For the first time in its history, the Multistate Tax Commission (MTC) held its 2020 Spring Committee Meetings via teleconference in lieu of the in-person meetings originally scheduled to take place in Alexandria, Virginia.  The Uniformity Committee held its meeting on April 22, while the Nexus and Audit Committees held meetings on April 21.  Portions of each meeting were open to the public. 

The Eversheds Sutherland SALT group attended all of these public sessions.  Several interesting topics were discussed during these meetings, including: (1) an updated P.L. 86-272 Statement of Information; (2) the Multistate Voluntary Disclosure Program (MVDP); and (3) the status of MTC’s Joint Audit Program.

Uniformity Developments

On April 22, the Multistate Tax Commission (MTC) Uniformity Committee approved two major projects for submission to the Executive Committee and provided insights into recent developments since the outbreak of the COVID-19 pandemic.

The Finnigan/Combined Filing Work Group presented an alternative to the Commission’s 2006 Model Statute for Combined Reporting. 

Combined reporting states generally adopt either the Joyce or the Finnigan approach to calculating the sales factor numerator when apportioning a group’s taxable income.¹ The Joyce approach excludes from the sales factor numerator group members lacking nexus or protected by P.L. 86-272.  Meanwhile, the Finnigan approach includes in-state sales from all unitary group members in the sales factor numerator.  The MTC’s 2006 model, which was adopted after months of deliberation, uses a Joyce approach, while the model presented on April 22 follows a Finnigan approach. Key elements of the proposed model include:

• Defining “person” to include a combined group.
• Requiring a combined group to file a single return.
• Limitations on the sharing of net operating losses and capital losses.
• Joint and several liability for taxes owed by the group.

The report was approved by representatives from 20 states and the District of Columbia.² Montana did not approve the report, and Washington abstained.

The P.L. 86-272 Statement of Information Work Group presented a revision to the MTC’s current statement of information that includes a new section regarding what online activities could go beyond P.L. 86-272 protection.³ This work group’s view is that static text or photos on a website does not constitute an unprotected business activity in a potential customer’s state, but most other forms of online interaction do.  Examples of online activities not protected by P.L. 86-272 include:

• Post-sale assistance via electronic chat or email.
• Soliciting online applications for branded credit cards.
• A careers page that accepts applications for non-sales positions.
• Remote product patches, upgrades or updates.
• The sale of extended warranty plans.
• The sale of streaming music or video services.

Furthermore, proposed revisions of the Statement of the Information provide that activities unprotected by P.L. 86-272 include the in-state presence of a taxpayer’s independent contractors or telecommuting employees within a state.  Work Group members had divergent opinions regarding how the proposed changes would be interpreted in light of the COVID-19 pandemic.  One member stated that COVID-19 telework many not have P.L. 86-272 implications under the new recommendations because it is not done on a “regular basis.”  Another member stated that COVID-19 work arrangements would surpass P.L. 86-272 protections, which is why some states are issuing guidance announcing that due to the unusual circumstances they will not assert income tax nexus on the basis of these teleworkers.

During the public comment period, Council of State Taxation General Counsel Karl A. Frieden commented that COST and the vast majority of the national business community disagree with the Work Group’s proposed changes.  Frieden noted that the Work Group interpreted P.L. 86-272 protections out of existence for most taxpayers with a normal online presence. Further, Frieden noted that the revised statement conflates consumer activities on their own computers with a seller’s activities in a state.

The proposed changes to the P.L. 86-272 Statement of Information were approved by 19 member states and the District of Columbia, with abstentions from Maryland, North Dakota, and Washington.⁴

The Wayfair/Marketplace Work Group presented a status update, indicating a significant slowdown in activity.  The Work Group has not had a meeting since February 5, when the group met to receive a taxpayer request for the MTC to send a letter to state tax commissioners endorsing the National Conference of State Legislatures (NCSL) model marketplace facilitator collection statute. Work Group members agreed that they wanted to see what impact newly-enacted marketplace laws will have before moving forward with larger project.

The public comments for this Work Group presentation primarily focused on nexus issues arising out of the presence of a taxpayer's inventory in the warehouse of a third-party marketplace facilitator. One commenter noted that states continue to pursue marketplace sellers for uncollected sales tax from periods prior to the Wayfair decision. Another commenter noted that some states also assert income tax nexus on the basis of in-state inventory, requiring numerous zero-returns to be filed by small out-of-state marketplace sellers. The MTC declined to direct the Work Group to consider inventory-related nexus issues.

After a brief status update from the New Project Selection Work Group, the Uniformity Committee meeting concluded with roundtable updates from each state regarding recent state-specific developments. State tax officials reported a recurring theme of issues with adjusting to remote work restrictions, stalled legislative sessions, and the need to issue guidance regarding pandemic-related tax filing extensions.

Some notable state highlights include:

• Alabama is preparing for possible ramifications from a major pending tax bill that would, among other things, change the state’s tax rate, decouple from certain federal provisions, implement single-sales factor apportionment, and remove the state’s throwback rules.⁵
• Colorado postponed its marketplace facilitator rulemaking meeting due to the pandemic, meanwhile Georgia is fielding several questions regarding its recent marketplace collection bulletin⁶ and North Carolina said that it would issue marketplace guidance in the coming weeks.
• Idaho reported not starting any new audits from March 15 through the end of April and officials from Kentucky said that they had a similar ban on new audits.
• Kansas reported a 25-30% increase in revenue collections after the implementation of that state’s marketplace facilitator law containing no de minis threshold. State officials reported an average of 375 new monthly sales tax registrations and a $9 million state surplus.⁷
• Maryland’s Comptroller is proactively drafting regulations for the state’s pending digital product and digital advertising bills, although there is still a probability that the governor may veto these bills.⁸
• Massachusetts mentioned its new COVID-19 guidance regarding employer withholding obligations and e-signatures. The state officials also noted that some court conferences are being held via videoconferencing software whereas oral arguments for other cases are being canceled as courts opt to rely solely on pleadings.
• Missouri is experiencing difficulties getting comments on its pending administrative rules and may opt to go through less formal channels.

Nexus Developments

27 states participated in the open session of the Nexus Committee meeting.  Richard Cram, Director of the National Nexus Program, reported that as of the end of the 3^rd quarter of fiscal year 2020, the MVDP has collected $15,290,411.00.  According to Cram, the MVDP has collected more revenue during the 2020 fiscal year than the MTC expected, and has already surpassed the total revenue collected through the program during the 2019 fiscal year ($14,695,429.00). 

Cram also summarized two sets of survey responses regarding the voluntary disclosure programs received from states participating in the National Nexus Program.  The first survey concerned how much discretion member states believe MTC staff should be given to reject voluntary disclosure agreement (VDA) applications or void VDAs based on sales and use tax economic nexus when the reported or actual total tax liability for the prior four years is below $500.00.  The MTC received responses from 11 states and there was no general consensus among those responses.  Therefore, Cram reported the MTC is of the opinion that when a VDA application based on sales and use tax economic nexus reports or results in a tax liability for the prior four years below $500.00, the MTC will refer to the individual states regarding whether the application should be processed or the agreement should be voided.

The second survey concerned the availability of payment plans as part of voluntary disclosure agreements.  Given the recent difficulties in making normal tax payments as a result of COVID-19 related restrictions, some taxpayers may need a payment plan in order to come forward and become compliant.  However, while some states already allow taxpayers to enter into payment plans as part of the voluntary disclosure process, while others currently do not.  Because of this lack of uniformity among the member states, the MTC will refrain from adding payment plan language to its standard VDA and instead will leave it up to states to include payment plan language in their VDA counter-offers.

Audit Developments

Holly Coon, Director of the MTC’s Joint Audit Program (“Program”), reported that during the period from July 1, 2019 to March 31, 2020, the Program completed parts of 9 corporate income tax audits, completed and closed 5 sales tax audits, and completed parts of 9 other sales tax audits.  In total, the Program proposed assessments of over $144 million for completed corporate income tax audits and over $1.8 million from completed sales tax audits during that period.  According to Ms. Coon, the Program currently has 19 income tax audits and 35 sales tax audits in progress.

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