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Manufacturing Across State Lines


If your business operates across state lines, it’s important to understand state income tax obligations. Following the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., manufacturers have focused on sales tax liability. But the recent explosion of remote work, together with revised guidance from the Multistate Tax Commission (MTC), may raise income tax issues.

Nexus Matters

Generally, for a state to impose its taxes on an out of state business, that business must have a substantial nexus — or connection — with the state. At one time, nexus required a substantial physical presence, such as offices, factories, warehouses, retail stores, employees or sales representatives. However, with the advent of the internet and e-commerce, states began to apply their sales tax laws to out-of-state businesses based on economic presence alone. In Wayfair, the Supreme Court endorsed this approach. The decision approved “economic nexus statutes” that impose sales tax obligations on out-of-state businesses that exceed certain sales thresholds in the state, regardless of whether they have a physical presence.

Nexus is also required for income taxes, but federal law protects certain activities by out-of-state businesses from triggering those taxes. A 1959 law — Public Law (PL) 86-272 — prohibits a state from imposing income tax on a business if the business’s only activities in the state involve soliciting orders for tangible personal property, and if those orders are accepted and filled from outside the state. These activities are protected, even if they’re conducted by sales reps or other personnel located in the state.

MTC Guidance

In 1986, the MTC issued a “Statement of Information” on the application of PL 86-272. Since there has been limited guidance from the federal government on this law, most states and taxpayers have followed the MTC’s guidance. The statement has been revised several times, most recently in 2021, to provide guidelines on internet activities that are protected or unprotected under PL 86-272.

Under the statement, an in-state activity is protected if it’s limited to solicitation of orders (including certain activities that are ancillary to solicitation), with exceptions for certain de minimis activities and activities conducted by certain independent contractors. Examples of protected in-state activities include:

    • Advertising,
    • Soliciting orders by in-state resident employees or representatives, provided they maintain no office other than a home office,
    • Providing samples or promotional materials free of charge,
    • Providing cars for sales personnel to conduct protected activities,
    • Passing orders, inquiries or complaints along to the home office,
    • Coordinating shipment or delivery without payment,
    • Selling products to in-state customers via a company’s website, and
    • Providing post-sale assistance to customers by posting a list of static FAQs.

Unprotected activities include:

    • Approving or accepting orders,
    • Collecting current or delinquent accounts,
    • Providing maintenance or repair services,
    • Picking up or replacing damaged or returned property,
    • Carrying samples for sale,
    • Conducting credit checks,
    • Maintaining an office or other place of business (other than a home office),
    • Providing post-sale assistance to in-state customers via electronic chat or email, and
    • Offering or selling extended warranty plans via the company’s website.

There’s some uncertainty over whether a business loses its PL 86-272 protection by delivering products in-state using its own vehicles. Once considered unprotected, the MTC removed this activity from its unprotected list but didn’t add it to its protected list. So some states may treat deliveries by company-owned vehicles as an unprotected activity.

Take Inventory

Manufacturers should evaluate their activities in various states to determine whether they’re subject to income taxes in those states. In some cases, the presence of remote workers engaged in unprotected activities may be enough to trigger income tax liability, although the presence of a small number of workers may be considered a protected de minimis activity.

Keep in mind that not all states follow the MTC guidance. You’ll need to consult your attorney to understand the laws, regulations and administrative rulings in each state where you do business. Contact us with any questions.