Multistate Tax Commission Issues New Interpretation on P.L. 86-272 Pertaining to E-Commerce
On August 4, 2021, the Multistate Tax Commission (MTC) approved an update to its Statement of Information Concerning Practices of the Multistate Tax Commission and Supporting States under Public Law 86-272 (P.L. 86-272). For more than 60 years, P.L. 86-272 has provided taxpayers with immunity from state income taxes when their connections within a state are minimal or solely related to solicitation of sales of tangible personal property. The original intent of the law was to protect interstate commerce from being subject to income tax. The update was to help clear up the ambiguity that P.L. 86-272 has in the changing times of e-commerce.
The main items addressed were whether business activities conducted by an internet seller extend beyond solicitation of sales and whether the “business activities within the taxing state” are creating nexus in that particular state for the seller. The MTC decided 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. However, for the purposes of this Statement, when a business presents static text or photos on its website, that presentation itself does not constitute a business activity within those states where the business’s customers are located. This interpretation essentially targets any business with an interactive website, a category that almost all e-commerce businesses fall into.
The proposal goes through several examples of what types of internet activities would defeat P.L. 86-272 immunity, such as a business regularly providing 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. 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.
Another example that defeats a business’s P.L. 86-272 immunity in states is if a business contracts with a marketplace facilitator that facilitates the sale of the business’s products on the facilitator’s online marketplace. The marketplace facilitator maintains inventory, including some of the business’s products, at fulfillment centers in various states where the business’s customers are located. The maintenance of the business’s products defeats the business’s P.L. 86-272 immunity in those states where the fulfillment centers are located. Placing internet cookies on the computers of in-state customers used to gather customer information that is only used for the solicitation of orders for tangible personal property also defeats a business’s P.L. 86-272.
The new update to this long-standing law could potentially cause companies selling their products on the internet to have income tax nexus in new states where they previously enjoyed protection under P.L. 86-272. Many critics argue that this update completely nullifies P.L. 86-272 in its current form and the decision about the boundaries of P.L. 86-272 is a decision for Congress to make, not the MTC.
In addition to this new development in P.L. 86-272, there is ambiguity around how digital goods fit into the existing taxing regime across the country. Many states allude to digital goods in their laws but do not strictly define them. States that adopt the Streamlined Sales Tax Governing Board do have well-formed definitions around digital goods. Therefore, part of the conversation around P.L. 86-272, digital goods, and the internet must include a discussion of if digital goods are tangible personal property. If the digital good existed in a tangible form, should it be taxed as if it still existed in the tangible form?
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