MTC policy would limit protections from state tax under P.L. 86-272

August 2021

In brief

The Multistate Tax Commission (MTC) on August 4 adopted a revised “statement of information” on the application of Public Law 86-272, which bars states and localities from imposing net income taxes where in-state business activities are limited to solicitation of sales of tangible personal property and ancillary activities. The revised statement takes the position that taxpayers generally engage in unprotected in-state business activities “when a business interacts with a customer via the business’s website or app.”

States are free to adopt the revised statement in any way they choose, regardless of their MTC membership status. The introduction to the revised statement anticipates that states may adopt all or portions of the MTC’s policy “by legislation, regulation or other administrative action.”

For consideration: It appears likely that the revised policy will be adopted in whole or in part by certain states seeking to challenge taxpayers’ assertions of P.L. 86-272 protection. Businesses should consider their positions under P.L. 86-272 and the potential impact of the MTC’s revised statement for purposes of analyzing whether they may be deemed subject to tax and in applying the apportionment “throwback” and “Joyce”/“Finnigan” rules. If states are successful in adopting and defending the approach taken in the revised statement, this along with the increasing adoption of mandatory unitary combined reporting and “Finnigan” apportionment could effectively narrow the applicability of P.L. 86-272 protections to a limited number of taxpayers.

In detail


In its introduction to the revised statement, the MTC cites the US Supreme Court’s finding in South Dakota v. Wayfair, Inc. that an internet seller “may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.” While the Court was not interpreting P.L. 86-272, the MTC considers the Court’s analysis to be “relevant to the question of whether a seller is engaged in business activities in states where its customers are located for purposes of the statute.”

P.L. 86-272 application to “activities conducted via the internet”

The primary addition to the revised statement is a new section regarding “activities conducted via the internet.”  In this section, the MTC states that “as a general rule, when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer’s state.” The MTC allows that “when a business presents static text or photos on its website, that presentation does not in itself construe a business activity within those states where the business’s customers are located.”

Observation: Today, most businesses use the internet to communicate and interact with potential and existing customers. Under the revised statement, it may be difficult for businesses to continue to interact with customers in the way they do today utilizing interactive elements and still be deemed to qualify for protection under P.L. 86-272.

The revised statement provides examples of activities conducted by a business that operates a website offering for sale items of tangible personal property (unless otherwise indicated). In each case, customer orders are approved or rejected, and the products are shipped from a location outside of the customer’s state. The business in each example has no contacts with the customer’s state other than what is indicated.

In one example, 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’s website. For example, the business regularly advises customers on how to use products after they have been delivered. “This in-state business activity defeats the business’s P.L. 86-272 immunity in states where the customers are located because it does not constitute, and is not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property,” the MTC states.

Observation: Regularly advising customers on how to use products after the sale generally has been deemed protected activity when conducted from outside the state (e.g., by telephone), although MTC commentary suggests it is not aware of any state guidance, rule, or decision that non-solicitation activities conducted via telephone are protected. However, the MTC argues that “by clicking on an icon on the business’s website,” the website transmits software to the customer’s computer that facilitates the taxpayer/customer interaction. It is this deemed in-state activity that the MTC believes is different from traditional telephonic communications.

In another example, a business “places Internet ‘cookies’ onto the computers or other devices of in-state customers.” These cookies gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale. The MTC statement likewise finds that this constitutes in-state business activity that does not constitute, and is not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property.

The revised statement also deems “transmitting code or other electronic instructions” for software fixes or upgrades to constitute in-state activity.

Observation: In these examples, the MTC is taking the position that Internet-enabled interactions constitute in-state activity based on the location of the electronic device’s user. The MTC does allow that if the deemed in-state activity is entirely ancillary to soliciting orders—such as the business storing customer information to facilitate online check-out—then such electronic interaction would be protected.

Other examples of “activities conducted via the internet” focus on the nature of the sale rather than the electronic interaction between the seller and its customers. For example, offering and selling extended warranty plans via a website to in-state customers is deemed not to be a protected activity because it is deemed a service that is not entirely ancillary to the solicitation of orders for sales of tangible personal property. Also, the revised policy states that video and music streaming is deemed not to constitute the sale of tangible personal property, and therefore such streaming services are deemed not to be protected by P.L. 86-272.

Observation: Some states have defined “digital products” separately from “tangible personal property,” while others have interpreted their tangible personal property definitions broadly to encompass digital products and even streaming services (for example, Colorado). Although these definitions often apply in the sales tax context, states’ treatment of digital products could influence their interpretation of what constitutes “tangible personal property” for purposes of P.L. 86-272.

Observation: Unlike the sales tax nexus standards adopted by most states (with a defined dollar and/or number of transactions threshold), the revised P.L. 86-272 interpretation does not provide any clear guidance as to what constitutes de minimis in-state activity. This leaves taxpayers with uncertainty regarding what level of unprotected activities will be deemed to defeat P.L. 86-272 protections.

P.L. 86-272 application to telecommuting

The MTC has updated its list of “unprotected activities” to include any activities performed by an employee “who telecommutes on a regular basis from within a state” unless those activities are soliciting orders for sales of tangible personal property or are entirely ancillary to solicitation.

Observation: Some businesses may be taking a position that the presence of a telecommuting employee not involved in sales—i.e., performing services that are not establishing or maintaining a market in the state—does not result in income tax nexus. However, it is important to note that these activities may be deemed to exceed the protections afforded by P.L. 86-272. For example, the in-state presence of a telecommuting engineer for an out-of-state manufacturer could be viewed as negating P.L. 86-272 protections.

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Sarah Massimino

Sarah Massimino

Partner, State and Local Tax, PwC US

Rob Ozmun

Rob Ozmun

Partner, PwC US

Christopher Whitney

Christopher Whitney

Partner, State and Local Tax, PwC US

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