Bloomberg Tax
Dec. 19, 2022, 9:45 AM

From Crypto to Sales Taxes, a Look at State Taxation for 2023

Gary Bingel
Gary Bingel
EisnerAmper LLP

While nothing is guaranteed, when I look ahead to 2023, there are some interesting things I expect to see in the world of state and local taxation.

Nexus and Apportionment

The major income tax developments should be more of the same: nexus and apportionment, including revenue sourcing. Taxpayers probably will continue to struggle with the Multistate Tax Commission’s new interpretation of P.L. 86-272 and its application to internet activities.

Internet activities that are unprotected under this new interpretation are wide-reaching and affect taxpayers who have an online presence, which includes just about every business.

While California and New York have provided some guidance regarding their adoption of these new provisions, the “how” and “when” are still vague. Other states are still grappling with whether to adopt these new provisions, leaving taxpayers (and their advisers) guessing. Additional states will come out with guidance stating how—and hopefully when—they will follow the MTC’s new interpretation, with most stating that they will follow it prospectively as written.

While market-sourcing for services and intangibles is nothing new, there are still some areas of apportionment where I expect to see more guidance and/or litigation. One area is the appropriateness of “looking through” to your customer’s customer when determining the relevant market, especially when a business may lack the information to do so. Both taxpayers and state tax authorities continue to struggle with determining when and how a customer’s customer approach should be used. States seem to be moving toward this approach through regulation. As such, we should see additional litigation here in 2023.

Pass-Through Entities

There were two significant cases of sourcing gains from the sale of interests in pass-through entities in 2022. One was a taxpayer win (VAS Holdings & Investments LLC v. Commissioner of Revenue), and the other a taxpayer loss (2009 Metropoulos Family Trust v. California Franchise Tax Board).

With the prevalence of pass-through entities as investment vehicles, significant money at issue, and the lack of clear guidance, this is an area that sees a great deal of both planning and audits. Next year, we’ll see additional guidance, conflicts, and litigation as states run low on Covid-19 relief funds and taxpayers withdraw some of their investments.


Perhaps the biggest state income tax area where additional guidance is needed, and thus where I expect to see at least some form of informal direction given, is that of non-fungible tokens and cryptocurrencies, including the sourcing of income and gains therefrom.

The current guidance is sparse at best, leaving taxpayers and taxing authorities trying to shoehorn income from these esoteric types of assets into historical guidance. For instance, to the extent income from the sale of cryptocurrencies and NFTs fall under the provisions for market sourcing, how do you determine your market when you may not know who the buyer is? These anomalies leave tax advisers to balance a common-sense approach with their clients’ needs and best interests.

Sales Tax

I expect additional sales tax developments in 2023, some of which mirror those in the income tax area. While income tax advisers and taxpayers struggle with whether nexus is created due to internet activities, their sales tax brethren struggle with nexus issues surrounding ecommerce—especially the presence of inventory at third-party warehouses such as those run by Inc.

In 2022, California continued to impose nexus on sellers due to the presence of inventory at third-party warehouses, while a Pennsylvania court found that merely having inventory at such a facility was not sufficient to create nexus. Pennsylvania, deciding not to appeal this finding, has an economic nexus threshold for sales tax of $100,000. Thus, if a seller exceeds this threshold in the state, they have nexus regardless of whether they have inventory. Pennsylvania also has marketplace facilitator provisions requiring companies to collect taxes on sales made on their platforms. As such, the potential number of taxpayers and revenue lost by this decision may be relatively small.

We saw a similar process in many states in the months following the South Dakota v. Wayfair decision, when states eliminated their transaction threshold after finding that many taxpayers were remitting inconsequential amounts of tax despite meeting the minimum number of transactions needed for nexus—making the juice not worth the squeeze. As a result of this win in Pennsylvania, we might see taxpayers continue to challenge these provisions in other states.

The sales tax arena also must struggle with the treatment of cryptocurrencies and NFTs. In addition to facing the same aforementioned sourcing issues for income taxes, states must also navigate the taxability of these items and the potential timing of when tax should be imposed, as sales taxes and the timing of a sale generally do not follow federal income recognition rules. For instance, if an NFT is sold as a means of raising capital to fund a future event or to fund the creation of a new taxable product, when does the sales tax transaction take place? Is it when the NFT is originally issued or when the event occurs/product is delivered? Is the proper tax base the value originally paid for the NFT or the value at the later date?

Remote Workforce

Finally, an area ripe for increased litigation, if not guidance from states and localities, is the impact of a remote workforce on nexus and apportionment. Now that remote and hybrid work arrangements are more long term than everyone originally anticipated, such arrangements bring a host of related issues.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Gary C. Bingel is partner-in-charge for state and local taxes in EisnerAmper’s State and Local Tax National Tax Group.

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