The evolution of technology has significantly changed, and continues to change, the way business is conducted around the globe. State tax laws had continually lagged behind until the U.S. Supreme Court’s decision in South Dakota v. Wayfair (Wayfair) upended the long-standing physical presence standard requirement with regards to an entity having sales tax nexus. In response to the Wayfair decision, states got to work and quickly passed economic nexus thresholds for sales tax purposes.
For net income tax purposes, economic nexus had long been asserted by states since Geoffrey, Inc. v. S.C. Tax Comm’n when intangible holding companies were deemed to be doing business in the state without having a physical presence. However, many taxpayers remain protected by Public Law 86-272 (P.L. 86-272) which prohibits states from imposing a net income tax on taxpayers when their in-state business activities are strictly limited to the solicitation of sales of tangible personal property and orders are approved as well as shipped from outside the state.
Prior Treatment of P.L. 86-272
P.L. 86-272 was enacted in 1959, a time when shopping via mail order catalogs was popular for many American consumers. Today, online shopping is the norm, connecting sellers and buyers from across the country and around the world almost instantaneously. If the sales thresholds are met, businesses may be required to register and charge sales tax on taxable sales. The question is whether P.L. 86-272 can protect online businesses from income taxes without a physical presence in that particular state.
The Multistate Tax Commission (MTC) is an intergovernmental state tax agency whose goal is to facilitate the equitable and efficient administration of state tax laws and policies that apply to multistate and multinational enterprises. The MTC’s original “Statement of Information Concerning Practices of the MTC and Supporting States under Public Law 86-272” was issued on July 11, 1986 , before the internet was opened to the public. Many states have adopted, in whole or in part, the MTC’s guidance on activities protected and not protected by P.L. 86-272.
Current Treatment of P.L. 86-272
On August 4, 2021, the MTC updated its guidance on P.L. 86-272 to account for the changes in how business is conducted, specifically related to internet retailers. The latest update to the statement provides examples of activities that the MTC considers to be protected under P.L. 86-272, specifically where a company sells tangible personal property directly through its website or app offering and the sale is approved and shipped from outside the customer’s state with no other connection to the customer’s state.
Examples of business activities protected under P.L. 86-272 per the statement include:
- The business provides post-sale assistance to in-state customers by posting a list of static FAQs with answers on the business’s website.
- The business places Internet “cookies” onto the computers or other devices of in-state customers. These cookies gather customer information that is only used 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 to remind customers what products they have considered during previous sessions.
- The business offers for sale only items of tangible personal property on its website. The website enables customers to search for items, read the product descriptions, select items for purchase, select delivery options, and ultimately complete the transaction by paying for the purchased items.
In contrast, examples of business activities that are not protected under P.L. 86-272 include:
- Post-sale assistance to in-state customers via either electronic chat or email correspondence in which customers initiate within the business’s website.
- Solicitation and receipt of on-line applications for branded credit cards via the business’s website as the issued cards generate interest income and transaction fees for the business.
- Recruitment. The business’s website invites viewers in a customer’s state to apply for non-sales positions within the business. The website enables viewers to fill out and submit an application electronically, as well as to upload a cover letter and resume.
- The business places internet “cookies” onto the computers or other electronic devices of in-state customers. These cookies gather a customer’s search history that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.
- The 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 who purchase the business’s products.
- The business contracts with a marketplace facilitator, such as eBay or Amazon, that enables the sale of the business’s products on the facilitator’s virtual marketplace. The marketplace facilitator maintains inventory, including some of the business’s products, at fulfillment centers in various states where the business’s customers are located.
- The business contracts with in-state customers to stream videos and music to electronic devices for a fee.
Although states are not required to follow the MTC’s guidance, many are likely to adopt the revised statement in whole, or in part, thereby impacting virtually every business that conducts business electronically. In light of the revised statement, businesses should review what activities it conducts online and determine whether it is a protected activity, or if creates an income tax filing obligation because it may no longer be considered a protected activity under P.L. 86-272.