Does your company sell products to customers in states outside of Pennsylvania?
If so, your company may be subject to income tax in those states if you are not careful about the types of services you provide to those out-of-state customers.
Each state has the right to tax any company “doing business” in that state.
To provide some uniformity to the taxation of companies selling their products throughout the country, Congress enacted Public Law 86-272 in 1959 preventing a state from imposing its income tax on a company whose only activity in the state is solicitation of orders if those orders are sent outside of the state for approval and those orders are filled and delivered from outside the state.
Courts have been trying ever since 1959 to define exactly what sales efforts a company can make in a state before the activity arises to the level that will make that company subject to the state income tax.
As a result of the decision of the United States Supreme Court in Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 S.Ct. 2447 (1992), the Multi-State Tax Commission has issued revised guidelines for businesses looking to sell products to customers in states outside the state of origin without paying income taxes to those states. Permissible activities include:
- Soliciting sale orders with any type of advertising;
- Carrying samples only for display or for distribution without charge or other consideration;
- Owning autos or furnishing them to sales personnel;
- Passing inquiries and complaints on to the home office; and
- Maintaining a sample or display room for two weeks or less at any location during the tax year.
Activities in the state where the customer is solicited which are likely to result in your company being subject to that state’s income tax include:
- Making repairs or providing maintenance;
- Installing or supervising installation;
- Conducting training courses, seminars or lectures for customer personnel other than those involved only in solicitation;
- Providing technical or engineering assistance or services; and
- Investigating, handling or assisting in resolving customer complaints.
What should you do?
If your company wants to avoid subjecting itself to multi-state income tax problems, follow the guidelines set forth above and consult your attorney and accountant for more details.
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