Since 1959, taxpayers have been relying on a federal law—Public Law 86-272—to protect them from having to file state income tax returns in states where the taxpayers’ in-state activities are limited to just soliciting sales of tangible personal property. On August 4, 2021, the Multistate Tax Commission (MTC) member states voted 20-0 to revise the MTC’s “Statement of Information” regarding Public Law 86-272 in an attempt to eviscerate the federal law’s protections. In other words, the MTC’s interpretation seeks to make out-of-state sellers liable for in-state income tax, despite federal law to the contrary.
Public Law 86-272 represents Congress’s affirmative exercise of its power to regulate interstate commerce under the Commerce Clause of the U.S. Constitution. In enacting the law, Congress sought to protect taxpayers who sell tangible personal property (e.g., manufacturers) into many states across the country, but whose only in-state activities are solicitation of customers. Without the protections of Public Law 86-272, such taxpayers would have to file significantly more state income tax returns, which Congress determined would burden interstate commerce.
In reliance on Congress’s protections, taxpayers have been structuring their activities to make sure that other than in the states where they have manufacturing facilities and/or their offices, they engage only in solicitation of customers. Conversely, states, feeling that they are missing out on revenue, have been aggressively auditing taxpayers who relied on Public Law 86-272 in not filing state income tax returns. Turning over every stone, states have been looking for any semblance of local activities beyond mere solicitation.
In their disputes over the scope and meaning of Public Law 86-272, states and taxpayers rely only on the plain language of the law and on court opinions. There are no “regulations” or “private letter rulings” interpreting Public Law 86-272 because it is not part of the Internal Revenue Code and does not otherwise delegate rulemaking or other authority to any federal agency. Thus, no federal agency and no state has the ability to modify or clarify Public Law 86‑272. Accordingly, the only way for taxpayers or states to conclusively clarify the law’s meaning is through litigation.
Nonetheless, the MTC, an organization formed by state tax administrators in 1967 (in part as a response to Public Law 86-272), has been issuing “guidance” regarding the law’s meaning since 1986 when it issued its first “Statement of Information.” The MTC’s “Statement of Information” was revised in 1993, 1994, 2001, and now in 2021. With each revision, the MTC has sought to further limit the applicability and scope of the law’s protections, with the 2021 amendment taking the cake (or cookie?).
The most recent MTC revisions proclaim that certain website features constitute in-state activities by a taxpayer that are not mere solicitation protected by Public Law 86-272. Generally, the MTC guidance provides that if a customer can interact with the taxpayer via its website, then the taxpayer engages in non-solicitation activity in the customer’s state. Examples of such online interaction identified by the MTC include: a chat feature, an email link that customers can use to email the business, online credit or job applications, and use of internet “cookies” for non-solicitation purposes (e.g., to adjust inventory or production). In other words, any modern website would, in the MTC’s eyes, essentially nullify Public Law 86-272’s protections.
Despite numerous well-reasoned objections to the MTC’s guidance by tax practitioners (e.g., that an interactive website is no different than using a telephone in 1959 to call customers in a state), the MTC voting member states unanimously adopted the revision. But as noted above, the MTC’s guidance is not law. It is not binding on taxpayers or on states. However, taxpayers relying on P.L. 86-272 should expect that at least the MTC member states will be influenced by the MTC’s guidance and that their audits will become even more aggressive.
Given the MTC’s aggressive interpretation of Public Law 86-272 and the buy-in of that interpretation by at least 20 states, this is an important time to fully evaluate the strength of any Public Law 86-272 positions and for taxpayers and practitioners get ready for battle. I can’t wait to challenge the MTC’s revised interpretation in court.
Her experience includes resolving and litigating numerous types of tax disputes:
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