As your manufacturing business expands into new markets, its
state and local tax obligations become increasingly complex, spinning a web of
different rules and obligations. Common business activities may produce a
taxable connection, or "nexus," that exposes your organization to sales and use
tax, state income tax, and other state tax obligations. Here's what you need to
know to stay on the right side of the state tax authorities.
The long arm of state tax laws
Not so long ago, manufacturers didn't have to worry about tax
liability in states where they lacked a physical presence, such as a plant or
corporate offices. That changed in 2018, when the U.S. Supreme Court ruled in Wayfair, Inc. v. South Dakota
that states can impose sales and use taxes on a business based solely on its
"economic activity" within the state, regardless of whether the organization
has offices or permanent employees there. As a result, many states began
imposing such taxes on out-of-state businesses that exceed certain annual
thresholds in revenue or number of transactions within their boundaries.
(States are increasingly dropping the transactions threshold, focusing instead
on revenue.)
The Wayfair
ruling doesn't apply to income taxes. A federal law known as Public Law (P.L.)
86-272 has long protected certain out-of-state businesses from state net income
taxes when their only in-state activities are the solicitation of orders for
sales of tangible personal property — as long as the orders are sent out of
state for approval and, if accepted, are fulfilled from outside the state.
But that protection has eroded in recent years. In 2021, the
Multistate Tax Commission (MTC), in recognition of the dramatic increase in
online business activities, issued a statement identifying certain activities
as protected or unprotected under P.L. 86-272. The list of unprotected
activities includes many potentially relevant to manufacturers, including:
- Repair or maintenance activities on sold property,
- Providing technical or service assistance,
- Owning, leasing, using or maintaining a warehouse or
inventory,
- Installation,
- Training,
- Carrying samples for sale or distribution,
- Collections and credit check activities, and
- Having a remote employee in a state who performs work
other than soliciting orders for tangible personal property (that employee
could trigger state payroll tax obligations, too).
The MTC guidance also addresses certain activities conducted
online. According to the MTC, for example, providing post-sale assistance to
customers in a state through electronic chat or email, with the communication
initiated by the customer clicking on an icon on your website, could subject
you to income taxes in that state. Even using internet cookies could put you
outside the protection of P.L. 86-272 under the MTC's model.
If your manufacturing business has nexus with a state for
purposes of sales and use tax, income tax, or other types of taxes, you could
be subject to tax obligations such as registering with the state tax authority
and reporting, collecting and remitting taxes. Keeping up with those
obligations is no small task.
Note:
Currently, California, New York, New Jersey and Massachusetts have adopted the
MTC's guidance to some degree; adoption across other states varies.
Compliance steps
Adoption of the MTC guidance isn't the only matter where states
have taken different stances toward the taxation of out-of-state businesses. If
you think your manufacturing business may have nexus with a state, you need to
know its rules and requirements regarding, among other things, the nexus
standards, sourcing of sales, apportioning of income and the availability of
exemptions.
You also must implement the necessary controls to ensure you
don't overlook "economic activities" that could subject you to taxation. For
instance, how will your tax team know if an employee crosses state lines to
perform an installation, make a service call or train a customer on how to use
your product?
And you should take potential state tax liability into account
when developing plans to grow your business. Increased revenue, inventory
storage, leasing or deliveries into a state could mean tax obligations that you
want to know about in advance so you can properly prepare.
Act now
States are increasingly using data and analytical tools to identify out-of-state businesses that may have filing or tax obligations within their jurisdiction. We can help you evaluate your business's multistate tax exposure so you can uncover compliance gaps, avoid costly assessments and penalties, and take advantage of all applicable tax credits and other incentives.
