At its meeting on November 7, 2018, in Orlando, Florida, the Multistate Tax Commission’s (MTC) Uniformity Committee considered several important topics, including a future effort to revise Public Law 86-272 guidance, the white paper on marketplace facilitator collection legislation, the Finnigan Combined Filing Work Group’s findings, and the challenges of enforcing state taxes against foreign sellers.
Plan to Explore Updating P.L. 86-272 Guidance
During its meeting, the Uniformity Committee discussed possible options for a new project, including updating the Section 18 special industry rules and model regulations related to federal partnership audit rule changes, before settling on revising P.L. 86-272 guidance. Generally, P.L. 86-272 prohibits states and localities from imposing net income taxes on a business whose activities within the state are limited to soliciting sales of tangible personal property, if those orders are accepted outside the state and the goods are shipped or delivered into the state from outside the state.
The MTC’s Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 provides details regarding the application of P.L. 86-272. It was first adopted in 1986 and was last updated in 2001. A number of states have adopted the Statement through regulations. In the intervening 17 years, laws and business operations have changed. The MTC staff also suggested that overturning the Quill physical presence rule places more emphasis on the taxpayer protections embedded in P.L. 86-272. Given the changing landscape, the Uniformity Committee voted to start a project to explore updating the Statement, including the specific lists of protected and unprotected activities. While the specifics of a new project were not discussed, the Committee generally starts these types of projects by having the MTC staff prepare an analysis of the existing Statement and potential issues.
Finnigan Combined Filing Work Group Reports Progress
The Finnigan Combined Filing Work Group is tasked with drafting a Finnigan alternative to the Joyce sourcing methodology for combined returns that is currently included in the MTC’s Model Statute for Combined Reporting. The Work Group is considering three methodologies: (1) an approach in which the combined group is treated as one single taxpayer; (2) an approach in which the apportionment factors are determined for the group as a whole and the group’s taxable income is assigned to individual members with nexus in the state; and (3) an approach that divides the apportionment factors of the group as a whole among the in-state members. Although states were split in an informal vote, more states favored taking the approach of treating the combined group as one taxpayer.
Marketplace Facilitator White Paper Progresses
The Wayfair Implementation Project Work Group drafted a white paper addressing best practices for implementing marketplace facilitator collection laws in response to the US Supreme Court’s decision in Wayfair, which it presented to the Uniformity Committee. The white paper addresses standard definitions for “marketplace,” “marketplace seller” and “marketplace provider.” The definition of “marketplace provider” has two versions—one shorter, narrow definition and one longer, broader definition. States are largely split on which definition they prefer, although a slight majority preferred the broader definition.
The Committee also reached a consensus that marketplace facilitators, rather than marketplace sellers, should be audited for taxes that are required to be collected by the marketplace facilitators. Similarly, most agreed that the marketplace facilitators should be responsible for taxability mapping.
The Work Group discussed how to count sales toward economic nexus thresholds when a marketplace facilitator or a marketplace seller makes both direct and facilitated sales. The consensus among those states present at the Uniformity Committee was that both direct and facilitated sales made by marketplace facilitators should count toward the threshold. States were more split on the threshold applied to marketplace sellers, but slightly more states expressed a preference for considering only direct sales made by marketplace sellers.
States also expressed support for requiring the marketplace facilitator, rather than the marketplace seller, to be responsible for accepting exemption certificates and for adding language to protect against class action lawsuits against marketplace facilitators. The white paper also addresses whether marketplace facilitators and marketplace sellers should be required to register with the state to collect and remit tax.
The Uniformity Committee voted to approve the white paper with attachments and forward it to the MTC Executive Committee for consideration.
Enforcing Tax Collection Duties on Foreign Sellers
MTC Counsel Brian Hamer discussed the limitations on states’ abilities to require non-US sellers to collect tax. Mr. Hamer outlined how the common law “revenue rule” generally prohibits a country from collecting the taxes of another country, which includes recognizing the tax judgments of courts in the other country. A thorough discussion of the legal limitations is included in Mr. Hamer’s memo to the Uniformity Committee.
Although there are significant limitations on states in this area, Mr. Hamer outlined the tools that states have to collect unpaid taxes from non-US sellers, including:
- Requiring US marketplaces to collect tax for sales that the marketplaces facilitate for non-US sellers;
- Obtaining purchase data from US Customs and deducting unpaid use taxes from state income tax refunds;
- Pursuing non-tax civil actions against sellers (for instance, suing for the tort of conversion for stealing unpaid taxes);
- Imposing Colorado-style reporting requirements and imposing penalties on sellers that do not comply because penalties are not taxes and are not subject to the revenue rule; and
- Levying credit card and similar payment receipts in the possession of US entities that provide payment processing services to foreign sellers.
The topic spurred additional discussion about the importance of definitions in marketplace facilitator laws, so that US marketplaces will be required to collect tax for sales by foreign sellers that the US marketplaces facilitate.