By Jonathan Liss
The Multistate Tax Commission (MTC) recently updated its interpretation of long-established Public Law 86-272 (P.L. 86-272)1 to address how we transact business through the internet in today’s economy.2 This has created quite a stir within the state and local tax community. Some claim that if the states were to adopt the MTC’s interpretation it would effectively eviscerate the protections of P.L. 86-272.
In February 1959, the U.S. Supreme Court held in Northwestern States Portland Cement Co. v. Minnesota that the state of Minnesota could impose its corporate income tax on an Iowa corporation that leased a sales office and had employees in Minnesota, and whose activities were limited to soliciting orders that were accepted at and filled from the home office in Iowa. Following this decision and others that negatively impacted interstate commerce, Congress adopted P.L. 86-272 as a temporary measure. (Congress had contemplated more comprehensive federal legislation that would have further restricted individual state taxing authority.)
As a refresher, P.L. 86-272 prohibits states from taxing the net income of businesses whose only activities in the taxing state consist of the “solicitation of orders” for the sale of tangible personal property, provided the orders are sent outside the state for acceptance and, if accepted, the goods are delivered from a point located outside the state. It should be noted that P.L. 86-272 is an exemption from income taxation. Even if a constitutional nexus exists, P.L. 86-272 may protect a company from state income tax.
Wisconsin Department of Revenue v. William Wrigley Jr. Co., decided June 19, 1992, is the seminal case addressing the scope and meaning of the term “solicitation of orders.” In brief, the court held that solicitation of orders covers only those activities that are “entirely ancillary to requests for purchases – those that serve no independent business function apart from their connection to the soliciting of orders.” The court also concluded that there is a de minimis exception for activities that go beyond the solicitation of orders (i.e., nonimmune activities).
Multistate Tax Commission Statement
In 1986, the MTC adopted the Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 (Statement of Information), which sets forth the MTC’s interpretation of those in-state activities that are conducted by, or on behalf of, a corporation and fall within or outside the protection of P.L. 86-272.
Following the Supreme Court’s 2018 decision in South Dakota v. Wayfair Inc., the MTC's uniformity committee formed a work group to update the Statement of Information "to address changes that have occurred during the past two decades in the economy and the way that business is conducted."
Revised for Activities Conducted Over the Internet
On Aug. 4, 2021, the MTC approved the fourth revision to its Statement of Information, which added a section on activities conducted over the internet.3
Like any other out-of-state business, sellers on the internet will fall within the protection of P.L. 86-272 if their only business activity within the state is soliciting orders for sales of tangible personal property where orders are approved and fulfilled by shipment or delivery from a point outside the state.
The Statement of Information establishes a general rule that "when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer's state. However, … 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."
The MTC's updated Statement of Information provides 11 examples of activities conducted by internet businesses and explains whether they are protected or unprotected for P.L. 86-272 purposes.
Activities such as post-sale customer assistance utilizing an electronic chat or email icon are considered unprotected because they are not ancillary to in-state solicitation. Additional unprotected internet activities listed in the Statement of Information include solicitation and receipt of online applications for credit cards, invitations to apply for nonsales employment positions, extended warranty plans, placement of certain internet cookies on in-state customers’ electronic devices, remote repair/upgrades to previously purchased products, music and video streaming, and the use of marketplace facilitators. In contrast, posting an online list of static “frequently asked questions” with answers is considered a protected activity.
Reaction to the Revised MTC Statement
Some are troubled by the MTC’s revised guidance, arguing that it improperly applies the Wayfair holding to an income tax context. Others in the state and local tax community question whether the revised Statement of Information renders P.L. 86-272 meaningless by severely limiting the scope of protected activities for internet businesses. They consider the MTC’s interpretation to be an overreach, citing the need for congressional intervention to change a federal statute.
The MTC justifies its revised interpretation by referencing the passage of time and the development of the internet and other new technologies. The MTC says a federal law enacted in 1959 needs to be updated to reflect the modern economy.
It should be emphasized that the states are not bound by MTC’s interpretation of P.L. 86-272. A state may adopt the guidance in whole or in part, or completely ignore the revised Statement of Information. The states of California4 and New York State5 recently issued guidance generally conforming to the MTC Statement of Information, and other states are likely to follow.
1 Codified at 15 U.S.C. Section 381.
2 Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272, Fourth Revision adopted Aug. 4, 2021.
3 Article IV, Section C.
4 California Technical Advice Memorandum (TAM) 2022-1.
5 Corporate Tax Reform Draft Regulations, released April 29, 2022, intended to be finalized in fall 2022.
Jonathan Liss is senior revenue policy analyst for the Philadelphia Department of Revenue. He is also an adjunct professor at Drexel University, Temple University School of Law, and Villanova University School of Law. He can be reached at email@example.com.
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