guide for Manufacturers

When operating across multiple states, it is crucial for manufacturers to thoroughly understand their multistate tax liability. State governments determine this liability based on whether a company has established a "nexus" within their jurisdiction—meaning the company's presence or activities in the state are substantial enough to subject it to state taxes.

This article delves into the activities that trigger nexus and explores the impact of the U.S. Supreme Court’s 2018 decision in *South Dakota v. Wayfair, Inc.*, as well as the updated guidance from the Multistate Tax Commission (MTC).

Understanding Nexus

For a state to impose taxes on an out-of-state manufacturer, the business must have a significant connection, or nexus, with the state. Traditionally, establishing nexus required a substantial physical presence, such as offices, factories, warehouses, retail outlets, employees, or sales representatives. However, with the rise of e-commerce, states have increasingly applied their tax laws to out-of-state businesses based on economic presence alone.

In the *Wayfair* decision, the Supreme Court validated this approach, effectively endorsing economic nexus statutes. These statutes impose sales tax obligations on out-of-state businesses that exceed certain sales thresholds in each state, regardless of whether the business maintains a physical presence there.

Nexus also extends to income taxes, although federal law protects certain activities by out-of-state businesses from triggering these taxes. Specifically, Public Law (PL) 86-272, enacted in 1959, prevents a state from imposing income tax on a business if its only activities in the state involve soliciting orders for tangible personal property, and if those orders are accepted and fulfilled from outside the state. These activities are protected even if carried out by sales representatives or other personnel located within the state.  Note that the protection under PL 86-272 is limited to income taxes and does not apply to other state taxes, such as franchise, gross receipts, or net worth taxes.

MTC Guidance on Nexus

The Multistate Tax Commission (MTC) is an intergovernmental state tax agency whose mission is to promote uniform and consistent tax policy and administration among the states, assist taxpayers in achieving compliance with existing tax laws, and advocate for state and local sovereignty in the development of tax policy.  Although they do not directly pass state laws, the MTC’s commentary is often used as a starting point by states for various tax regulations.  In 1986, the Multistate Tax Commission (MTC) issued a "Statement of Information" regarding the application of PL 86-272. Given the limited federal guidance on this law, most states and taxpayers have adhered to the MTC’s recommendations.

According to the MTC statement, an in-state activity is protected if it is limited to the solicitation of orders, including certain ancillary activities, with exceptions for specific de minimis activities and those conducted by independent contractors.

Protected in-state activities include:

- Advertising;

- Soliciting orders by in-state employees or representatives, provided they maintain no office other than a home office;

- Providing samples or promotional materials free of charge;

- Supplying vehicles to sales personnel for conducting protected activities;

- Transmitting orders, inquiries, or complaints to headquarters;

- Coordinating shipment or delivery without payment;

- Selling products to in-state customers via a company’s website; and

- Offering post-sale assistance to customers by posting a list of static FAQs.

Unprotected activities include:

- Approving or accepting orders;

- Collecting current or delinquent accounts;

- Providing maintenance or repair services;

- Picking up or replacing damaged or returned property;

- Carrying samples for sale;

- Conducting credit checks;

- Maintaining an office or other business premises (other than a home office);

- Providing post-sale assistance to in-state customers via electronic chat or email; and

- Offering or selling extended warranty plans via the company’s website.

The statement has been revised multiple times, most recently in 2021, to address internet-based activities that are either protected or unprotected under PL 86-272.

One of the examples the revised MTC statement includes as an unprotected internet-based activity is as follows:  “The business places Internet “cookies” onto the computers or other electronic devices of in-state customers. These cookies gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale. This in-state business activity defeats the business’s P.L. 86-272 immunity because it does not constitute, and is not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property.”

Although states may not have adopted the MTC’s interpretation on internet-based activities thus far, this is something businesses should certainly be aware of and monitor, as it could serve as a basis for future state guidance leading to potentially significant income tax costs for out-of-state businesses.

Conducting a Nexus Study

Manufacturers should carefully assess their activities in each state to determine where they are subject to state and local taxes. Conducting a nexus study can help identify the taxes your manufacturing company may be liable for and evaluate the impact of these taxes on your overall profitability.