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This is the case in California, and soon will be the case in
Minnesota and New York. For over six decades, businesses have
avoided multistate income taxation relying on a federal law (P. L.
86–272) adopted in 1959. P. L. 86–272 prohibits states
from imposing income tax on income derived by an out-of-state
business if the seller’s only business activity in that state
is solicitation of orders for tangible personal property. Orders
must be sent outside the state for approval or rejection and filled
from a point of shipment outside the state. But if a seller accepts
any orders within the state, or provides any services along with
the remote sales of products, then the protections of this law do
not apply.
On August 4, 2021, the Multistate Tax Commission (MTC), an
intergovernmental agency that promotes uniformity across state tax
codes, issued an interpretation of what types of remote
interactions with a customer via website or app should be
considered engaging in business activity and subjecting a seller to
income taxation by the customer’s state.
California adopted that interpretation, issued guidance in 2022,
and has begun enforcement via audit. [Note: this interpretation is
currently being challenged in court.] Earlier this year, the
Minnesota Department of Revenue circulated a proposed notice
adopting the MTC guidance. Under that guidance, activities by
out-of-state businesses that would subject that business to income
taxation in the state include the following:
(i) providing post-sale assistance to Minnesota customers via
chat, email, or website, (ii) receiving applications via the
Internet from Minnesota customers for branded credit card through
its website, (iii) inviting Minnesota residents to apply for
non-sales positions via website, (iv) transferring Internet cookies
onto the computers or devices of Minnesota customers for business
purposes that include product development, inventory management, or
market research; (v) offering and selling extended warranty plans
via website to Minnesota customers; and (vi) contracting with
Minnesota customers to stream digital videos and music to their
devices for profit.
Bottom Line: If your business is engaging in these activities
for customers in California or New York, it is already purportedly
subject to taxation. It appears that will soon be the case in
Minnesota as well.
You must learn from the mistakes of others. You
can’t possibly live long enough to make them all yourself.
–Sam Levenson
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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