On August 4, 2021, the Multistate Tax Commission (MTC) held a vote of their compact and sovereignty member states on the revised “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272†(the Statement). The changes that were voted on are related to a section addressing internet activities, specifically.
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Public Law 86-272 (PL 86-272) Background
For over 60 years, PL 86-272 has been widely accepted and used by taxpayers to provide immunity from state income taxes when their connections within a state are minimal or solely related to solicitation of sales of tangible personal property. When the law was enacted in 1959, the original intent was to protect interstate commerce from being subject to income tax
“on income derived within such state by or on behalf of such person,…the solicitation of orders by such person, [if the person is] in such state for sales of tangible personal property that are sent outside the state for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state…â€
In 1959, the creators of this law could not have predicted the changes in the economy over the next 60 years, and recently PL 86-272 has become a source of interest by the MTC to make updates to their statement which provide notice to taxpayers of how the MTC and supporting states will interpret and apply the law. This statement has not been updated since 2001. In November 2018, a work group was formed to make updates. Those revisions have been accepted by the Uniformity Committee and the Executive Committee and as of August 4, 2021, the member states voted to accept the changes 20-0.
Internet Activity Changes
The main items addressed by the working group were whether business activities conducted by an internet seller extend beyond solicitation of sales and whether the “business activities within the taxing state†are therefore creating nexus in that state for the seller. The work group agreed upon a general rule:
“when a business interacts with a customer via the business’s website or app, the business engages in a business activity with the customer’s state. However, for purposes of this Statement, when a business presents static text or photos on its website, that presentation does not in itself constitute a business activity within those states where the business’s customers are located.â€
The proposal goes through several examples of what types of internet activity would defeat PL 86-272 immunity, such as (but not limited to) providing post-sale assistance via email or chat, soliciting and receiving applications for credit cards, inviting job applications for non-sales positions, placing internet cookies onto the computers of in-state customers, and remote repairs and upgrades.
The new “internet update†to this longstanding law could potentially cause companies selling their products on the internet to have income tax nexus in brand new states where they were previously protected under PL 86-272. Many critics argue that this update essentially wipes out PL 86-272 as we know it, and that this is a decision for Congress to make, not the MTC.
The REDW State and Local Tax (SALT) team will continue to stay up-to-date on any further news and the states’ responses to this updated guidance. We welcome any questions you may have. Please contact REDW SALT Manager Jeanna Schenk, CPA, or REDW Principal George Rendziperis, JD.
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