The following article has been produced exclusively for Mailers Hub by Martin Eisenstein and Jamie Szal of Brann & Isaacson.
This also will be the topic of the January 18 Mailers Hub Webinar.
You may have heard, indeed possibly from the authors of this article, that the US Supreme Court’s 2018 decision in Wayfair v. South Dakota changed the standard for sales tax obligations for companies. In the wake of that case, an online company may be required to collect and remit a state’s sales tax, based merely on sales to a state, even if it has no physical presence or activity in the state.
Mail producers
You probably thought, ”What does that have to do with me and my business as a commercial mail producer or broker of direct mail materials and related services such as data processing and list rental?” Well, the short answer is that it has a lot to do with your business, because you may be tagged with sales tax liability based upon the volume of mailings you produce and deliver for your customers into a state. Even though you may consider yourself in a service industry, in most states producing and delivering direct mail constitutes the sale of tangible personal property and, therefore, is subject to the sales tax.
Previously, the lack of activities of your business in a destination state shielded the business from sales tax obligations in that state. Wayfair changed that picture not only for online companies but for any company selling tangible personal property at retail.
That’s not the only potential implication to your business of the Wayfair decision. States have not stopped with sales taxes, but have taken the position that Wayfair authorizes them to impose state income tax, gross receipts taxes, and other taxes on businesses in the nature of taxes on net worth or capital stock taxes, if a company has a minimal level of sales or receipts in the state. This “economic presence” position will affect both online retailers and all other businesses alike.
Defense
But there are defenses to attempted enforcement of economic presence by a state against out-of-state companies. The primary defense, with regard to state income taxes, is a federal statute called Public Law 86-272. That statute provides that if an out-of-state company’s activities in a state are limited to the solicitation of the sales of tangible personal property, it is not subject to the income tax of the state.
There are important caveats regarding the federal statute:
- First, it relates only to income taxes, and not the other state taxes.
- Second, courts may narrowly read the statute, and the states bridle at the imposition of this limitation on state tax authority by the federal government through a federal statute, and as such aggressively seek a narrow interpretation. (Under the Commerce Clause of the US. Constitution, the states are not permitted to ignore a federal statute.)
- Third, the literal language of the statute will protect an out-of-state company as long as the company (i) does not engage in any activities in the state through employees or through agents or representatives of the company, unless those activities are related to the solicitation of sales of tangible personal property (solicitation of the sales of services is not protected); and (ii) doesn’t accept orders in the state or ship direct mail materials from a location in the state.
The difficult part in your industry, however, is limiting solicitation activities in other states to the sale of direct mail materials. To give you an example of the challenges direct mail producers face:
- A company may seek to sell services such as data processing services in connection with selling print production.
- Print production alone may be eligible for protection,
- But adding in the solicitation of the data processing service takes the activity beyond the boundaries of the federal statute’s protection.
- In addition, some companies go well beyond the protections as described above by, for example, shipping the materials from a location in the state and delivering those materials to an end-destination within the same state.
There are other defenses under the state statute and Constitution that can be raised in connection with gross receipts taxes and franchise taxes. And with regard to sales taxes, certain states provide tax exemptions for direct mail materials, depending on the type of mailing and from where the mailing is made.
Be proactive
The “bottom line” is that a company should not wait for the other shoe to drop before taking action, but instead, proactively make sure its house is in order before a state tax agency goes after the company for payment of state taxes.
We do know of some state tax agencies that have started directing their attention to direct mail producers and brokers, but thus far that is limited to four or five states. But it is only a matter of time before more states do come calling – and when they do, it will be important that you have adequately reviewed your nexus profile to make sure you have not exceeded the exemptions and exclusions from tax and maximize exemptions from taxability of sales taxes.
In short, direct mail producers and brokers have potentially significant exposures to state taxes than have existed in the past.
In the Mailers’ Hub Webinar scheduled for 1 pm ET on January 18, we will explore safeguards and ways to limit your exposure, including an analysis of the implications of income tax liability for a pass-through entity and C corporation in the event your company does have nexus. We hope that you will have a chance to attend.
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