Public Law 86-272 Revisions
In 1959, the Interstate Income Act included a provision titled Public Law 86-272 (P.L. 86-272) which prohibited states from imposing income tax on out-of-state sellers if their in-state activities did not extend beyond the solicitation of orders of tangible personal property.
For the last 63 years, out-of-state sellers of tangible personal property have enjoyed the protection offered by P.L. 86-272. However, the landscape of interstate commerce has drastically changed over the years and when P.L. 86-272 was placed in service, the internet didn’t even exist. Since then, questions have been raised as to if out-of-state sellers in-state activities extend beyond the scope of P.L. 86-272 because of their cyberspace activities.
In August of 2021, the Multistate Tax Commission (MTC) approved revisions to P.L. 86-272 that indicated that certain internet activities extend beyond the solicitation of orders for tangible personal property and prevent out-of-state taxpayers from being exempt from corporate income tax.
Based on the MTC’s revisions to P.L. 86-272, internet sellers are acting beyond the scope of P.L. 86-272 when the business interacts with a customer via the business’s website or app. Features such as a chat function that provides post sales assistance, soliciting and receiving branded credit cards, posting of non-sales positions, placing on instate customers’ computers or other electronic devices cookies that gather customer search information, options to upgrade, warranty plans, etc. are all web-based functions that the MTC standards consider to be beyond the scope of activities protected under P.L. 86-272.
A handful of states have enacted, or are in the process of enacting, the MTC revisions to P.L. 86-272. California, Colorado, and Pennsylvania have indicated that they take the position as indicated by the MTC. New York State has drafted a rule that indicates that certain internet activities will not qualify for the federal protection under P.L. 86-272.
Stay tuned for updates on this hot topic as we will be keeping a close eye as states continue to revise their rules and limit the opportunities for out-of-state sellers to take the P.L. 86-272 position.
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