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Manufacturing & Distribution

THOUGHTWARE®

State Income & Sales Tax Update for Manufacturers & Distributors

September 12, 2018

THOUGHTWARE®

Bob Johnson Jr.SALT ServicesPartnerKansas City | 816.701.0283

Jim Pierzchalski, CPASALT ServicesDirectorKansas City | 816.489.4323

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To Receive CPE Credit

• Individuals

• Participate in entire webinar

• Answer polls when they are provided

• Groups

• Group leader is the person who registered & logged on to the webinar

• Answer polls when they are provided

• Complete group attendance form

• Group leader sign bottom of form

• Submit group attendance form to training@bkd.com within 24 hours of webinar

• If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar

Agenda

• Sales/use tax update

• Review history of nexus

• Explain agency & affiliate nexus

• Discuss Wayfair decision & identify how it will impact sales/use tax

• Review remote seller use tax notices & reporting requirements

• Income/franchise tax update

• Review pre-Wayfair income/franchise tax nexus

• Discuss impact of Public Law 86-272

• Explain factor-based nexus rules

• Identify how Wayfair decision will impact income/franchise tax

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Sales/Use & Income/Franchise Tax Update for Manufacturers & Distributors

Nexus: What Is It?

• Connection potential taxpayer has with a state that allows the state to impose its taxing powers

• Minimum presence required before state taxing authority can subject a taxpayer to various taxes within the jurisdiction

• Person or entity who has nexus in the state is required to register, file & pay taxes in that state

• Pre-Wayfair, nexus-creating activities for sales/use tax were different from income/franchise tax

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Nexus: A Brief History in the Supreme Court

• First introduced in the Supreme Court with the Miller Brothers Co. v. Maryland (1954) decision

• Remote seller fulfilling orders without in-state solicitation is not sufficient nexus under Due Process Clause

• Scripto, Inc. v. Carson (1960) further defined nexus • Remote seller with in-state sales agent had sufficient nexus under Due

Process & Commerce Clauses

• National Bellas Hess v. Department of Revenue of Illinois (1967) created physical presence requirement

• Remote seller fulfilling orders & soliciting orders did not have sufficient nexus under Due Process & Commerce Clauses without a physical presence

Nexus: A Brief History in the Supreme Court

• Complete Auto Transit, Inc. v. Brady (1977) – creates the four-prong test for creating nexus

• “Substantial nexus” mentioned as one of four factors for imposing any state tax but not defined

• Quill Corp. v. North Dakota (1992) – do not necessarily need physical presence

• Remote seller soliciting orders is not sufficient nexus under the Commerce Clause without physical presence. Due process is now satisfied without physical presence

• Stay tuned for South Dakota v. Wayfair, Inc.

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Traditional Nexus-Creating Activities

• Place of business, offices, warehouses

• Ownership of equipment, land, property, inventory or other assets

• Employees residing in-state

• Performing services in-state

• Frequent or recurring solicitation

• In-state affiliates

Nontraditional Nexus-Creating Activities: Agency Relationship

• Created through independent contractors & third-party agents – Scripto, Inc. v. Carson

• For nexus purposes, distinction between employees & independent contractors is without constitutional significance

• Nexus cannot be avoided by outsourcing activities to independent contractors or third-party agents

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Nontraditional Nexus-Creating Activities: Affiliate/Attributional Relationship

• Attributing nexus from a taxpayer’s affiliated entities or other affiliates if there is an overlap of selling or other shared activities

• Out-of-state seller is owned by or holds a substantial interest in an in-state seller & out-of-state seller sells same or similar products under same or similar name

• In-state taxpayer advertises, promotes or solicits sales

• In-state taxpayer performs other services assisting or on behalf of out-of-state seller

• Activities of one company may create nexus for other related entities

How Did We Get to Wayfair?

• States established nexus through the court with

• Physical presence

• Traditional nexus-producing activities

• Agency & affiliate nexus statutes

• What did they think was missing?

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How Did We Get to Wayfair?

• Huge increase in online sales by companies without nexus in the state

• Huge deficits in the states due to the recession

• Legislators feel pressure from brick & mortar retailers to capture the potential tax that would be generated with ‘ordinary’ sales

• Some states responded by enacting economic nexus statutes disregarding the physical presence standard of Quill; however, without standing they could not enforce these statutes

Nexus: South Dakota v. Wayfair, Inc.

• The U.S. Supreme Court held that states may force an out-of-state seller to collect & remit sales tax on purchases, even if the seller does not have a physical presence in the taxing state

• Economic nexus is sufficient as long as the activity is ‘substantial’

• Measure that will be considered ‘substantial’ is up to the state unless Congress intervenes

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Post-Wayfair State Responses

• Without an exact measure of what is ‘substantial’ states have begun to enact their own standards of what will be sufficient to create nexus within their jurisdiction

• Generally, states are following South Dakota’s thresholds• $100,000 or more in total sales in-state or

• 200 or more transactions in-state

• Notable exceptions • $10,000 in total sales in-state (Oklahoma)

• $250,000 in total sales in-state (Alabama)

Application to M&D Businesses

• Post-Wayfair state legislation will cause more companies to have sales tax nexus in more states

• Will require new registrations & returns in those states

• Sales tax on purchases should also be reviewed more thoroughly as additional vendors will likely now be charging sales tax

• Review sales tax nexus thresholds due to lack of uniformity

• Consider impact of online sales

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Remote Seller Use Tax Notice & Reporting Requirements

• In 2010, Colorado passed legislation to require remote sellers without nexus in the state

• To send a notice to purchasers that the purchaser may be subject to Colorado sales & use tax

• To send an annual purchase summary to customers who purchase more than $500

• To file an annual customer information report with Colorado Department of Revenue

• Out-of-state sellers not obligated to collect Colorado sales tax must notify Colorado customers of their obligation to self-report & pay use tax

• Other states with similar notice & reporting requirements already passed since 2010 include Georgia, Louisiana, Oklahoma, Pennsylvania, Rhode Island, Vermont

Income/Franchise Tax Update for Manufacturers & Distributors

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Income & Franchise Tax Nexus

• Similar to sales tax nexus but requires less activity

• Evolution of income/franchise tax nexus

• Actual physical presence

• Public Law 86-272

• Intangible holding company nexus

• Economic & factor-based nexus

Public Law 86-272

• Public Law 86-272 prohibits states from imposing a “net income tax” on taxpayers whose only in-state activity during taxable year is solicitation of orders by such person or a representative for sales of tangible personal property for approval & fulfillment by shipment or delivery from a point outside state

• Provision does not apply to any corporation which is incorporated in-state or any individual who is domiciled in or a resident of state

• Provision does not apply to lease, rental or licensing of tangible personal property; sale, lease, rental or licensing of real property; sale, lease, rental or licensing of intangible property in a state; or sale of services

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Public Law 86-272

• Wisconsin Department of Revenue v. William Wrigley Jr. Co.

• Examples of protected activities

• Soliciting of orders by an in-state resident employee or representative of the company, so long as such person does not maintain or use any office or other place of business in-state other than an “in-home” office

• Furnishing & setting up display racks & advising customers on display of company's products without charge or other consideration

• Checking of customers' inventories without a charge therefore (for reorder, but not for other purposes such as quality control)

• Recruiting, training or evaluating sales personnel, including occasionally using homes, hotels or similar places for meetings with sales personnel

Public Law 86-272

• Examples of unprotected activities

• Making repairs or providing maintenance or service to property sold or to be sold

• Collecting current or delinquent accounts, whether directly or by third parties, through assignment or otherwise

• Investigating credit worthiness

• Installation or supervision of installation at or after shipment or delivery

• Conducting training courses, seminars or lectures for personnel other than personnel involved only in solicitation

• Providing any kind of technical assistance or service including, but not limited to, engineering assistance or design service, when one of the purposes thereof is other than facilitation of solicitation of orders

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Public Law 86-272

• De minimis activities

• Nontrivial additional connection

• Activities are not considered in isolation

• States must consider the activities of the person or entity as a whole

Public Law 86-272

• Public Law 86-272 does not apply to the following types of taxes imposed by state & local jurisdictions

• Capital or equity-based taxes

• Franchise taxes not based on net income

• Business activity taxes

• Gross receipts taxes

• Examples – Ohio CAT, Nevada Commerce, Washington B&O

• Minimum taxes

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Economic/Factor-Based Nexus

• Nexus may be created by economic presence in the state. In the majority of states, economic presence is met if a person or entity has

• $50,000 in payroll

• $50,000 in property; or

• $500,000 in sales; or

• 25% of total property, total payroll or total sales in the state

• Public Law 86-272 supersedes factor-based nexus for taxpayers who are afforded protection; however, it only applies for purposes of net income tax

• Taxpayers are still subject to such taxes as franchise taxes not based on net income, gross receipts & minimum taxes

Factor-Based Nexus

• States to adopt factor-based nexus include

• Alabama

• California

• Colorado

• Connecticut

• Michigan

• New York

• Tennessee

• Variations from $500,000 sales threshold

• Impact on sales factor throwback

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Application to M&D Businesses

• Public Law 86-272 only applies to sales of tangible personal property

• Service income & other business activities such as warranty work will not qualify as protected activities

• Need to consider activities of independent contractors & affiliated representatives

• Public Law 86-272 will not apply for franchise/net worth taxes or gross receipts taxes

• Public Law 86-272 protection will overcome a state’s economic/factor nexus standard

Other Activities Creating Income/Franchise Tax Nexus

• Transportation activities

• Mileage greater than 25,000 miles in-state

• Mileage greater than 3% of total mileage

• Intrastate mileage

• Certain number of trips into state

• Pickups or deliveries within state

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Other Activities Creating Income/Franchise Tax Nexus

• Pass-through nexus

• S corporation or partnership doing business in the state generally creates nexus for the shareholders or members

• Must consider impact of nonresident withholding for the shareholders or members

• Exceptions in some states

• Entity-level taxation

• Limited partners

Wayfair & Income/Franchise Tax

• Filing obligations will likely increase as state enforcement related to sales tax reporting increases

• Taxpayers should review their filing methodologies &nexus positions from an income tax perspective

• Consider impact on throwback sales for sales factor purposes

• Will more states expand income tax nexus statutes?

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Continuing Professional Education (CPE) Credit

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered

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To Receive CPE Credit

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

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