States' reactions to MTC's application of P.L. 86-272 to internet sales.

• Author: Bell-Jacobs, Moshe

Following the August 2021 release by the Multistate Tax Commission (MTC) of a revised Statement of Information addressing the application of the Interstate Income Act of 1959, better known as P.L. 86-272, to the modern economy and internet transactions, many businesses, including internet sellers, have been closely tracking whether states would adopt the MTC's approach.

P.L. 86-272, codified as 15 U.S.C. Sections 381-384, is a federal law that prohibits a state from imposing a net income tax on the income of a business derived from within a state through interstate commerce if its only business activities within the state consist of the solicitation of orders for sales of tangible personal property. This protection only applies to orders that are sent outside the state for acceptance or rejection. If the orders are accepted, they must be filled by shipment or delivery from outside the state. P.L. 86-272 protection does not apply to the solicitation of orders for sales of services or intangible property.

Since P.L. 86-272 was enacted, businesses have evolved from primarily engaging in sales of tangible personal property via in-person activity to engaging in substantial amounts of electronic commerce through remote means. However, Congress has never amended or updated P.L. 86-272 to address how it should be applied to modern business transactions. Furthermore, the federal government has never provided any administrative guidance to assist with applying the statute. Due to the lack of federal guidance, states and taxpayers historically have considered the MTC's guidance, issued in the Statement of Information, in determining whether a business activity is protected under P.L. 86-272.

Since the MTC's issuance of its revised statement, California and New York both have provided their own guidance regarding P.L. 86-272 protection as it applies to internet transactions. This column reviews the MTC's revised statement and then addresses the approaches taken by California and New York. Also, this column briefly discusses developments in New Jersey and Oregon concerning P.L. 86-272 protection, with further general considerations concerning P.L. 86-272 and its application to business conducted over the internet.

MTC's revised statement

Given the brevity and age of P.L. 86-272, its application to many types of business transactions is often difficult to divine. In an effort to explain and clarify the protection provided by P.L. 86-272, the MTC first issued a Statement of Information in 1986 concerning practices of the MTC and supporting states under P.L. 86-272. The statement's introduction explains that a "supporting state" is a state "that adopts or otherwise expressly indicates support for this Statement by legislation, regulation or other administrative action." However, the statement notes that "[o]ther states may adopt or otherwise indicate support for individual sections of this Statement." Regarding the purpose of the statement, the introduction provides that the "contents of this Statement are intended to serve as general guidance to taxpayers and to provide notice as to how Supporting States will apply the statute." The MTC revised its statement in 1993, 1994, and 2001. As the economy evolved over the past few decades, the lack of additional guidance made it more difficult for companies expanding into new lines of business to determine how the P.L. 86-272 safe harbor and the MTC's interpretive statement might apply to them.

Shortly after the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), the MTC decided that the emphasis on taxpayer protection under P.L. 86-272, coupled with the growing popularity of more technology-dependent business models, required revisions to its historic Statement of Information regarding the application of P.L. 86-272. Following several hearings, the MTC adopted and released a revised statement in August 2021, including a new subsection addressing what constitutes protected versus unprotected activities and analyzing the treatment of certain internet-facilitated transactions. The revised statement adopts the Supreme Court's analysis in Wayfair concerning virtual contacts as "relevant to the question of whether a seller is engaged in business activities in states where its customers are located" for purposes of P.L. 86-272, even though the Court did not address P.L. 86-272 in its decision. The development and issuance of this revised statement was an effort to encourage uniformity among states in applying P.L. 86-272 to internet transactions.

The MTC's revised statement explains that the determination of whether a person that sells tangible personal...