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:
- A business regularly provides post-sale assistance to in-state customers via either electronic chat or email that customers initiate by clicking on an icon on the business’ website.
- A business solicits and receives on-line applications for its branded credit card via its website. The issued cards will generate interest income and fees for the business.
- A business website invites viewers in a customer’s state to apply for non-sales positions with the business. The website enables viewers to fill out and submit an electronic application as well as to upload a cover letter and resume.
- A business places Internet “cookies” onto the computers or other electronic devices of in-state customers which will be used to:
- adjust production schedules and inventory amounts,
- develop new products, and/or
- identify new items to offer for sale.
- A business remotely fixes or upgrades products previously purchased by its in-state customers by transmitting code or other electronic instructions to those products via the Internet.
- The business offers and sells extended warranty plans via its website to in-state customers.
- The business contracts with a marketplace facilitator to enable the sale of products on the facilitator’s online marketplace. The marketplace facilitator maintains inventory of the business at fulfillment centers in various states where the business’ customers are located.
- The business contracts with in-state customers to stream videos and music to electronic devices for a charge.
The revised guidance includes the following examples of protected internet activities which would not create in-state nexus:
- A business places Internet “cookies” onto the computers or other electronic devices of in-state customers. These cookies gather the following information that will be used only for purposes entirely ancillary to the solicitation of orders for tangible personal property, such as:
- to remember items that customers have placed in their shopping cart during a current web session,
- to store personal information customers have provided to avoid the need for the customers to re-input the information when they return to the seller’s website, and/or
- to remind customers what products they have considered buying during previous sessions.
- The business offers for sale only items of tangible personal property on its website and that website enables customers to:
- Search for items
- Read product descriptions
- Select items for purchase
- Choose among delivery options
- Pay for the items
The following are additional notable changes in the recent MTC statement:
- The MTC amended Article IV, “Specific Listing of Unprotected and Protected Activities,” by adding to the list of unprotected activities those performed by a regularly telecommuting employee, unless the activities are soliciting orders for sales of tangible personal property or are entirely ancillary to soliciting sales of such tangible personal property.
- Article V, regarding “Independent Contractors,” was amended to provide that P.L. 86-272 does not protect the activities of an independent contractor, who on behalf of a seller, performs unprotected activities such as performing warrant work or accepting returns or products.
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.