Physical Presence and Tax Implications: Decoding Multi-State Filing for the Consumer Products Industry

Often, executive officers and high-level decision-makers within the Consumer Products industry are burdened with the complexity of multi-state tax compliance. Are companies expected to file state income tax returns in every state where they have sales? Does selling online through platforms like Amazon expose companies to unexpected state filing requirements? Are there consequences to hiring remote employees who work 100 percent of the time from their homes in outside states? Answering these questions, among countless others, all play a significant role in determining if a company has a sufficient presence (or income tax nexus) within a state or filing jurisdiction to trigger an income tax filing requirement.

Public Law 86-272

The Interstate Income Act of 1959, known more commonly as Public Law 86-272, was enacted to help answer these multi-state tax questions. The law “restricts a state from imposing a new income tax on income derived within its borders from interstate commerce if the only business activity of the company within the state consists of the solicitation of orders for sales of tangible personal property.” In other words, this law was designed to shield companies from income tax exposure based solely on a customer’s location. For instance, a telephone call placed from one state to another to execute a sale does not trigger an income tax nexus where the customer is located. The business activity in a state should exceed simply completing a sales transaction to trigger income tax nexus. Thus, the law helps to shield companies from excessive multi-state tax exposure in states without a sufficient physical presence.

Physical Presence

What constitutes having a physical presence in a state? Three of the most common determining factors include:

• Having a physical office location within a state
• Having a warehouse/inventory held within a state
• Employees who work out of a particular state

A company with corporate headquarters in one state may have additional office locations in other states. Even if these offices prove to be more ancillary to business operations than the primary office, their presence would give the company income tax nexus in these additional states.

In addition to office locations, warehouses/inventory held in a state other than where the business is headquartered also triggers an income tax nexus. A company may feel that simply using a state for storage shouldn’t trigger a filing requirement. However, similarly to the idea of additional office locations, holding inventory in a state gives a company business exposure to that state beyond transacting a sale with a customer. Thus, Public Law 86-272 would not apply. Many Consumer Products companies that sell goods online may utilize marketplaces such as Amazon to help fulfill orders. In these instances, companies may allow Amazon to hold their inventory in Amazon-owned and operated warehouses, which can be located in any number of states throughout the country. Should Amazon choose to hold inventory in a state, even if Amazon is making the call to hold the inventory there, the company would still be considered to have an income tax nexus in that state. Regardless of who owns the warehouse, the company’s assets are being held in the state, and they are thus engaging in business in the state beyond simply executing a sale.

Besides having a physical presence in a state via physical business structures, a company also holds a physical presence if employees work within a state’s borders. Before the COVID-19 pandemic, when work-from-home arrangements were far less frequent, employee presence was likely consistent with office and warehouse locations. With remote employees more common in the workplace, companies must evaluate and understand the potential state income tax consequences. As a general rule, if an employee works from home in a state where a company otherwise holds no physical presence, that employee is now giving the company a physical presence in that state and triggering a state income tax filing requirement.

Final Thoughts

In an increasingly globalized world, business owners may feel overwhelmed by the burden of multi-state income tax compliance. In addition to the points emphasized above, while Public Law 86-272, in many instances, does shield companies from having income tax nexus through selling to customers online, certain Internet applications and data tools such as chatbots and cookies, which perform functions beyond the scope of just selling goods to customers, are coming under constant scrutiny as potentially triggering physical presence. It’s essential to employ tax accounting firms such as Marcum LLP to handle your tax affairs, as the specialists and industry experts who work within these firms can help make sure you are meeting all of your state income tax filing needs.

Source

• Public Law 86-272 https://www.mtc.gov/wp-content/uploads/2023/02/StatementofInfoPublicLaw86-272.pdf