Reproduced with permission from Daily Tax Report: State, 86 DTR State, 05/06/2019. Copyright 2019 byThe Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

INSIGHT: Multistate Tax Commission Considers AlternativeCombined Reporting Statute, Income Tax Nexus

BY JEFF FRIEDMAN, STEPHANIE DO, AND MICHAEL J.HILKIN

Eversheds Sutherland (US) LLP attorneys StephanieDo and Michael Hilkin attended the Multistate TaxCommission’s (MTC) Uniformity Committee meetingthat considered several important topics, includingevaluation of a draft alternative model combined re-porting statute based on the Finnigan method, a statusreport by the Public Law 86-272 Work Group, and po-tential new projects, including gathering information onpost-Wayfair issues and challenges.

‘Finnigan’ Combined Filing Work GroupPresents Its Draft Model

In July 2018, the Uniformity Committee voted to cre-ate a work group to draft a Finnigan alternative to theJoyce sourcing methodology for combined reportingthat is currently included in the MTC’s ‘‘Model Statutefor Combined Reporting.’’ Under Joyce, each memberof a combined unitary report is treated as a separatetaxpayer and sales of out-of-state members are not in-cluded in the sales factor numerator if the member doesnot have nexus in the state. While under Finnigan, theunitary group, as a whole, is considered the taxpayerand sales of out-of-state members are included in thesales factor numerator, even if the member lacks nexuswith the state. The Combined Filing Model WorkingGroup presented its draft of a Finnigan combined re-porting model. The draft generally reflects Utah’s ap-

proach where the combined group is treated as onesingle taxpayer.

State representatives were concerned with thedraft’s approach to sharing tax attributes, which allowssome sharing of net operating losses (NOLs). The staterepresentatives unanimously agreed to return the draftto the Work Group to evaluate NOL sharing. However,they did not formally adopt an approach or direct theWork Group.

Progress on Updates to Public Law86-272 Guidance

In November 2018, the Uniformity Committeeagreed to form a work group to update the MTC’s‘‘Statement of Information Concerning Practices ofMultistate Tax Commission and Signatory States underPublic Law 86-272.’’ Generally, Pub. L. 86-272 prohibitsstates and localities from imposing net income taxes ona business whose activities within the state are limitedto soliciting sales of tangible personal property, if thoseorders are accepted outside the state and the goods areshipped or delivered into the state from outside thestate. The Pub. L. 86-272 Statement of InformationWork Group intends to propose revisions to the State-ment, which was last updated in 2001, and is focusingon how Pub. L. 86-272 should apply to businesses en-gaging in activities over the Internet.

The Work Group has applied a two-step frameworkto determine if Pub. L. 86-272 provides a business withimmunity from net income taxation: (1) determinewhether a business activity constitutes the solicitation

Copyright 2019 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. ISSN 1534-1550

TM

: State

of orders for tangible personal property (as such activ-ity is protected by Pub. L. 86-272); and (2) presumingthe relevant activity extends beyond solicitation, deter-mine where the non-protected activity takes place (i.e.,inside or outside of the taxing state).

The Work Group has focused on the second step oftheir framework. While its inquiry remains ‘‘a work inprogress,’’ a consensus has developed among its mem-bers that if an in-state customer interacts with a remotebusiness’s website (e.g., does more than just view a pre-sentation on the website), the business will have en-gaged in non-protected activities in that state. TheWork Group supported its position based on their un-derstanding that a seller’s website will transfer ‘‘soft-ware or code’’ that will be stored on a customer’s com-puter and will ‘‘facilitate’’ an interaction between a cus-tomer and the seller.

The Work Group members’ consensus view was thata seller that provides post-sale assistance outside of astate via a toll-free number identified on its websitewould not exceed Pub. L. 86-272 in the state of its cus-tomer. However, a seller that provides post-sale assis-tance via an electronic chat session with an out-of-statecustomer service representative through the seller’swebsite would exceed Pub. L. 86-272 in the state of itscustomer.

Plan to Explore Post-’Wayfair’ IssuesThe Uniformity Committee discussed possible op-

tions for new projects, including potential model stat-utes or regulations for sourcing digital goods and ser-vices for sales tax purposes and implementing the eco-nomic substance doctrine at the state level. Althoughvalue was seen in both of those issues, the state repre-sentatives unanimously prioritized a perceived pressingissue—navigating post-Wayfair issues and challenges.The new exploratory project would encompass infor-mation gathering, issue spotting, and identifying the ap-propriate stakeholders. The Uniformity Committeeplans to give a status update at its next meeting sched-uled for Aug. 6, 2019 so that state representatives cangive input on refining the goals of the project.

This column does not necessarily reflect the opinionof The Bureau of National Affairs, Inc. or its owners.

Jeff Friedman is a partner and Stephanie Do is anassociate at Eversheds Sutherland’s Washington office,and Michael J. Hilkin is an associate in the firm’s NewYork office. Jeff provides state and local tax planning,strategic advice, and advocacy to numerous Fortune100 and industry-leading companies. Stephanie andMichael advise clients in a full range of state and localtax matters.

2

5-6-19 Copyright 2019 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550