Discussion:Public Law 86-272 status (multi-state taxation)

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Discussion Forum Index --> Basic Tax Questions --> Public Law 86-272 status (multi-state taxation)


Discussion Forum Index --> Tax Questions --> Public Law 86-272 status (multi-state taxation)

Jossiecpa (talk|edits) said:

9 March 2011
Does anyone know if this expired, or if Congress extended this or passed anything similar?

Michaelstar (talk|edits) said:

9 March 2011
Public Law 86-272 is alive and well!!!!!

Jossiecpa (talk|edits) said:

9 March 2011
Okay, so if I have a client that is an Illinois business and they make sales in numerous other states, although they do not have physical presence or sales reps going to those states, does that mean that they are not subject to taxation in those states and don't have to file income taxes in those states? They do collect and remit sales tax in those states, which was a requirement by one of their largest suppliers, who was the contact point for them to get business in those other states. I understand that states have tried to find ways around this, and have come up with their own definitions of nexus. But my client has no physical presence whatsoever, other than to receive orders and ship product.

KatieJ (talk|edits) said:

10 March 2011
Jossie, I take it your client is selling tangible personal property only -- not services or other intangibles. If your client has no employees in any of those states performing any sort of service on its behalf, even part of the time, then P.L. 86-272 doesn't even come into play. Instead, the question is whether the client has due process/commerce clause nexus in those states.

I would question why the supplier insists on the client registering for use tax collection. Is this a drop shipment situation -- i.e., the supplier ships product direct to the client's customer and bills the client? If so, then I can understand why the supplier would want the client (the actual seller) to be registered for sales and use tax purposes -- so that the supplier isn't responsible for the tax when it ships product to a customer in a state where it (the supplier) is taxable.

A number of states have recently adopted the "economic nexus" standard that was proposed by the Multistate Tax Commission in 2002, or some version of it. Under that statutory provision, an entity that has the lesser of $50,000 or 25% of its property or payroll, or the lesser of $500,000 or 25% of its sales, in the state is by definition "doing business" in the state and subject to tax unless its activities there are protected by P.L. 86-272. The theory is that such an entity is exploiting the market in the state and therefore has economic, if not physical, nexus there. Since your client has no payroll or property in these states, I believe its exposure would be limited to states that have adopted that statutory framework AND where the client has sold $500,000 or 25% of its total sales.

Asm242 (talk|edits) said:

10 March 2011
The important thing to remember about 86-272 is that it is a protection against income tax nexus, not sales tax nexus. If you have a sales employee operating in a state, then you are not subject to income tax in that state based on that employee's operations - but you are liabile for sales tax.

If the client travels into the state or has other connections with the state, that can create sales tax nexus as well.

Also, the states you are having issues with matter as well. Some states, such as CO, AZ, and NJ are getting very aggressive, Arizona especially with their TPT garbage.

Jossiecpa (talk|edits) said:

10 March 2011
Thanks for the feedback. My client doesn't have any employees in those states (there are 12 of them, mostly on the east coast and midwest). And yes, they do sell tangible propery - They sell construction safety supplies and equipment like hard hats, etc. I'm not sure why the supplier wants them to collect sales tax on those purchases; I'm not that familiar with the arrangements they have with the vendor. I do understand that 86-272 relates to income taxes only, and not sales tax, and they have no problem with the sales tax collection, if that's what it means to get the customer referrals from the vendor. Some of the states have net worth tax and gross receipts taxes, that don't come under 86-272, from what I can see. But some of the states, like Massachusetts and Tennessee, do have questions that ask if the company is exempt from excise tax due to PL 86-272, and that's when my attention was brought to this issue. I have other multi-state clients, but they do have physical presence in those other states, or employees, but this is basically someone selling products to customers in other states, and having those products shipped (not always drop-shipped) into those states. I guess I'm trying to understand why they would even need to file and pay the net worth taxes and gross receipts taxes, if they don't have nexus, but I suppose I need to research each state and discover what their definition of nexus, including economic nexus is?

KatieJ (talk|edits) said:

10 March 2011
Jossie, if your client has NO connection with these states OTHER THAN (1) selling tangible personal property to customers in those states, based on orders that are received by mail, telephone, or internet, approved outside the state and shipped from inventory located outside the state, and (2) being registered as a seller for use tax collection purposes solely to meet the requirements of a key supplier, I don't believe your client has any filing requirement for any other kind of tax because it does not have due process/commerce clause nexus there. However, some states may assert jurisdiction based on the fact that the client has, so to speak, marched in and volunteered by registering as a seller. And a state that has adopted some form of economic nexus statute may assert jurisdiction on that basis.

I do believe you have to look at this state by state. I don't think registration to collect and pay over use taxes creates constitutional nexus for your client, but that's a battle the client may have to fight or concede.

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