September 2, 2021
Multistate Tax Commission updates statement on P.L. 86-272 to address its views on activities conducted over the internet
On August 4, 2021, the Multistate Tax Commission1 (MTC) approved the fourth revision to its Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272 (Statement), which added a section on activities conducted over the internet. The newly revised Statement generally limits the activities protected under P.L. 86-272, which prohibits the imposition of state income tax on out-of-state sellers whose in-state activities do not exceed soliciting orders of tangible personal property.
According to the MTC, the Statement is "intended to serve as general guidance to taxpayers and to provide notice as to how Supporting States will apply the statute."2
Although the revised Statement has been approved by the MTC, it is not automatically adopted by states. The Statement provides that Supporting States will need to expressly indicate support through statutory, regulatory or administrative action for the Statement to be effective in that state.
In February 1959, the U.S. Supreme Court (Court) held in Northwestern States Portland Cement3 that Minnesota could impose its corporate income tax on an Iowa corporation that leased a sales office in Minnesota and had employees in Minnesota whose activities were limited to soliciting orders that were accepted at, and filled from, the home office in Iowa.4 Following this holding and with the active support of the business community, Congress enacted P.L. 86-272 in September 1959.
P.L. 86-272 (codified at 15 U.S.C. Section 381) prohibits a state, and any of its political subdivisions, from imposing a net income tax on an out-of-state seller if the seller's "only business activities" within the state consist of "the solicitation of orders by such person, or his representative … for sales of tangible personal property … which … are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State." Thus, even if constitutional nexus exists for an out-of-state business, P.L. 86-272 effectively preempts state income taxation on an out-of-state business whose activities in the state are limited to soliciting sales of tangible personal property as described in the federal law.
In 1986, the MTC adopted the "Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272," which sets forth the MTC signatory states' interpretation of those in-state activities that are conducted by or on behalf of a corporation and fall within or outside the protection of P.L. 86-272. In 1992, the U.S. Supreme Court (Court) addressed the scope of the activities protected under P.L. 86-272 in Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992) (Wrigley), and listed protected and unprotected activities under its interpretation of the federal statute. Thereafter, the MTC revised the Statement in 1993, 1994 and 2001.
In 2018 the Court held in South Dakota v. Wayfair5 that a physical presence was not required under its dormant Commerce Clause in order for a state to impose a sales tax collection requirement on an out-of-state seller. Following this ruling, the MTC's Uniformity Committee formed a work group at the request of some of its members to update the Statement "to address changes that have occurred during the past two decades in the economy and the way that business is conducted." Although the Wayfair Court was not interpreting P.L. 86-272, "the Supporting States consider the Court's analysis as to virtual contacts 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," according to the Statement.
After numerous meetings, drafts and public hearings (the materials of which can be found on the MTC's website), the MTC adopted the fourth revision to the Statement on August 4, 2021. While many sections of the Statement were modified, the most significant change is new Section C, "Activities Conducted via the Internet," which was added to Article IV, "Specific Listing of Unprotected and Protected Activities" (hereafter, Art. IV, Section C). Other notable changes to the Statement include the addition of teleworking under the list of unprotected activities, the revisions to the application of the Statement to foreign commerce and eliminating the application of the Joyce Rule6 in determining whether the activities of a company conducted in the state exceed the protections of P.L. 86-272.
Unprotected and protected activities conducted via the internet
New Art. IV, Section C addresses whether an out-of-state business that uses the internet to conduct in-state business activities is engaged in protected activities under P.L. 86-272. Like other out-of-state businesses, internet sellers will fall within the protection of P.L. 86-272 if their only business activity within the state is soliciting orders for sales of tangible personal property where orders are approved at and fulfilled by shipment or delivery from a point outside the state.
Regarding internet activities, the Statement describes a general rule that, "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. However, … when a business presents static text or photos on its website, that presentation does not in itself constitute a business activity within those states where the business's customers are located."
The Statement includes "examples of activities conducted by a business that operates a website offering for sale only items of tangible personal property." For purposes of these examples, the business has no other connection with the customer's state, and orders are approved (or rejected) and the property shipped from outside the customer's state.
Under the Statement, it is the MTC's view that protected activities of a business for purposes of P.L. 86-272 include:
According to the Statement, unprotected activities of a business include:
The MTC makes clear in the Statement that "soliciting orders for sales" refers specifically to sales of tangible personal property and any prior references to "company" have been changed to "business."
Other changes in the newly revised Statement include the following:
The Statement also includes a new Addendum II, which sets forth the MTC's factor presence nexus standard for business activity taxes approved by the MTC on October 17, 2002.7
Assuming states adopt this guidance, taxpayers will need to consider the following questions:
In states that adopt the MTC's revised Statement, out-of-state businesses that conduct activities over the internet, and whose activities were previously protected under P.L. 86-272, should consider evaluating their in-state activities and determine whether such activities continue to fall within that protection. In particular, businesses may consider whether business activity transacted over the internet constitutes in-state business activity in the state within the meaning of the Statement. Given the new examples outlined by the MTC, particular attention should be paid to "cookie" content and application in the customer states. In almost all states, the applicable statute of limitations has not begun to run where income tax returns were not filed and where it is subsequently determined such a filing responsibility exists.
1 The Multistate Tax Commission, which was created in 1967, "is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws that apply to multistate and multinational enterprises."
2 For purposes of this Statement, a "Supporting State" is "a State that adopts or otherwise expressly indicates support for this Statement by legislation, regulation or other administrative action. Other states may adopt or otherwise indicate support for individual sections of this Statement."
3 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959).
4 Shortly thereafter, the Court denied certiorari for a series of similar cases in which the highest courts of Louisiana and North Carolina declined to rule against the states' imposition of their income taxes on out-of-state businesses whose only contact in the state involved the activities of independent contractors who solicited orders from within the state (Brown-Forman Distillers Corp. v. Collector of Revenue, 359 U.S. 28 (1959), dismissing appeal and denying cert. in 234 La. 651, 101 So. 2d 70 (1958); ET & WNC Transportation Co. v. Currie, 359 U.S. 28 (1959)(per curiam) aff'g 248 N.C. 560, 104 S.E.2d 403 (1958), International Shoe Co. v. Fontenot, 259 U.S. 984 (1959), denying cert. in 236 La. 279, 107 So. 2d 640 (1958)).
5 South Dakota v. Wayfair, 585 U.S. ___; 138 S. Ct. 2080 (2018).
6 The Joyce rule adopts the principle established in Appeal of Joyce, Inc., Cal. St. Bd. of Equal. (Nov. 23, 1966). The MTC has posted a copy of the original California State Board of Equalization opinion in Joyce on its Model Option for Combined Filing Under Finnigan Approach Reference Information website here. The prior, alternative Finnigan opinions (original and rehearing) are also available on this website.
7 Under the MTC's model factor presence nexus standard, an out-of-state taxpayer doing business in a state will have substantial nexus with the state and be subject to the state's franchise and income tax if any of the following thresholds are exceeded in the state during the tax period: (1) $50,000 or 25% of the total property; (2) $50,000 or 25% of the total payroll; or (3) $500,000 or 25% of the total sales.