Friday, August 16, 2019
Darien Shanske (UC-Davis), State Tax Administrators: Please Do Your Part in Sending PL 86–272 Off Into the Sunset:
This is the story of an arbitrary and destructive interstate tax shelter, one created by the federal government. No, this is not about collecting the sales and use tax. That tax shelter is largely on its way out; it was created by the Supreme Court in 1967, embraced anew in 1992 and finally ended, by the Court, in 2018, in a case called Wayfair. The tax shelter I am talking about in this post was created in 1959, by Congress. It was meant to be temporary, but is still with us and it shields certain large multistate taxpayers from the state corporate income tax.
The law in question, PL 86–272, shields taxpayers from paying the corporate income tax if certain conditions are satisfied. In particular, the taxpayer must be engaged in selling only tangible personal property in the state and the only activity in the state must be “solicitation.” Leaving aside the wisdom and propriety of Congress creating a tax shelter at all, these requirements indicate how dated the statute is now — and how poorly thought through it always was. Why are only sellers of tangible person property given the benefit of this special rule? Why only solicitation? How is solicitation a proxy for whether it would be fair and reasonable to ask a taxpayer to pay the income tax? If one remember the statute’s vintage, then one can understand the focus on tangible personal property because that was a more important part of the economy. This also explains the emphasis on solicitation as this refers to a then much more common business model of relying on an in-state sales force, though it never made a lot of sense to give a break to taxpayers large enough to engage in only solicitation. ...
Fortunately, the Multistate Tax Commission is aware of all of this and has convened a task force to consider PL 86–272 in light of Wayfair. I think the taskforce is clearly on the right track and I hope it publishes clear guidance to the states about how they ought to fairly — and narrowly — interpret PL 86–272. I then hope the states follow that guidance — or, just do the job themselves. State tax administrators should follow the best possible interpretation of the law. As I have argued, a narrow interpretation would be the best one. Foregoing public dollars through adopting the weaker interpretation would not be right. It also would deprive the courts of the opportunity to reach the correct decision.
To conclude and to repeat, with Wayfair in place there is a sound constitutional rule to protect taxpayers who truly have too little nexus with a state to justify taxation. Indeed, in all likelihood states generally assert nexus in fewer cases than they could because they set their statutory limits above the constitutional minimum, which I think is a good idea.