In 1959, the federal government enacted P.L. 86-272, which protects an out-of-state company from a state’s net income tax if its only activity within that state is the mere solicitation of orders of tangible personal property that are shipped from outside the state.
In 1986, the Multistate Tax Commission (MTC), an intergovernmental state tax agency, adopted the “Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272” (the Statement). The Statement documents the MTC’s interpretation of those in-state activities that are conducted by or on behalf of a corporation and states whether they fall within or outside the protection of P.L. 86-272. Since its creation, the Statement has been revised by the MTC in 1993, 1994, and 2001.
Following the U.S. Supreme Court decision in South Dakota v. Wayfair, the MTC deemed necessary revisions to the Statement based on the growth of e-commerce businesses. Recently, the MTC has approved updates to the Statement regarding interactions between an out-of-state business and its in-state customer through the business’s website/app, identifying that it is sufficient to create nexus within the customer’s state and will not fall under the protection of P.L. 86-272. Some of the recently defined interactions include:
- Regularly providing post-sale assistance to in-state customers via electronic chat or email through the business’s website.
- The business contracts with a marketplace facilitator that facilitates the sale of their products on the facilitator’s online marketplace. The facilitator maintains the business’s inventory in the states where customers are located.
- Placing internet cookies on the computers of the in-state customers to gather customer information that is used for the solicitation of orders for tangible personal property.
It is important to note that if a business’s website is set up merely for the presentation of static texts and photos with no engagement features, this will not create nexus within the customer’s state and will continue to be protected by P.L. 86-272.
So far, there are no states that have released their own guidance regarding these revisions to the Statement. However, based on historical trends, we anticipate states will adopt the updated revisions in whole or in part. Even if states begin to update their laws to reflect the MTC’s recommendations, taxpayers will likely challenge these new statutes in court for being in violation of P.L. 86-272 which, like Wayfair, may take years before an outcome is decided. We will continue to provide updates regarding this matter, but in the meantime, if you have any questions, please consult with your WG tax advisor.
