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AICPA Paper Will Focus on Small Marketplace Seller Income Taxes

Posted on Nov. 18, 2019

Post-Wayfair compliance issues for small marketplace sellers — particularly regarding potential income tax liability — will be the focus of an issue paper to be developed by an American Institute of CPAs panel.

Members of the AICPA State and Local Tax Technical Resource Panel expressed concern November 15 that small sellers could wind up with income tax liability in 20 or more states overnight because they have no control over where in the nation marketplace facilitators store their inventory.

During the AICPA Fall Tax Division Meeting in Washington, panel chair Cathie Stanton of Cherry Bekaert said that states will only exacerbate the problem if they chip away at business activities that are protected by Public Law 86-272.

Stanton said members of a Multistate Tax Commission work group are aggressively interpreting different types of internet contacts as business activities exceeding P.L. 86-272 protection from a state’s imposition of net income tax on remote sellers.

“It’s just going to spur a lot more litigation,” Stanton said.

Jamie Yesnowitz of Grant Thornton LLP said the MTC is trying to modernize P.L. 86-272 through its interpretation of how the 1959 federal law applies to internet activities. He added that Congress is not going to amend P.L. 86-272.

When Steve Wlodychak of EY suggested that states consider enacting de minimis thresholds to prevent out-of-state small marketplace sellers from having income tax liability, Stanton said California has adopted the MTC’s factor presence nexus standard but most states have not. Under the MTC model standard, out-of-state sellers with less than $50,000 in tangible personal property or personnel in the state, or less than $500,000 in sales in the state, do not owe corporate income tax to the state.

Substantial nexus for income tax purposes could well be an issue discussed in the paper, AICPA panelists said. Wlodychak said that the concept of substantial nexus for income tax purposes is now probably closer to that of minimum contacts.

The discussion came up again later when MTC officials joined the AICPA panel. Stanton went into more detail about how Inc. puts the inventory of its Fulfillment by Amazon small marketplace sellers wherever it wants. She and Wlodychak said small sellers are only now becoming aware through news headlines that they might have income tax liability in multiple states, and it’s creating a great deal of anxiety.

“Trust me when we say we believe very strongly in the ongoing relevance of our factor presence nexus standard,” said MTC General Counsel Helen Hecht. She added that this is true regardless of the Wayfair decision.

Regarding the MTC’s Statement of Information on P.L. 86-272, Hecht said that the commission has received feedback from small sellers that the way the work group interprets internet activities as exceeding the federal law’s protection is pulling in a lot of small businesses. She reminded the AICPA panel that the MTC didn’t draft the federal law.

MTC Counsel Brian Hamer said the P.L. 86-262 work group is considering adding language to the statement of information recognizing the existence of factor presence nexus statutes, to remind states that the concept exists. That is, factor presence nexus provides income tax liability protection to small businesses having very little presence and very little income in a state, he said.

Verenda Smith, deputy director of the Federation of Tax Administrators, came at the issue from a slightly different angle.

“This is the nature of what happens when you have a new industry. This is the nature of the internet,” Smith said, adding that it is now possible for a small business to become a national business overnight. She said AICPA members should raise all their concerns and detailed suggestions for solutions with state lawmakers, “because they listen to you more than they listen to us.”

Hecht agreed, and suggested that in addition to pitching factor presence nexus standards, AICPA members should tell state lawmakers that there should be a moratorium on past income tax liability for small marketplace sellers. Richard Cram, director of the MTC’s National Nexus program, also tied the issue to one that came up during the development of the second white paper on Wayfair implementation issues: States need to be sensitive about information sharing regarding remote sellers.

Hecht said that the AICPA and business community will not get a lot of arguments from the MTC if they try to convince lawmakers of the need for a safe harbor or no penalties for small marketplace sellers that file income tax returns in their home states.

“The intent is not to trap a lot of small sellers,” Hecht said.

“And the fiscal note on this would be minimal,” Smith added.

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