MTC Provides Guidance Limiting Protection under P.L. 86-272 for Online Business Activities
By Zacarias Quezada, Manager, Tax & Business Services
On August 4, 2021, the Multistate Tax Commission (“MTC”) unanimously adopted a revised version of the “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272.”
Public Law 86-272, or P.L. 86-272, generally prohibits states from imposing income taxes on income derived from interstate commerce where such business activities in the state are limited to the solicitation of orders of tangible personal property that are subsequently sent outside the state for approval and fulfillment. In the past, the MTC has issued guidance to member states interpreting the reach and limitations of P.L. 86-272. Generally, the guidance has been widely adopted and followed by states as well as courts, and has provided some degree of certainty for taxpayers engaged in interstate commerce.
The primary update to the revised guidance is a new section that addresses “activities conducted via the internet.” Under the revised guidance, if a business “interacts” with a customer via the business’s website or app, the business is deemed to be engaged in activity within the customer’s state that goes beyond the protection afforded by P.L. 86-272.
However, the MTC did provide some clarity when it specifically mentioned that static text or a photo on a business website does not constitute a business activity within those states where the business’s customers are located. To this end, the revised guidance states that the following online activities conducted by a business are protected by P.L. 86-272:
- Posting a static FAQ to assist customers;
- Placing Internet ”cookies” that are used ancillary to the solicitation of orders, such as to remember items in a shopping cart; and
- Offering tangible personal property for sale on a searchable website.
The revised guidance also provided that the following eight (8) online activities conducted by a business are NOT protected by P.L. 86-272:
- Providing post-sale assistance via electronic chat or email that is accessible to customers through the business’s website;
- Soliciting or receiving online credit card applications;
- Inviting and/or accepting employment applications via a web-based platform;
- Placing internet ”cookies” on customer computers to gather market or product research;
- Transmitting code or electronic instructions via the internet to fix or upgrade products;
- Offering or selling extended warranty services over the internet;
- Contracting with a marketplace facilitator to store products/inventory or to fulfill orders; and
- Contracting with in-state customers to stream videos and music to electronic devices.
Though states are not obligated to follow the revised guidance, some have already indicated they would adopt the guidance in whole or in part. Since a narrow interpretation of P.L. 86-272 broadens the state’s ability to impose an income tax on out-of-state businesses, it seems likely that the revised MTC guidance may continue to influence many states to legislatively and/or administratively adopt similar rules.
The revised MTC guidance may affect businesses with a web-based presence that do anything more than accept orders of tangible personal property. Since websites are becoming ever more sophisticated and often contain more than just static text or photos (e.g., interactive functions), it is not difficult to see how a business with an online presence could lose P.L. 86-272 protection and consequently have an unexpected income tax liability. Therefore, businesses with an online presence should begin to assess potential exposure that may arise from the revised guidance.
Please contact your dedicated Marcum State and Local Tax professional to address any questions regarding this notice or any other tax matter.