Hosting a Business Website? Here’s how it could Impact Your California Tax Return

Doing business in today’s world is not what is used to be. In the age of marketplace facilitators, online shopping, and internet cookies, the digital world has had an immense impact on the way businesses are taxed, specifically in the state of California.

For many years, most companies in the business of selling tangible personal property to interstate customers were shielded from state and local income taxes based on Public Law 86-272. Public Law 86-272 is a federal law that was established to protect these out-of-state businesses from being subject to state and local income taxes if the only activity was the solicitation of sales of tangible personal property. For example, if you were a retailer simply shipping goods from your warehouse to customers in all 49 other states, your profits would not be subject to income tax in those 49 states if you had no other business activity there.

Public Law 86-272 specifically impacted those doing business in California with a concept called the “throw-back rule”. The throw-back rule impacts apportionment of income to the state so that if you are shipping goods from a warehouse located in California to customers in states in which your business is not subject to income tax, the sale is deemed to be a California sourced sale.

What has changed?

Recently the Multistate Tax Commission released guidance regarding Public Law 86-272 in which a company with a modern website may no longer benefit from the protections of the law. The guidance attempts to clarify what activities will rise to the level of soliciting sales when companies communicate with their customers via their website. This communication is deemed to rise to the level of engaging in a business activity within the customer’s state and exceeds the mere solicitation threshold.

Here are a few examples, as provided by the Multistate Tax Commission, of activities that are not protected by Public Law 86-272:

• Regularly providing assistance following the sale to in-state customers by either electronic chat or email that customers initiate by clicking an icon on the business’s website;
• Soliciting and receiving online applications for a business’s branded credit card via its website;
• Inviting viewers in a customer’s state to apply for nonsales positions with the business through the business’s website;
• Placing 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;
• Remotely fixing or upgrading products previously purchased by in-state customers by transmitting code or other electronic instructions to those products over the internet;
• Offering and selling extended warranty plans on a business’s website to in-state customers who purchase the business’s products;
• Contracting with a marketplace facilitator that facilitates the sale of the business’s products on the facilitator’s online marketplace and the marketplace facilitator maintains some of the business’s inventory in fulfillment centers in states where the business’s customers are located; and
• Contracting with in-state customers to stream videos and music to electronic devices for a charge.

What does this change mean for me?

If a company is no longer covered by the protections of Public Law 86-272 under these updated guidelines, then some of their sales may no longer be subject to California’s throw-back. These sales now become “nowhere” sales until additional states adopt these changes and may ultimately lower the income subject to tax in California.

On the contrary, this may also subject businesses to tax in additional states as the Public Law 86-272 protection is eliminated for these activities.