By unanimous vote on August 4, 2021, the Multistate Tax Commission (“MTC”) adopted a revised “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States under Public Law 86-272” (“MTC Statement”). With this interpretation, the MTC is attempting to so narrowly interpret the reach of Public Law 86-272 (“P.L. 86-272”) that—if the MTC’s interpretation is adopted by states and then sustained by the courts—the result would be a near-total abrogation of the federal statute.
Background: Since 2018, the MTC has been reviewing its interpretation of P.L. 86-272, the federal statute that prohibits a state from imposing a net income tax on the income of any person whose only business activities within the state consist of the solicitation of orders for sales of tangible personal property, as long as those orders are accepted and fulfilled from outside the state. P.L. 86-272 was adopted by Congress in 1959, in reaction to the Supreme Court’s decision in Northwestern States Portland Cement v. Minnesota, 358 U.S. 450 (1959), which upheld Minnesota’s ability to impose an income tax on an out-of-state corporation that was engaged exclusively in interstate commerce in the state. Court cases over the years have attempted to address the parameters of “solicitation,” including the Supreme Court’s decision in Wisconsin Department of Revenue v. William Wrigley Jr. Co., 505 U.S. 214 (1992), which held that protected “solicitation” also includes activities that are “entirely ancillary to requests for purchases.” Exactly which activities are “ancillary” to sales has led to much dispute, and many states have issued regulations purporting to define activities that exceed the scope of P.L. 86-272’s protection. Now, the MTC, through the MTC Statement, has updated its guidance to severely narrow the scope of P.L. 86-272-protected activities.
The MTC Statement: Likely the most controversial provision is a new section on “Activities Conducted Via the Internet,” which sets out 11 examples of activities that will or will not be considered protected. Out of the 11 examples, eight result in a finding of unprotected activity, including: providing advice by electronic chat or e-mail on how to use products after they have been delivered (example 2); soliciting and receiving online applications for branded credit cards (example 3); remotely fixing or upgrading products by transmitting code or other electronic instructions (example 7); and selling extended warranty plans on a website (example 8).
The MTC therefore seems to have concluded that all of these activities occurring over the Internet—normal business activities for most companies these days—are “business activities within [the] State by or on behalf of” (emphasis added) the out-of-state company as described by P.L. 86-272, even if no employee or agent of the company has ever visited the state.
Since the MTC Statement was adopted unanimously, it can be expected that states will soon incorporate these positions into their regulations or statutes. Undoubtedly, court challenges will follow, raising arguments that the states, having failed to convince Congress to limit or remove P.L. 86-272 through the legislative process, are instead impermissibly invading an area pre-empted by an explicit federal statute. The MTC Statement should not be regarded as the final word on the subject.