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54 MoldMaking Technology —— SEPTEMBER 2017 THE BOTTOM Income Tax Nexus: Are You Protected? By Michael J. Devereux II, CPA, CMP Are you trialing molds at customer loca- tions in other states? If so, you may have engaged in an unprotected activity under Public Law 86-272. Therefore, you may be subject to income tax in the state where you have trialed the mold. Trialing or sampling molds at cus- tomer locations in other states is just one of the activities that may result in the creation of nexus to states other than the one where a shop is based. A company creates a "nexus" with a state when that company has sufficient physical presence in the state for that state to subject the com- pany to taxes. Here are some recommended dos and don'ts when seeking protection under Public Law 86-272. Public Law 86-272 The Interstate Income Act of 1959, more commonly known as Public Law 86-272, governs interstate commerce, or the sale of tangible personal property across state lines, and protects companies that engage in such interstate commerce (including molds) from additional taxes. However, protected activities are limited. Essentially, protection covers the mere solicita- tion of sales that occur outside of the state where a company is located. Protection does not cover activities like trialing or sampling molds. Public Law 86-272 only provides immunity to the solicita- tion to sell personal property. Therefore, the law generally affords protection to molds, dies and other things that mold shops sell to their customers in other states. However, mold shops may be engaging in other types of activities that are not protected under this law. In those cases, mold shops create an income tax nexus to other states. If a mold builder creates an income tax nexus in another state, the mold builder may be required to file an income tax return in the state for which it has created the nexus. The term "mere solicitation" is somewhat vague. In Wisconsin Department of Revenue v. William Wrigley, Jr., Co. (1992), the Supreme Court of the United States weighed in on its meaning by looking to various dictionary definitions. The court found that "mere solicitation" includes both explicit requests for orders and "any speech or conduct that implicitly invites an order." Soliciting an order does not mean accepting or facilitating an order. Therefore, if mold shop employees are merely soliciting sales in other states, but they approve and fill the orders in the state where the mold shop is located, then Public Law 86-272 likely protects those activities. If the law protects the activity, then the throwback rule applies to that sale. The throwback rule refers to sales that are taxed in the seller's home state. Conversely, sales involving unprotected activities are not subject to the throwback rule, and may then be taxable in the state of the customer. In these instances, the mold builder must file an income tax return in the state of the customer. Protected activities. These activities do not necessarily trig- ger income tax nexus, and may include the following: • Soliciting orders for sales or advertising. • Passing on orders to the home office. • Coordinating shipment or delivery of new molds, without payment or other consideration. • Carrying promotional materials for display or distribution. • Exhibiting at trade shows, so long as orders are not accepted or facilitated. • Recruiting or training sales personnel. • Using personal property, such as cell phones, computers, or computer software to carry out protected solicitation. Alone, these activities should not create an income tax nexus within a state, as the law deems them as mere solicita- tions of sales. Unprotected activities. Public Law 86-272 does not protect these activities, which may include: • Trialing of a new mold at the customer's location. • Approving or accepting orders. • Securing deposits on the sale of a new mold. • Providing warranty services or repairs to molds. • Installing or hanging new molds. • Providing technical assistance or service, such as engineering assistance or design services related to new molds. For exam- ple, mold builders should consider whether they are sending tooling engineers to a customer's site outside of their state to assist in the design of a new mold.