Evaluating Your Manufacturing Company’s Multistate Tax Liability

When operating across state lines, it’s critical for manufacturers to understand their multistate tax liability. To determine state tax liability, state governments consider whether a company has “nexus” in their respective states, meaning that its presence in them is significant enough to subject it to taxes.

Let’s examine the effects of the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. and the revised guidance from the Multistate Tax Commission (MTC) on what activities trigger nexus.

What does nexus mean?

Generally, for a state to impose its taxes on an out-of-state manufacturer, the business must have a substantial nexus — or connection — with the state. At one time, nexus required a substantial physical presence, such as offices, factories, warehouses, retail stores, employees or sales representatives. However, with the popularity of e-commerce, states began to apply their sales tax laws to out-of-state businesses based on economic presence alone.

In Wayfair, the Supreme Court endorsed this approach. The decision essentially upheld economic nexus statutes that impose sales tax obligations on out-of-state businesses that exceed certain sales thresholds in each state, regardless of whether they have a physical presence there.

Nexus also applies to income taxes, but federal law protects certain activities by out-of-state businesses from triggering those taxes. A 1959 law — Public Law (PL) 86-272 — prohibits a state from imposing income tax on a business if the business’s only activities in the state involve soliciting orders for tangible personal property, and if those orders are accepted and filled from outside the state. These activities are protected, even if they’re conducted by sales reps or other personnel located in the state.

What does the MTC guidance offer?

In 1986, the MTC issued a “Statement of Information” on the application of PL 86-272. Because there has been limited guidance from the federal government on this law, most states and taxpayers have followed the MTC’s guidance. The statement has been revised several times, most recently in 2021, to provide guidelines on internet activities that are protected or unprotected under PL 86-272.

Under the statement, an in-state activity is protected if it’s limited to solicitation of orders (including certain activities that are ancillary to solicitation), with exceptions for certain de minimis activities and activities conducted by certain independent contractors.

Examples of protected in-state activities include:

• Advertising,
• Soliciting orders by in-state resident employees or representatives, provided they maintain no office other than a home office,
• Providing samples or promotional materials free of charge,
• Providing cars for sales personnel to conduct protected activities,
• Passing orders, inquiries or complaints along to headquarters,
• Coordinating shipment or delivery without payment,
• Selling products to in-state customers via a company’s website, and
• Providing 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 place of business (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.

Be aware that there’s some uncertainty over whether a business loses its PL 86-272 protection by delivering products in-state using its own vehicles. Once considered unprotected, the MTC removed this activity from its unprotected list but didn’t add it to its protected list. So some states may treat deliveries via company-owned vehicles as an unprotected activity.

Time for a nexus study

Manufacturers should evaluate their activities in each state to determine where they’re subject to state — and local — taxes. A nexus study can help identify the taxes to which your manufacturing company’s activities may expose you and help assess the effect of state and local taxes on your bottom line.