In August, the member states of the Multistate Tax Commission (MTC) voted unanimously to formally adopt revisions to its “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272 (the “Statement”). In its revised Statement, the MTC takes the position that virtually any interaction between a customer and a taxpayer via the taxpayer’s website would exceed the protections of PL 86-272 and create income tax nexus anywhere the website is accessible to the taxpayer’s customers.
PL 86-272 — enacted by Congress in 1959 and codified as 358 U.S. 450 — prohibits any state from imposing an income tax on out-of-state businesses whose only activities in the taxing state are limited to the solicitation of interstate orders of tangible personal property.
There is relatively little authority guiding taxpayers as to what activity is considered exempt solicitation under the statute. Over the years, taxpayers have relied on the few state and federal cases defining the scope of PL 86-272’s protection. The MTC, an organization formed by state tax administrators for the purpose of promoting uniform and consistent tax policy and administration, has long sought to fill that void and influence the interpretation of PL 86-272.
Originally adopted by the MTC in 1986, the Statement attempts to define the parameters of PL 86-272 by providing specific listings of protected (i.e., solicitation activities or activities entirely ancillary thereto) and unprotected (i.e., nonsolicitation) business activities. Many member states have adopted similar guidance by statute or regulation.
The MTC’s revised Statement is likely the most significant revision to its PL 86-272 guidance. The revision adds a new section addressing activities conducted via the internet, which essentially removes any protection from PL 86-272 if “the business interacts with a customer via the business’s website or app.” According to the MTC, the following would be unprotected activities creating nexus in the customer’s state: post-sale assistance to customers by electronic chat or email; the placement of “cookies” on customers’ devices to gather customer search information; offering or selling extended warranties via the website; and links to job applications that invite viewers in a customer’s state to apply for nonsales positions.
Under the MTC’s new approach, nearly all businesses with a modern, interactive e-commerce website will be performing unprotected business activities. This interpretation may have extreme results for businesses that have historically relied on the protection of PL 86-272 in states where their only activity within the state consists of sales representatives soliciting interstate orders of goods or e-commerce solicitation of interstate orders.
The MTC’s Statement regarding internet activities arguably goes too far and is likely to face challenges in court should states choose to adopt this policy. Nevertheless, multistate taxpayers should be aware of the MTC’s revised Statement and how it might affect their income tax nexus positions across the country. While the MTC’s Statement is not binding on any state, MTC member states may choose to weaponize this new interpretation and take increasingly aggressive positions in asserting nexus.
Businesses that are subject to an audit involving nexus assertions should seek qualified outside counsel to assist in managing the audit and minimizing the risk of tax assessments and penalties.