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The Tax Issues Facing Tax-Exempt Organizations

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: nonprofit niche. People may not always associate tax policy with nonprofits, largely because we call them tax-exempt organizations. Maybe it comes to mind when you're donating to a group because you may be able to claim a tax deduction. But tax laws and policy at the federal, state, and local level can have a profound impact on the nonprofit sector, even more so during times of crisis like a global pandemic. Here to talk more about this is Tax Notes chief correspondent Fred Stokeld. Fred, welcome to the podcast.

Fred Stokeld: Thank you, David. I'm happy to be here.

David Stewart: Now I understand you've been covering the nonprofit sector at Tax Notes for quite some time.

Fred Stokeld: That's right, David. I came to Tax Analysts in 1993. In 1994 the editor of the Exempt Organization Tax Review, a Tax Analysts publication, asked me if I'd like to write about nonprofit tax issues, and I agreed.

David Stewart: Now you recently spoke with someone about this area. Can you tell me about your guest and what you talked about?

Fred Stokeld: Certainly. I recently interviewed David Thompson, vice president of public policy at the National Council of Nonprofits, about current tax policy developments and proposals affecting charities and other types of tax-exempt organizations.

David Stewart: All right. Let's go to that interview.

Fred Stokeld: I'm here today talking with David Thompson, vice president of public policy at the National Council of Nonprofits.

David Thompson: Hi, Fred. Thanks for having me.

Fred Stokeld: My pleasure. In general, nonprofits are tax-exempt organizations. So why does the National Council of Nonprofits care so much about tax policy?

David Thompson: Oh what a great question, Fred. I heard that on a webinar just yesterday of nonprofit people, nonprofits saying, "Well, we're, tax exempt." That exact question. "Why are we talking tax?" We even asked the Council of Nonprofits and we charitable nonprofits are affected by tax policy at all levels of government and all branches of government.

Let me give you some examples. [At] the local level, all the property owned by charitable nonprofits used for that purpose is exempt from property taxes throughout the country. But a lot of city council members don't get that memo and then try to tax the property owned by charitable nonprofits, or they try to impose fees that are actually taxes or demand "voluntary payments in lieu of taxes."

Just Pennsylvania alone has 5,000 jurisdictions. So you could see that that's a big issue across the country or can be. Every state every year is tinkering with its tax laws. Tax exemptions are not immune from that annual tinkering. So states are regularly looking at expanding or increasing the exemption for income tax, property tax, sales and use taxes as well as dealing with the unemployment taxes that nonprofits pay. So that's at the state level.

Then at the federal level, each branch of government is active every day in the tax policy world relating to tax-exempt nonprofits. Just last week we filed an amicus brief in the U.S. Supreme Court dealing with the big case involving the Schedule B schedule of contributors that the attorney general of California is requiring charitable nonprofits to file. That's the judicial branch. [In the] executive branch, we're regularly involved in filing comments, public comments with the IRS on things like regulations on the unrelated business income tax for silos, which was a big deal from the 2017 tax law. That's the executive branch.

And then legislatively, last year was a very big and active year for charitable nonprofits. There's a phrase that has been used that some of those beautiful words in the English language: refundable payroll tax credit. That's something that benefits charitable nonprofits that benefits everyone else, but it was invented to help charitable nonprofits. We don't pay income tax, so an income tax credit doesn't do us any good. We do pay payroll taxes. So Congress in the Families First Act with the paid leave mandate or in the CARES Act or the employee retention tax credit created the refundable payroll tax credit to help nonprofits and everyone else. So that's all branches and all levels of government dealing with nonprofits in one way or another.

Fred Stokeld: Thank you. So let's talk about the COVID-19 pandemic. How has the pandemic in the past year affected nonprofits?

David Thompson: I'd say the pandemic has affected nonprofits exactly like every for-profit business and worse. I say it sounds flippant, but the reality is charitable nonprofits were forced to shut down whether it's the thrift shop that nonprofits run, whether it's the in-school programs they provide. All of those things were shut down, just like restaurants, just like performance venues and everything else. And nonprofits still have their mission to continue. Children still needed to be fed. Homeless people still needed to be found and brought to shelters. Shelters needed to be run. So nonprofits had to keep operating. They couldn't hunker down, hibernate, and wait out the pandemic. So our costs went up.

Here's a classic example. The food bank of Los Angeles used to operate with 120 volunteers. All those volunteers, mostly older people, could not perform anymore, could not come to work anymore. So the food bank had to hire 120 people. It was unemployed people who got jobs, which is a good thing, but the cost went up exponentially. Donations probably went up, but probably not enough to cover those 120 employees plus all the other expenses [like] PPE. So nonprofits had to continue operating, had to experience or undergo the increased costs, and at the same time, donations never kept up.

Fred Stokeld: Has Congress passed any tax policies during the past year to help charities and other nonprofits cope with the economic difficulties caused by the pandemic? I think you touched on this a few minutes ago.

David Thompson: Absolutely. I'm going to say it again: The refundable payroll tax credit. I hear the angels singing, whenever that phrase is uttered. Both the Families First Act and the CARES Act extended in the year-end COVID bill, extended in the American Rescue Plan. Each includes some form of improvement on the refundable payroll tax credit. That's a good thing. That was important. Also unemployment insurance. That's a tax policy issue because it's usually run through state tax bureaus and so forth.

Why that matters is that there's usually an unemployment tax on employers at the federal level. Congress created both a funding system through Treasury and the Department of Labor to help employers make sure they weren't having to pay the increased costs for unemployment at least for last year. And they covered it for a group called reimbursing employers — those who opt out of the state system, but still have to pay the cost. Charitable nonprofits, local governments, tribal governments can opt out. It's a tax issue in that the federal government covered part of those costs. But those entities, nonprofits that I'm concerned about, had to pay tremendous amounts of money. Congress helped, but not enough.

The refundable tax credit, also the ability to delay payment of the payroll taxes, was another provision. So there were a number of issues. The very good news is that nonprofits were top of mind throughout the process. We didn't get everything we wanted and we're still pushing for more, but those are some of the tax issues that helped nonprofits continue operating.

Fred Stokeld: Turning to the states, the American Rescue Plan Act prohibits state and local governments from using COVID-19 relief funds provided by the act for tax relief. Now more than 20 states are speaking out against the prohibition, and Ohio has filed a lawsuit to overturn the ban. David, what is your take on this?

David Thompson: Two-fold. This is the $350 billion provided to the states and local governments through the American Rescue Plan Act. In there, you're asking about the limitation, but let me talk about the invitation first. The statute expressly says that state and local governments can use this money to spend with nonprofits through grants, through unemployment, through a variety of programs. So that's the good news. That's the "Ye high!" We're thrilled with that part of the statute.

The guardrail, the provision that says states cannot use this money for tax cuts. In most cases, it is being litigated. I think there are 16 lawsuits that have been filed, or 16 states are litigating. As you said, 20 states are raising objections. And at some point the Treasury Department, Secretary Yellen has said the Treasury Department will be issuing guidance to narrow the areas of challenge. For nonprofits, a very big question, an outstanding question is can the states use this money to pay down the debt they owe on unemployment insurance? The debt they owe to the Treasury Department?

Lots of states have hundreds of millions of dollars in debt to the Labor Department. Can they pay that down? One would hope. But what if they put the money to plus up their trust fund? So there was no longer a deficit in the state unemployment trust fund. Most states have an automatic tax hike when the trust fund goes below a certain amount. If they use the money to fill up, remove the deficit in the trust fund, that will defer or eliminate a tax hike, which might trigger the law.

We've asked the people who literally wrote the language of the bill — does it apply? And nobody knows the answer yet. That's a huge issue because nonprofits that contribute to the unemployment system are on the hook. They're waiting to know whether they're going to have to pay 50 percent increase in their unemployment tax, 100 percent — Massachusetts is threatening a 100 percent increase in the unemployment tax. So this is a major issue. We hope it's resolved cleanly because I don't think anyone wants to hurt employers, but it's an issue that's out there that's causing consternation.

Fred Stokeld: You mentioned a few minutes ago, David, that a number of states are considering legislation to limit the nonprofit property tax exemptions by imposing fees or payments in lieu of taxes. I understand this is not something the nonprofit sector supports. In your opinion, why would states want to go this route? And what are the National Council of Nonprofits and other nonprofit representatives doing in response?

David Thompson: Wow. Lots of parts to that question. Let me address them. States, as I said, are always tinkering with their tax laws and it's also local governments as well if they can. Why would they do it? For two reasons. They see nonprofits as a pot of money. And the whole point of tax policy is to find pots of money and tax it. We don't take that personally.

We do take personally that there's the reality that charitable nonprofits do not engage in partisan election-related activities. We don't run candidates against people who pass bad laws. We can't do it. And we think that's the way the law should be. So sometimes they think of nonprofits as an easy mark, that we can go after nonprofits because they can't fight back. Or, and this is frequently the case because well, these eds and meds aren't popular. Higher education — eds, meds — big hospitals that take up a lot of property in communities.

They're big and politicians think they can go after big. We've seen this in Connecticut regularly that they target the salaries of executives. And if they pay a salary over a certain amount, they will try to curb the property tax exemption. But we've seen it in Montana and Nebraska and Nevada and elsewhere around the country. It's a bit of a populist angle. What we're doing is highlighting the challenges.

I should add, not just legislative. It's also tax auditors, tax officials who run for elections of the state tax person, sometimes as a politician. So they see finding new money so that we don't have to raise property taxes on residences type of thing. So it's politics. I don't want to say it's smart politics. I don't want to encourage it. What we're doing is first highlighting that the truism, the reason nonprofits are exempt from property taxes, is that we provide more to the community than the taxes ever would.

Our argument when the state or local government official says, "We have a budget hole so we need your money." Our answer is always, "Your budget hole is smaller already because of the nonprofits in the community." If you have a museum, you're bringing in tourism. Spend money elsewhere and generate more tax revenue. Nobody wants to live in a town that doesn't have a hospital. And the towns that do have higher education usually have higher property values and so forth.

So nonprofits always provide the benefit greater benefit than the tax exemption itself. So first off is the rationale reminding them why nonprofits are exempt in the first place. And then we push back. We demonstrate that nonprofits contribute more to the community, that we earn our tax exempt status every day. It's an opportunity for a conversation. And we always point out the solution you're seeking is money. Nonprofits are in the community.

The negative part of the message is we were here before you were elected, and we'll be here after you're elected, so you should listen to us instead of trying to bash us. The positive side is we know the problems in the community. Instead of taxing nonprofits and then building a community pool, why don't you work with us to build a community pool together? For every challenge in a community, nonprofits are probably already on the ground working on it and working through it.

And the best example of interaction I know is in Memphis. The mayor of Shelby County, a man named Lee Harris, has created a nonprofits collaborative where they identify the local problems and then they've identified what nonprofits are already doing that the city or the county can promote, take advantage of, so that no one is overspending, or reducing duplication. And they're providing positive solutions. Amplify that throughout the country. And I'd like to say that's what we're doing.

Fred Stokeld: Looking ahead, what federal and state tax policies would you like to see passed to help charities and other nonprofits cope with the pandemic and other challenges?

David Thompson: Well, as I've said, we really like the employee retention tax credit and we like the improvements to it. So Congress has already stepped up at the end of last year and this year. So that's good news there. Additional things: we need unemployment relief going forward. I still see that as a tax policy.

And charitable giving incentives are needed very much so. The 2017 tax law doubled the standard deduction. That was done not to smite nonprofits. That was done to reduce the burden of tax preparation. [That] made perfect sense. An unintended consequence was that the number of people who itemize shrank from 30 percent of taxpayers down to 10, and that means that only 10 percent of taxpayers — now federal taxpayers — get an incentive for giving to charitable nonprofits. If you don't itemize, you don't get an incentive. So let's come back to the universal charitable deduction.

There are other things that Congress can be doing. A few years ago, Congress made permanent the IRA charitable rollover. That was a very good benefit for those age 70.5 can roll money over without it suffering a tax consequence, roll money over from their IRA to charitable nonprofits. There are lots of ideas for improving that. Maybe rolling it over into charitable remainder trusts to generate some income and so forth, or to lower the age and expand who can take advantage of that incentive. And there are lots of other incentives. But the universal charitable deduction is probably the big kahuna among the tax policy issues.

Fred Stokeld: Universal charitable deduction. That is when it makes it available, the deduction available to nonitemizers. Do you think the economic downturn caused by the pandemic will improve the chances of enacting legislation to enhance the charitable deduction for nonitemizers?

David Thompson: I pause only because no one has an accurate crystal ball anymore. The pandemic has changed everything. Fascinating news about the universal charitable deduction is that the support for it is genuinely bipartisan from across the political spectrum. In the Senate, there's a bill introduced. The name of it is the Universal Giving Pandemic Response and Recovery Act. And I know how we tax people love nicknames so it's the UGPRRA.

UGPRRA has tremendous bipartisan support from across the political spectrum. Sen. Catherine Cortez Masto, D-Nev., Sen. James Lankford, R-Okla., Sen. Mike Lee, R-Utah, as well as Sen. Chris Coons, D-Conn., and Sen. Amy Klobuchar, D-Minn. — I'm throwing out these names, these are people all over the political spectrum support expanding charitable giving for nonprofits. When it's truly bipartisan, old rule was well that means things are pretty good. That ups the ante or the improves the chances. Right now if we go with a budget reconciliation approach where it's only Democrats this time as opposed to the 2017 tax law that was only Republicans, I don't know if that helps or hurts. We just don't know.

The good news is that support for the universal charitable deduction is improving. It's consistently improved since 2017. Before the 2017 tax law that doubled the standard deduction there was bipartisan support for a universal deduction of some form. That's continued to grow through the congresses after the 2017 tax law. And right now it was just in mid-March that the new bills were reintroduced. The current version, the most popular version would provide the universal charitable deduction of a third of the standard deduction. So about $4,000 for an individual and $8,000 for a couple.

This is building on the progress on the universal charitable deduction that was enacted in the CARES Act. You will recall the CARES Act in 2020 created a $300 deduction. So the first $300 that someone donated they could take off on their taxes even though they take the standard deduction. That was only good for 2020.

The end-of-the-year tax law said that for 2021, it's $300 for an individual or $600 for a couple. And that's for 2021. So we're making progress. Can we jump up to $4,000 for 2022? I don't know yet, but we're working on it. And the good news from the nonprofit perspective is that everybody in the nonprofit community supports this. Every charitable nonprofit will accept charitable donations. Some rely on them more than others, but across the breadth of the nonprofit community, this is a popular proposal.

And we've discovered during — we've known all along, but we've discovered or relearned — the lesson that grassroots really matters. My network is upstate associations and nonprofits across the country are heavily engaged in promoting this. They're doing Zoom calls with senators, with representatives, and this is always the number one issue. So I'd say in a regular year maybe not. This year it could generally happen. Now we may need for bipartisanship to break out, which we haven't seen in a while, but it could happen.

Fred Stokeld: Let's switch gears a bit. In January the National Council of Nonprofits asked the IRS to replace form 1023-EZ with an exemption application that would seek more information from applicants and thereby stop undeserving organizations from obtaining tax-exempt status. Have you received a response from the IRS?

David Thompson: We have not. What you're asking about is the 1023-EZ. To sum up the Form 1023 in one word, I'd say an abomination. Perhaps a little background would help. Historically the IRS relied on the Form 1023 for applications for tax-exempt status. It's a 10-page form. It was an endurance contest. It was painful, but by the time an individual or a group of people completed the 1023, they knew how to run a nonprofit. They knew what the rules are, what was expected of them. They had had to do their due diligence and learn how to be a contributing member of the nonprofit society. This is not an elitism. This is, "We need people to following the rules because we rely on the public trust of charitable nonprofits."

We had the kerfuffle, the scandal involving the IRS that they allegedly were targeting conservative groups using the 1023-EZ to weed out conservative applicants. The fact didn't quite live up to the myth, but that created a problem. The IRS needed to deal with a backlog of applicants. The Citizens United case, going back to 2010, opened the floodgates to money in politics. And people quickly discovered that if we're giving money through a non-charitable nonprofit, a 501c(4) social welfare organization, we can still do politics and we can keep our donors secret. So there are c(3)s and c(4)s all getting a lot more attention. So there was a groundswell of new applicants for tax-exempt status, 501c(3) and 501c(4).

The IRS discovered they had to do something so they came up with a short form. Most of us think the short form for smaller organizations is a decent idea, but they went way too far. As I was thinking about it the other day, it occurred to me with baseball season starting that in the old days you had to have an actual ticket to get into the Washington Nationals stadium. Now you can just wave a piece of paper the right color and get through the ticket gates, and then you're in. And then you can be a legitimate, honorable nonprofit, or you can be a bunch of bad actors. But the IRS didn't catch you at the gate. That's important because public trust is important.

And this is not just me saying bad actors came in. The taxpayer advocate has regularly said that people not eligible for tax-exempt status, organizations not eligible were getting through the system. It ranged from, based on their audits, from 26 percent to 46 percent. Nearly half of the applicants they studied, that they audited did not qualify for tax-exempt status and the IRS should not have approved them.

That's a serious problem for the charitable nonprofit community. And it's a problem for state law enforcement as well. We all know IRS has mostly abdicated its enforcement of the tax exempt field. They're not going after bad actors nearly enough. That means that the state law enforcement officials, the attorneys general of the state, charities officials have it as their job to weed out the bad actors. And that puts more burdens on them. By bad actors, we mean charitable nonprofits that are created to promote private inurement. And for donors to dictate that their nieces and nephews get scholarships to various colleges, or they use the money to engage in partisan election-related activities, things that are taboo and should not be allowed.

That last example, donors dictating that a nonprofit engaged in partisan election-related activity. They're engaging in politics. They're pushing their political will and they're getting a tax deduction for it. That's all wrong. So we need law enforcement, federal level. We strongly support more money for the IRS to enforce the law of tax-exempt and government entities. And we need state government to have the tools they need to enforce the law. It's important because if the public doesn't trust charitable nonprofits, they're not going to donate their time and money.

Regularly, we see local newspapers using the word political nonprofits. Those aren't charitable nonprofits. Those are c(4)s, c(5)s, chambers of commerce, and so forth. The public, when they think political nonprofits, they think disgust. They don't want anything to do with us. We have to be vigilant. We, the National Council of Nonprofits and all charitable nonprofits, have to be vigilant to set the record straight, and we need law enforcement to help in that.

Fred Stokeld: Finally, another thing we're keeping an eye on is that in a few weeks, and I think you mentioned this a few minutes ago, the U.S. Supreme Court will hear arguments on whether states can require charities to disclose the identities of their donors to straight regulators on the IRS Form 990 Schedule B. Where do you stand on this issue? Where does the National Council of Nonprofits stand on the issue? And what do you expect to see from oral arguments?

David Thompson: We the National Council of Nonprofits are in the controversial and unenviable position of being in the middle in the center of the firing squad. We take the unpopular view that the interests of the charitable nonprofit community are more important than — 80 amicus briefs have been filed in this case. We filed one of them. There are plenty who were saying the freedom of assembly of donors is sacred. Actually that's never been ruled by the U.S. Supreme Court. We see law enforcement saying that their rights and powers should be unfettered. They probably overstate that as well.

Our position is public disclosure of donors is a bridge too far. We and all charitable nonprofits are adamantly opposed to public disclosure of donors. But there's a lot of confusion on that. Lot of the briefs that we've read in the Supreme Court keep talking about public disclosure of donors, which is not an issue before the Court. It's a red herring that's used to scare people.

The actual issue before the court is: can the attorney general require disclosure on a confidential non-public basis of the schedule B schedule of contributors? This is the exact same form that the IRS demands. So the burden on a nonprofit to file it at the state level is to create a PDF and attach it to whatever private, confidential disclosure they make to the state government. Our view, as I've already said, is that law enforcement is a critical partner of nonprofits in preserving public trust. As long as there's no shenanigans, there's no tracking down looking up who the donors are and then exerting political pressure against them, this should absolutely be allowed because law enforcement needs the tools. We see it also as a deterrent by requiring the Schedule B — and let me reiterate the federal government, the IRS is not adequately enforcing the law, but the states are.

The states have a preexisting duty back to common law before there was a republic. Attorneys general had the duty to enforce the law, to create and enforce the law governing trusts, which is what charitable nonprofits are. So the states have their own authority and we need them to be weeding out the bad actors. The filing of requirement of the Schedule B is a flag. It's a deterrent. If you know that it's being filed with the state regulators, you're less likely to engage in shenanigans. You're less likely to go into that state and do bad acts. So we see it as a deterrent. We don't think it's unfettered, but as long as it's confidential and protected information that only law enforcement people can use for law enforcement purposes, it's not an issue of donor privacy or donor rights. It's an issue of law enforcement because the purpose of the law isn't to create tax breaks for donors.

The purpose of charitable nonprofits is to advance their mission. Tax law supports the ability of nonprofits to advance their mission, and they can't do it without public trust. So all of these issues come together to support. If it supports public trust, we're for it. If it violates public trust, we're going to get engaged on behalf of the charitable community against all-comers trying to tarnish the community.

Fred Stokeld: Well, David, this has been a very good discussion and I appreciate your time. Before we wrap up, is there any final thoughts you'd like to share?

David Thompson: Only that charitable nonprofits are engaged in their communities at all levels, which I said at the outset. And we work closely — we only accomplish our missions by working — we need support of the legal profession to keep an eye out, to identify opportunities. We need government officials, the readers of Tax Notes, to know that nonprofits are problem solvers in the communities and that the vast majority are engaged in problem solving. What can governments do to work with us?

One final point is the vast majority of charitable nonprofits are small. Eighty-eight percent have budgets of $500 million. Ninety-two percent have budgets of $1 million or revenues of $1 million or less. So most nonprofits are small. People will think of a hospital or a national name brand nonprofit, but most of the work of nonprofits occurs in communities by smaller organizations. Sometimes volunteers only, and policy ideas that are thrown out may be targeting a big nonprofit, but the impact can be devastating to the smaller nonprofits. And the point is, don't do it. The point is reach out to nonprofits. We engage with government. We engage with the for-profit community every day, and we're all about problem solving. So give us a call.

Fred Stokeld: David, it has been a pleasure talking with you today. Thank you very much for your time.

David Thompson: Hey Fred, thank you. And thank you for all the articles you write. This is very helpful to all of us.

David Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Janelle Julien. Janelle, what will you have for us?

Janelle Julien: Thanks, Dave. In Tax Notes Federal, Jessica Jay argues that the IRS should not disqualify an easement simply because it includes an amendment clause. Kenneth Brewer and Albert Liguori examine when using captive insurance companies for the purpose of insuring against tax risk makes sense. In Tax Notes International, Lewis Greenwald and Gianluca Mazzoni review the recently proposed U.S. cloud regulations. Samantha Keleher proposes applying blockchain technology to tax-exempt organizations to monitor and prevent financial crimes. On the Opinions page, Roxanne Bland examines the balancing of interests required by courts reviewing tribal and state sovereignty in tax matters. Marie Sapirie discusses Emmanuel Saez and Gabriel Zucman’s proposal for indirectly increasing the federal minimum wage as a refundable tax credit to employees and payroll tax on employers. And now, for a closer look at what’s new and noteworthy in our magazines, here is Tax Notes State Editor in Chief Jéanne Rauch-Zender.

Jéanne Rauch-Zender: Thank you, Janelle. I'm here with Brian Hamer, counsel with the Multistate Tax Commission, and we're going to discuss his Tax Notes State article "An Insider's View of the MTCs P.L. 86-272 Project." Welcome to the podcast, Brian.

Brian Hamer: Thank you, Jéanne. It's a pleasure to be here.

Jéanne Rauch-Zender: To begin, Can you tell us a little about your article?

Brain Hamer: I would be happy to. Most broadly, my article addresses the application of P.L. 86-272 to the modern business world, most notably business activities conducted via the internet. P.L. 86-272 as I'm sure many of listeners know is a federal statute passed in 1959 that prohibits a state from imposing income tax on an out-of-state business if the only activity the business conducts within the state is the solicitation of orders for tangible personal property.

I originally thought that the topic, which became the subject of my article, would not attract much attention or interest. I was wrong. Many public sector and private sector tax professionals have taken a great deal of interest in the subject. There have been numerous panels and numerous articles written, including a number of articles in your magazine.

Jéanne Rauch-Zender: Agreed, Brian. This is a very, very interesting, intriguing topic. In your article you write, "It's been more than six decades since Congress enacted PL 86-272. Since then, how business is conducted has changed significantly. In light of these changes, Congress is free to update its handiwork, but until it does states must comply with the statute as enacted in 1959. The P.L. 86-272 work group has set forth a compelling framework that states can use to apply the statute to modern business activities." Would you share with us why the work group updated the commission's state of information and briefly address this new framework?

Brian Hamer: Absolutely. So let me note that the MTC first adapted its statement of information back in 1986 to provide guidance to taxpayers and how signatory states and the commission itself would interpret Public Law 86-272. As many may know the statement has been revised on a number of occasions, but its most recent revision was in 2001, which incredibly was 20 years ago. And since then, the world has changed in some significant ways, particularly the way business is done. And particularly, most importantly, the fact that the internet has come to the business world.

So the uniformity committee of the MTC decided that it was appropriate to take another look at the statement and to update it to address the world we live in today. The uniformity committee appointed a work group. The work group consisted of representatives from a dozen states. And over the course of 23 meetings, the work group considered how best to interpret the statute in the light of developments in the business world.

So that's where we are. The work group gave the subject a great deal of thought. Most significantly the work group concluded that when a business interacts with a customer via the business's website, the businesses engages in a business activity within the customer's state. And if those activities extend beyond solicitation, then the business may generally be taxed by the customer state under the statute.

As I think you know, Jéanne, the proposed changes to the statement were subject to a public hearing and they will be considered by the commission later this year. So I thought it was important to write about what the commission had done or what the work group had done, explain their thinking, and address some of the criticisms that have been raised by observers in response to the work group's work.

Let me give an example. Some observers have argued that Public Law 86-272 permits states to impose income tax on a seller that engages in unprotected activities only if the seller has a physical presence in the taxing states. And of course, internet sellers often don't have a traditional physical presence in the states where their customers are located.

I explain in the article that the statute does not require a physical presence and that in fact, back in 1959, when Congress enacted the statute, it rejected various alternative, pieces of legislation that would have required the seller to have some form of physical presence. So there you have it.

Jéanne Rauch-Zender: I agree. Very helpful insight, Brian. I really appreciate that. One final question. Where can listeners find you online?

Brian Hamer: Probably the best way to contact me is through email at bhamer@mtc.gov.

Jéanne Rauch-Zender: Thank you for joining me today, Brian. It's been a real pleasure.

Brian Hamer: Jéanne, it's always a pleasure to talk to you. And I have to say I love writing for Tax Notes State and look forward to publishing more articles in the future.

Jéanne Rauch-Zender: I look forward to receiving them and publish them as well, and working together, Brian. You can find Brian's article online at taxnotes.com and be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussions on what's new and noteworthy in Tax Notes. Again, that's Tax Analysts with an S. Back to you, Dave.

David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk

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