The Interstate Income Act of 1959, commonly known as Public Law 86-272 or P.L. 86-272, generally prohibits states from imposing income taxes on income derived from interstate commerce if the business activities in the state are limited to solicitation of orders of tangible personal property that are sent outside the state for approval and, if approved, are filled by shipment or delivery from a point outside the state. For its member states, the Multistate Tax Commission (MTC) issued guidance over the years interpreting various aspects of this limitation on state and local income taxation. This guidance has been widely adopted and followed by states and courts and has provided a level of certainty for taxpayers engaging in multistate activities.
On Aug. 4, 2021, the MTC unanimously adopted an updated version of its guidance specifically to address internet activities. The new guidance is the culmination of a two-year, often contentious, effort to identify which internet activities are and are not covered by the law.
The revised MTC guidance provides that the determination of whether a person that sells tangible personal property through the internet is shielded by P.L. 86-272 requires the same analysis as with a person selling such property by other means. However, the MTC guidance states that when a business ‘interacts’ with a customer via the business’s website or app, the business engages in activity within the customer’s state. The presence of a static text or photos on its website itself, however, does not constitute business activity where the customer is located.
The guidance lists 11 examples of internet activities that are or not deemed to be doing business in the state of the customer. The following activities are not protected by P.L. 86-272:
- Providing post-sales assistance through an electronic chat or email that customers access through the company’s website
- Soliciting or receiving online credit card applications
- Inviting and or accepting applications for employment through a web-based platform
- Placing internet ‘cookies’ on computers of customers that are designed 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 house products or inventory or to fulfill orders, and
- Contracting with in-state customers to stream videos and music to electronic devices
The following are examples of internet activities that, if performed alone, continue to receive the protection under 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
What does the MTC updated P.L. 86-272 guidance mean for your business?
In this age of electronic commerce, the MTC guidance will affect virtually every business with a web presence. If a company’s website does anything more than accept orders for tangible personal property, it will be afforded no protection under P.L. 86-272. In 2021, websites are becoming more sophisticated, allowing customers and potential customers to connect with businesses virtually through a variety of means from offering 3-D simulations or virtual reality to live personal shopping assistants. Moreover, companies are doing far more than accepting orders for tangible personal property through the Internet.
No states are obligated to follow the revised guidance. However, at least 22 states have already indicated that they would adopt the guidance in whole or part. Because all states believe that P.L. 86-272 should be interpreted as narrowly as possible, the MTC guidance will influence many states to legislatively or administratively adopt similar rules.
Once implemented, the MTC guidance will likely affect many companies that previously enjoyed the federal safe harbor. A company that only sells tangible personal property into a state would normally be shielded from income tax liability. But if that company allows a customer to chat online about a purchased product or to extend a warranty, it may find itself facing new and substantial tax liabilities. Businesses should consult their state and local tax advisors for more guidance.
