Guest Article: Understanding SALT (State and Local Taxes)

Inez Mello, Director of Sates and Local Taxes at CCR LLP, discusses the implications that State and Local Taxes (SALT) can have on businesses.


Understanding SALT (State and Local Taxes)

As states seek additional sources of revenue, the boundaries of how far they can extend their ability to legally tax are being stretched. Virtually every state imposes its own version of an income, franchise, or privilege tax. While state tax audit activity is increasing at every level and for every state tax, taxing authorities are also escalating their efforts to identify companies that are not compliant. Meanwhile, being compliant with State and Local Taxes (SALT) becomes more challenging in a difficult economy.  Companies need to identify their state and local tax filing obligations and file the appropriate returns.

One of the greatest assets to any multi-state entity is awareness of where they have a multi-state tax filing requirement. Nexus describes the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on a corporation. The measure of the relationship that is necessary to create nexus is defined by state statute, case law, the Due Process Clause, and the Commerce Clause of the U.S. Constitution. Typically, sufficient nexus for income tax purposes is present when a corporation uses its own or leased property in the state or employs personnel in the state, yet state taxation is so specialized that there are various areas of uncertainty and exceptions.

For example, cloud computing is one of the hottest topics in the multi-state tax arena today. Wikipedia defines cloud computing as a service rather than a product, whereby shared resources, software and information are provided to computers and other devices as a utility (like the electricity grid) over a network (typically the Internet). Despite cloud offerings being couched in terms of a “service”, such as infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS), it is necessary to examine each contract to determine what is truly being provided and whether nexus is established.

Public Law 86-272 (P.L. 86-272) was enacted by Congress in 1959 to limit a state’s ability to tax interstate activities. Although Public Law 86-272 provides significant protection for a multi-state business, it has the following important limitations:

1.      Applies only to taxes imposed on net income and provides no protection against the imposition of:


Ø  Sale and Use Taxes

Ø  Property Taxes

Ø  Gross Receipts Taxes (e.g., Ohio Commercial Activity Tax, Washington Business & Occupation Tax)

Ø  Corporate Franchise Taxes on Net Worth or Capital


2.      Public Law 86-272 protects only sales (solicitation) of tangible personal property.  It does not protect activities such as:

Ø  Leasing tangible personal property

Ø  Selling services

Ø  Selling or leasing real estate

Ø  Selling or licensing intangibles

Although solicitation activities are the crux of P.L. 86-272, it was never defined in the law, thus creating much uncertainty. Fortunately, the term was addressed by the U.S. Supreme Court’s 1992 Wrigley decision. Wisconsin Department of Revenue v. Wrigley, Jr. Co. (June 19, 1992) provides guidance in interpreting solicitation. The decision does not replace P.L. 86-272, but merely expands its intent regarding income tax nexus within a state through sales activity only. All other requirements of P.L. 86-272 still apply.

In the Wrigley decision, the U.S. Supreme Court ruled that solicitation is: speech or conduct that implicitly or explicitly invites an order or the activities must be entirely ancillary to requests for an order. 

Ancillary activities are those activities which serve no other business purpose, apart from the solicitation of orders. Ancillary activities mainly offer support and assistance, and protection will generally be extended to any salesperson’s activities which specifically invite orders (pre-sales activities). However, other post-sale activities performed by salespeople, unrelated to sales request, are not protected.  These non-immune activities are activities which the employer will otherwise perform, but are not assigned to salespeople as a convenience to the employers (i.e. deliveries or pickups, collecting delinquent accounts, etc.)

Wrigley also established limited protection to de minimis, non-solicitation activities.  Non-solicitation activities are de minimis only, which when taken together, establish a trivial additional presence.  Any continuous or regularly established company location will not be considered trivial.


SALT problems are somewhat like hypertension – they become increasingly serious if unattended. State and Local Taxes are a significant cost of doing business, but they can be managed like any other expense.

To see how your organization’s SALT policies hold up, take the State and Local Taxes Quiz.

To learn about common SALT problems, attend an event about SALT on October 18th at CCR’s Westborough office.

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