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MTC Updates Guidance on Multi-state Income Tax Law


The Multistate Tax Commission (MTC) recently updated its guidance on P.L. 86-272, which deals with net income tax, including a new section on businesses that interact with customers online and make digital sales. Zacarias Quezada, a manager with Marcum LLP, provides an overview of the limitations of the law and what it means for businesses.

Sep 3rd 2021
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On August 4, 2021, the Multistate Tax Commission (MTC) unanimously adopted a revised version of the Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272. 

Public Law 86-272, or P.L. 86-272, generally prohibits a state from imposing a net income tax on income derived within its borders from interstate commerce if the business activities within the state are limited to the solicitation of orders for sales of tangible personal property and the orders are sent outside the state for approval and fulfillment.

Previously, the MTC had issued guidance to member states on how to interpret the reach and limitations of P.L. 86-272. This guidance was widely adopted and followed by states as well as courts, and it has provided some degree of certainty for taxpayers engaged in interstate commerce.

The primary update to the revised guidance is a new section that addresses “activities conducted via the internet.” Under the revised guidance, if a business “interacts” with a customer via the business’s website or app, the business is considered to be engaging in activity within the customer’s state, which goes beyond the protections afforded by P.L. 86-272.

However, the MTC did provide some clarity on how certain activities are defined; for example, static text or a photo on a business website does not constitute a business activity within the state where the customer is located. The revised guidance states that the following online activities conducted by a business are protected under P.L. 86-272:

  1. Posting a static FAQ to assist customers,
  2. Enabling ”cookies” that are ancillary to the solicitation of orders, such as to remember items in a shopping cart, and
  3. Offering tangible personal property for sale on a searchable website.

However, the MTC says that the following online activities conducted by a business are not protected by P.L. 86-272:

  1. Providing post-sale assistance via electronic chat or email that is accessible to customers through the business’s website,
  2. Soliciting or receiving online credit card applications,
  3. Inviting and/or accepting employment applications via a web-based platform,
  4. Enabling "cookies" to gather market or product research,
  5. Transmitting code or electronic instructions via the internet to fix or upgrade products,
  6. Offering or selling extended warranty services over the internet,
  7. Contracting with a marketplace facilitator to store products/inventory or to fulfill orders, and
  8. Contracting with in-state customers to stream videos and music to electronic devices.

Though states are not obligated to follow the revised guidance, some have already indicated they would adopt the guidance in whole or in part. Since a narrow interpretation of P.L. 86-272 increases the state’s ability to impose an income tax on out-of-state businesses, it's likely that the revised MTC guidance will continue to influence many states to legislatively or administratively adopt similar rules.

The revised MTC guidance may affect businesses with a web-based presence that do anything more than accept orders of tangible personal property. Websites are becoming more sophisticated and often contain more than just static text or photos (e.g., interactive functions), so any business with an online presence should assess its online activities for a potential loss of P.L. 86-272 protection to avoid an unexpected income tax liability. 

This article was originally published on Aug. 30, 2021, on Marcum LLP's website.  

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