The Multistate Tax Commission, or “MTC,” recently published amendments to their “Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272.” This statement provides guidance from the MTC to states regarding which online activities should and should not exceed the protections afforded by P.L. 86-272.
P.L. 86-272 was enacted in 1959 to protect taxpayers from any unfair burdens imposed by states on their interstate commerce. P.L. 86-272 protects out-of-state businesses from state income taxes when their in-state activity is exclusively limited to sales of tangible personal property. Therefore, a business may be making substantial remote sales of tangible personal property into a state, but as long as their only in-state connection is limited to individuals engaged in protected sales activities, the business is able to claim P.L. 86-272 protection and not file income tax returns in the state.
The purpose of the MTC’s revised Statement on P.L. 86-272 is to address changes that have occurred during the past two decades in the economy and the way that business is conducted. Essentially, the statement seeks to address those issues that have now arisen due to the digital economy, which could not have been foreseen upon the original adoption of P.L. 86-272 in 1959. The revisions to the statement include a new section on protected and unprotected activities over the internet, among other clarifying changes.
It is important to note that the MTC is not a governing or legislative body and does not have legislative authority over states. The MTC is an intergovernmental state tax agency whose mission is to achieve fairness in state taxation by promoting uniform and consistent tax policy among states, and to preserve the sovereignty of state and local governments over their tax systems. The MTC statement is intended to serve as general guidance to taxpayers and to provide notice as to how supporting states will apply the statute. A supporting state is a state that adopts or otherwise expressly indicates support for the revised MTC statement by legislation, regulation, or other administrative action.
At this point, it is unclear how, or even if, states will adopt the revised statement. Some states may choose to proactively adopt the statement legislatively and some may instead informally adopt the guidance by incorporating it into their income tax audit procedures. Due to the current uncertainty concerning the widespread application of the revised statement, businesses should evaluate those states in which they are currently claiming protection under P.L. 86-272 and consider whether they have any activities within those states that would no longer qualify for protection under the revised guidance. Additionally, businesses may want to adjust their online activities to exclude any activities cited by the MTC as exceeding the protections of P.L. 86-272.
The following are the MTC’s examples of activities not protected by P.L. 86-272 which would create in-state nexus:
The revised guidance includes the following examples of protected internet activities which would not create in-state nexus:
The following are additional notable changes in the recent MTC statement:
In light of the MTC’s amended statement, businesses should reevaluate nexus considerations for any states in which they are currently claiming P.L. 86-272 protection. If you’d like more information regarding this revised guidance and the potential impact to your business, please contact the Maxwell Locke & Ritter tax team.