5 Key Takeaways | State and Local Tax Risk and Opportunities

Why It Matters

The trends increase exposure to state tax liabilities and demand more sophisticated planning, affecting profitability and operational decisions for companies operating across state lines.

Key Takeaways

• Courts narrow Public Law 86‑272 for internet and data‑gathering activities
• Post‑Wayfair cases expand marketplace facilitator liability for remote sellers
• New York’s “convenience of employer” rule taxes nonresident remote workers
• California permits alternative apportionment formulas after recent sourcing disputes
• ITFA shields cloud; states test taxes on digital ads, AI

Pulse Analysis

The erosion of Public Law 86‑272 protection is reshaping how out‑of‑state sellers conduct internet‑based activities. Recent rulings in Minnesota and Wisconsin demonstrate that even limited market‑data collection can trigger state tax obligations, prompting businesses to reassess nexus strategies and contract structures. Coupled with the wave of post‑Wayfair litigation, companies must now evaluate both pre‑ and post‑Wayfair exposure, especially as states expand marketplace‑facilitator definitions to capture early‑stage sales activities.

Remote‑work arrangements have become a focal point for state revenue offices. New York’s “convenience of the employer” rule, upheld in the Zelinsky case, extends income‑tax liability to nonresident employees working from home, while other jurisdictions are watching closely. Simultaneously, California’s apportionment reforms—allowing alternative formulas after the Microsoft and Smithfield decisions—highlight a broader push for fairer allocation of multistate income. Tax professionals are advised to model various apportionment scenarios and document employee work locations to mitigate audit risk.

The digital economy introduces another layer of complexity. The Internet Tax Freedom Act continues to preempt taxes on broadband and cloud services, yet states are testing the limits with levies on digital advertising and emerging AI chatbot offerings. Recent rulings in Indiana and Illinois suggest a tentative exemption for AI services, but the regulatory landscape remains fluid. Companies leveraging AI or digital platforms should monitor state proposals closely and consider structuring contracts to align with prevailing ITFA interpretations.