Internet activities protected from state tax under P.L. 86-272

Public Law 86-272 can shield companies from state income tax liability when doing business over the internet. 

A business must have nexus with a state for the state to tax it. P.L. 86-272 protects some sellers from having income tax nexus. To help promote uniform application of P.L. 86-272, the Multistate Tax Commission (MTC) adopted a Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272. Recently, the MTC adopted a revised statement to address when P.L. 86-272 protections extend to internet activities.

Public Law 86-272

P.L. 86-272 protects an out-of-state company from state income taxation when the company’s activity is only soliciting orders for tangible personal property. The orders must be:

• sent out-of-state for approval; and
• filled by shipment or delivery from outside the state

Immunity under P.L. 86-272 fails if the activities are not:

• solicitations of orders for sales of tangible personal property;  
• entirely ancillary to the solicitation; or 
• de minimis.

MTC revised statement

The MTC statement lists specific protected and unprotected activities. Revisions to the statement, adopted by the MTC on August 4, 2021, addressed selling goods over the internet.

The revisions require an out-of-state company conducting business over the internet to use the existing analysis to determine immunity from taxation. 

Internet activities are limited to:

• the solicitation of orders for tangible personal property,
• where orders are sent outside the state for approval, and
• then are filled by shipment or delivery from a point outside the state.

So, when a company interacts with a customer on its website or app, the company engages in a business activity in the customer’s state. However, static text or photos on a company’s website do not in themselves constitute a business activity in states where the company’s customers are located.

The statement goes on to list examples of internet activities conducted by out-of-state businesses. 

Protected activities

Examples of protected activity by an out-of-state company include:

• A company providing post-sale assistance to in-state customers by posting a list of static FAQs with answers on the company’s website.
• A company placing Internet “cookies” on computers or other devices of in-state customers for limited use. The cookies gather customer information only for purposes entirely ancillary to the solicitation of orders for tangible personal property, like:
  
  -remembering items customers have placed in their shopping cart during a current web session, 
  -storing personal information customers have provided to avoid the need for customers to re-input the information when they return to the seller’s website, or
  -reminding customers what products they have considered during previous sessions. 
  
  
• A company selling only items of tangible personal property on its website. Customers can only search for items, read product descriptions, select items for purchase, choose among delivery options, and pay.

Unprotected activities

Examples of unprotected activity by an out-of-state company include:

• A company regularly providing post-sale assistance to in-state customers by electronic chat or email initiated by customers clicking on an icon on the website.
• A company soliciting and receiving on-line applications for its branded credit card via the company’s website. The cards generate interest income and fees for the company.
• A company’s website inviting viewers in a customer’s state to apply for non-sales positions with the company, including filling out and submitting an electronic application and uploading a cover letter and resume.
• A company placing Internet “cookies” on computers or other electronic devices of in-state customers. The cookies gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.
• A company remotely fixing or upgrading products previously purchased by its in-state customers by transmitting code or other electronic instructions to those products over the Internet.
• A company offering and selling extended warranty plans on its website to in-state customers who purchase the company’s products.
• A company contracting with a marketplace facilitator to aid in selling the company’s products on the facilitator’s on-line marketplace. The marketplace facilitator maintains inventory, including some of the company’s products, at fulfillment centers in various states where the company’s customers are located.
• A company contracting with in-state customers to stream videos and music to electronic devices for a charge.

States saying internet activities would create nexus

In a survey conducted by Healy, Schadewald, and Nelson, several states indicated they would subject an out-of-state company to their state income tax for certain internet activities listed in the MTC statement.

For example, states indicating they would subject an out-of-state company to its income tax if the company engaged in post-sale assistance via electronic chat or email include:

• California
• District of Columbia
• Florida
• Idaho
• Kansas
• Montana
• Nebraska
• Tennessee
• Utah

States indicating they would subject an out-of-state company to its income tax if the company used cookies for purposes other than solicitation include:

• California
• District of Columbia
• Idaho
• Kansas
• Minnesota
• Montana
• Nebraska
• North Dakota
• Tennessee
• Utah

States indicating they would subject an out-of-state company to its income tax if the company contracts with a marketplace facilitator to aid in selling the company’s products on the facilitator’s on-line marketplace include:

• California
• District of Columbia
• Florida
• Hawaii
• Idaho
• Kentucky
• Minnesota
• Montana
• Nebraska
• Tennessee
• Utah
• West Virginia

It will be interesting to see which states formally adopt the revised MTC statement.