Marvin Kirsner, Greenberg Traurig shareholder

When the U.S. Supreme Court in 2018 handed down its internet tax decision in South Dakota v. Wayfair, which held that a company does not need to have a physical presence in a state to be required to collect sales tax on sales to customers, a thunderstorm erupted within the e-commerce industry. There was, however, a silver lining to the Wayfair case. Unfortunately, many Florida businesses might find the silver lining just as challenging as the storm itself.

Prior to the Wayfair decision, a company could avoid collecting tax on sales to customers in another state by avoiding any type of physical presence there—no office, no employees or independent contractors, no trade shows, no "click-through" arrangements to pay commissions to a referral source in the state, and no inventory in the state. In such a case, Supreme Court precedent held that the state could not compel the company to collect its tax. However, Wayfair reversed the prior precedent, holding that a state may require a company to collect its tax so long as the company had a material level of sales there.

In the South Dakota law reviewed by the court, economic nexus is established once a threshold of at least $100,000 in sales into the state or 200 separate sale transactions in the prior 12-month period has been reached. Since then, almost every state that imposes a sales tax has passed a so-called "Wayfair Law" stating that a company must collect sales tax if it meets an economic activity threshold—most of them setting the same $100,000 in sales or 200 transaction threshold as the South Dakota law. Companies who were not collecting sales tax had to scramble to register with each state to collect sales tax, and to implement tax collection and return filing procedures. This is a complex and time-consuming task that has many companies frazzled.

So, what is the silver lining to this tumultuous course of events? Now that physical presence in a state is no longer relevant to the requirement to collect sales tax if the sales threshold is reached, the company no longer needs to be concerned about having a physical presence there. Before Wayfair, a single employee working remotely from home in another state was adequate to establish a physical presence there, requiring the company to collect that state's tax. After Wayfair, companies have been freed from not being able to have employees present in the state—it must collect sales tax in any event so long as they meet the sales threshold. This gives companies the flexibility to hire the best person for the job—no matter where they choose to live, as long as they can perform their duties remotely.

The reason this silver lining is not very bright for many Florida based businesses involves state income tax. If a company has employees working in another state remotely from their homes, that might trigger a state income tax obligation as well. This would be the case for a business based in any other state, but it would eliminate one of the great tax advantages afforded to businesses in the Sunshine State—Florida does not impose an income tax on pass-through entities (such as LLCs, partnerships and Subchapter S corporations) or their owners. Why does this make a difference when it comes to having to pay income tax to another state? If a company (or its owners) pays income tax to another state, the company (or its owners) is allowed a credit on its home state income tax return for the tax paid to the other state.  Therefore, for a business in a state that imposes an income tax on individuals and entities, the taxes due to the other state are offset by the credit allowed by their home state. However, since Florida does not impose a tax on individuals or pass-through entities, the income tax paid to another state saves them no Florida tax—the full amount of income tax due to the other state is an additional out-of-pocket tax cost that would not have been due if the Florida company did not have an employee working from home in the other state.

There is a federal law (P.L. 86-272) that allows limited employee activity in another state without triggering an income tax obligation there, but it would be of very limited use to many companies. P.L. 86-272 does not allow a state to impose its income tax on a company that sells tangible personal property if the company's only presence in the state is a sales representative whose only activity is to solicit sales.

States have interpreted P.L. 86-272 very narrowly, saying that it does not protect a company from income tax obligations in three different common situations.

• States say that P.L. 86-272 does not apply if the sales representative does anything other than merely solicit sales. For example, if the sales representative trains its customer on use of the product, makes repairs to or exchanges the product, stocks the customer's shelves with the products or collects accounts receivables, then the state says these activities exceed mere solicitation of sales, and the company is subject to its income tax.  As a result, PL. 86-272 will not protect the company from state income tax exposure if the employee performs any duties other than soliciting sales.
• States say P.L. 86-272 only protects companies that sell tangible personal property, not services such as cloud computing (although there is an argument that P.L. 86-272 protects a service-oriented business too, but states will dispute that).
• L. 86-272 only protects companies from state income taxes. States which impose a tax on gross receipts, including Ohio, Washington, and Texas say that P.L. 86-272 does not apply to them since a tax on gross receipts is not a tax on net income. Furthermore, some states (including New York and New Jersey) take the position that P.L. 86-272 does not protect a company from the corporate minimum or alternative tax. Because of these limitations, the potential protection afforded by P.L. 86-272 to a Florida based business would be easily defeated in many situations, so that an employee, present in the state would result in the company being subject to income tax.

Some states are taking very aggressive positions that many remote activities conducted over the internet would trigger an income tax obligation even if there no employees there. For example, some states are staking out positions that interactive applications or the presence of a company's cookies on customers' computers and devices will trigger income tax (for example, Massachusetts). If these aggressive positions are upheld in the courts, then it might not make a difference if a company allows employees to work remotely in other states; however, for the time being, a Florida based business which is structured as a pass-through entity should be wary of allowing employees to work remotely in another state to avoid state income tax obligations.

Greenberg Traurig shareholder Marvin A. Kirsner focuses his practice on corporate, transactional, and industry specific tax issues. He serves as the co-chair of the State and Local Tax (SALT) Practice.