Consulting And Public Law 86-272: What's The Verdict?

Public Law 86-272, enacted by Congress in 1959, prevents states from imposing net income tax on corporations if their only in-state activity is soliciting orders for sales of tangible personal property. This law applies to companies located outside of a state, protecting them from state taxes based on net income. However, with the advent of the digital age and e-commerce, the interpretation of this law has become more complex, especially regarding internet activities and their impact on state tax liability. The Multistate Tax Commission (MTC) has issued updated guidance on how Public Law 86-272 applies to internet activities, and states like California and New York have issued regulatory guidance to clarify their positions. This evolving landscape of state tax laws and interpretations highlights the need for businesses to consult state and local tax advisors to navigate their specific situations effectively.

Public Law 86-272 and its application to companies outside of California

Public Law 86-272 was enacted by Congress in 1959 to prevent states from imposing a net income tax on any income derived from interstate commerce when a company's only business activity within a state is to solicit the sale of physical goods. This law was later amended in 1976.

Public Law 86-272 applies to companies located outside of California whose only in-state activity is the solicitation of the sale of tangible personal property to California customers. These companies are exempt from state taxes based on net income. However, they may still be considered to be doing business in California and may be liable for filing and paying the applicable amounts.

The law's protection is only available if the company strictly limits its in-state activities to the solicitation of orders. The U.S. Supreme Court has ruled that solicitation of orders includes "requests for purchases" and "activities that are entirely ancillary to requests for purchases and serve no independent business function apart from their connection to the soliciting of orders." Examples of protected activities include distributing free samples of a product, checking a customer's inventory level without charge, and sales personnel mediating a customer complaint to facilitate future purchases.

In 2021, the Multistate Tax Commission (MTC) issued a statement regarding how to apply Public Law 86-272 to business activities conducted on the internet. The MTC concluded that certain business activities, such as post-sale assistance, credit card applications, job applications, and remote repairs, are not protected by the law.

California's Franchise Tax Board (FTB) issued a Technical Advice Memorandum (TAM) in February 2022, outlining revised guidance on what business activities remain protected under the statute. The TAM includes 11 examples of business activities conducted on the internet, closely paralleling the MTC's statement. However, a California court ruled in December 2023 that the TAM is invalid due to non-compliance with the state's administrative procedure laws.

Public Law 86-272 has significant implications for out-of-state businesses, and tax preparers must carefully consider whether claiming immunity from state tax under this law is consistent with the facts in each state where the taxpayer has customers.

The Multistate Tax Commission's (MTC) role in Public Law 86-272

The Multistate Tax Commission (MTC) is an agency of state governments that works to promote uniformity and consistency in tax policies and laws across states. The MTC assists taxpayers in complying with existing tax laws and advocates for state and local sovereignty in tax policy development.

In 1986, the MTC adopted the "Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272," which has been modified several times since, with the most recent revision in August 2021. This statement provides guidance on the proper application of Public Law 86-272, which was enacted by Congress in 1959 to prevent states from imposing net income tax on businesses whose only in-state activity is the solicitation of orders for tangible personal property.

The MTC's 2021 revision addresses how Public Law 86-272 applies to business activities conducted on the internet, concluding that "when a business interacts with a customer via its website or app, the business engages in a business activity within the customer's state." The MTC provides examples of activities that are considered protected or unprotected by Public Law 86-272, including:

Unprotected Activities:

• Post-sale assistance via electronic chat or email
• Credit card applications on the website
• Job applications on the website
• Internet cookies gathering customer information for purposes beyond solicitation
• Remote repairs or upgrades of products
• Extended warranty plans sold on the website
• Marketplace facilitator contracts
• Streaming services

Protected Activities:

• Static FAQs on the website
• Internet cookies used solely for solicitation purposes
• Offering items of tangible personal property for sale on the website, including search, product descriptions, delivery options, and payment

The MTC's interpretation of Public Law 86-272 significantly impacts businesses with an online presence, and states can choose to adopt the MTC's guidance in whole or in part. California and New York have already issued regulatory guidance closely following the MTC's statement, while New Jersey and Oregon have indicated their intention to do so. The MTC's interpretation has also been challenged in court, with the American Catalog Mailers Association filing a lawsuit against California's new interpretation.

The impact of e-commerce on Public Law 86-272

Public Law 86-272, also known as the "Nexus Law", is a federal law that protects businesses from having to pay taxes in states where they do not have a physical presence. This law is particularly important for businesses that operate across multiple states, as it prevents double taxation. However, the rise of e-commerce has complicated the application of this law, as it is often difficult to determine whether an online business has a physical presence in a particular state. This has led to costly legal issues for businesses found to be in violation of the law.

To address these challenges, businesses must carefully navigate the implications of Public Law 86-272 and ensure compliance with state and federal laws. The law stipulates that if a business sells taxable goods or services in a state by "soliciting orders" but does not have a physical presence there, the profits from those sales will not be subject to income taxes in that state. However, the definition of 'soliciting orders' may not include digital activities such as websites or emails, and some states may still require e-commerce businesses to register for sales tax.

The Multistate Tax Commission (MTC) has provided guidance on applying Public Law 86-272 to e-commerce activities, concluding that certain business activities are not protected by the law, such as post-sale assistance, credit card applications, and job applications. California and New York have issued similar regulatory guidance, and other states are expected to follow suit.

In conclusion, while Public Law 86-272 provides some protection for e-commerce businesses, the complexities of the digital economy and evolving state tax laws require businesses to stay up-to-date and work with experienced professionals to ensure compliance and optimise their tax strategies.

The protection provided by Public Law 86-272

Public Law 86-272, or the Interstate Income Tax Act, was enacted by Congress in 1959 to protect certain taxpayers from paying income tax. The law prohibits states from imposing a net income tax on out-of-state companies whose activities within the state are limited to the solicitation of orders for sales of tangible personal property. The orders must be sent outside the state for approval and fulfilled by shipment from outside the state.

On the other hand, activities that go beyond solicitation and are not protected by the law include installation, customer training, engineering and design assistance, technical assistance, maintenance and repair, and credit and collection activities. The U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. in 2018 further clarified that online sellers can be subject to state sales taxes even without a physical presence in the state.

In recent years, the Multistate Tax Commission (MTC) and some states, including California, New York, and New Jersey, have issued guidance and regulations regarding the application of Public Law 86-272 to internet-based activities. These updates reflect the shift to e-commerce and aim to clarify which internet activities are protected by the law and which are not. For example, providing post-sale assistance via electronic chat and using internet cookies to gather customer information for marketing purposes are considered to exceed the protections of the law.

While Public Law 86-272 has provided important protections for corporations selling tangible personal property in states where they have no physical presence, the rise of e-commerce has made it more challenging to meet the strict requirements for protection. As a result, businesses and tax preparers must carefully consider whether claiming immunity from state tax under this law is still consistent with their activities in each state.

Public Law 86-272 and nexus tax

Public Law 86-272, or the Interstate Income Act of 1959, was enacted to prevent states from imposing a net income tax on companies whose only business activity in a state is the solicitation of orders for sales of tangible personal property. The law applies to companies that send orders outside the state for approval and then ship the approved orders from a point outside the state.

The law was passed to protect interstate businesses from state net income taxes. However, with the advent of the digital age and the internet, the original scope of the law has been expanded. In August 2021, the Multistate Tax Commission (MTC) issued an updated definition of "solicitation" to include any conduct that invites an order and activities that are ancillary to order requests. This has led to some states, like California and New York, issuing regulatory guidance that closely follows the MTC's statement.

The impact of this updated interpretation is significant. It means that businesses that previously relied on Public Law 86-272 to limit their state income tax filing obligations may now be subject to additional state income tax liabilities. For example, a company that provides post-sale assistance via electronic chat or email, solicits job applications, or uses cookies to gather customer information may now be considered to be conducting unprotected business activities within a state and may be subject to that state's income tax.

The MTC's interpretation of Public Law 86-272 is not binding, and states can choose to adopt it in whole or in part. However, it is likely that more states will follow California and New York's lead, and businesses that previously relied on Public Law 86-272 may need to reevaluate their state tax filing requirements.

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