This spring, the Minnesota Department of Revenue issued a draft revenue notice requesting comment on the adoption of the Multistate Tax Commission’s (MTC) guidance applicable to when an out-of-state business's internet activities exceed P.L. 86-272 protections. Minnesota would be one of the first to adopt the revised guidance.
In 2021, the MTC released its revised guidance detailing when online activities fall outside P.L. 86-272 protections. Since that time, only two other states have moved toward following the MTC. California issued a technical advice memorandum, currently being challenged in court. New York addressed the MTC guidance in draft regulations that have not yet been promulgated. Several other states have indicated that they were considering or discussing adoption of the MTC position including New Jersey and Oregon.
Under the MTC's guidance, customer interaction with an out-of-state seller's website or app constitutes an in-state business activity. Accordingly, the following activities are considered in-state activities that 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
RSM’s state tax policy specialists offer their opinions on the further limitation, or modernization, of the P.L. 86-272 protection.
I have written about this issue often since the MTC released it guidance in August 2021. To be frank, I think P.L. 86-272 should be repealed. It does not work well in the modern economy and its protections benefit a small percentage of taxpayers. It only applies to tangible personal property – in an economy dominated by services and intangible property. And you cannot do anything but solicit sales. I have long been sympathetic to the states who detest the law as an infringement on their taxing sovereignty.
But to be clear, this is a federal law and only Congress can repeal it. Yet, the MTC revised guidance effectively repeals the law. California, New York, and possibly Minnesota cannot administratively end a federal law that was aimed at protecting taxpayers from state action.
And make no mistake. The MTC guidance essentially repeals P.L. 86-272. If you have a website created after 1995, you will lose your protection. Modern websites perform some or all of the activities the MTC will cause a taxpayer to lose the protection. For that reason alone, we should hope that state efforts to adopt the MTC guidance fails.
We often have few opportunities to discuss federal laws impacting state and local taxes. What federal laws apply? Probably more than you think. There are federal laws addressing state taxation of rail carriers, laws impacting compensation and retirement taxation, laws addressing the taxation of financial institutions, and laws targeting telecommunications and other utility taxation, just to name a few. There is also the Internet Tax Freedom Act which has gained notoriety over the last decade. But perhaps one of the most well-known to your bread-and-butter tax professional is P.L. 86-272, passed just months after Northwestern Cement in 1959. P.L. 86-272 was a Congress-made protection restricting the states’ power to tax interstate businesses, and from a federal statutory position, has remained unchanged from that time.
But here’s the kicker, P.L. 86-272 was meant to be a temporary solution. The intent was to study the issue and perhaps provide a more nuanced solution to a growing web of interstate taxation. Unlike most temporary legislation (federal or state) one critical aspect was missing – a sunset date. (Can you see where this is going?) A study was completed in the early 1960s which resulted in a report known as the Willis Commission report, named after the chairman of the Special Committee on State Taxation of Interstate Commerce, Edwin Willis. This was Congress at its best – over 1,000 pages of analysis and evaluation on interstate taxation and state income taxes – surely carving the way for a permanent solution. Proposals followed, but none received much attention. The economy modernized. Generation X was born, then Xennials, Millennials, and whatever one calls the generation of TikTok. Baby-boomers became retirees. We landed on the moon, then sent robots to Venus and Mars. Apple Inc. rose, then failed, then rose again. And we all plugged every moment and aspect of our lives and businesses into the internet. As you read this, P.L. 86-272 can begin to receive partial Social Security benefits – a living time capsule of what was trying to exist in what is.
Federal laws impacting state taxation, in my opinion, should be rare and provide benefit to the taxpayers living and doing business in the states. An opportunity for Congress to exercise their Commerce Clause authority for the good of the taxpayer – for protection and with restraint. The P.L. 86-272 statute is hardly over 500 words, and yet under the revised MTC interpretation, taxpayers are now finding the protection may no longer apply if an interstate business accepts resumes through its website. That’s absurd. With all due respect for the many good efforts of the MTC over the years, including the first round of MTC guidance that has helped provide some clarity and uniformity to businesses, the ever-reaching interpretations of a few paragraphs written in the 1950s is less about evolution and more about mutation.
Congress acted over 60 years ago and has chosen not to since. Whether we care or not, the ball is in the court of 535 people who seemingly have no desire to continue the conversation. However, that does not anoint the MTC, or the states, to modernize federal statutory law on their own. Doing so obfuscates the intent of Congress and lessens the reach of the federal protection for interstate taxpayers, regardless of its genesis occurring before Old Glory had 50 stars.