Navigating P.L. 86-272 in the Internet Era: The Effects of Internet Activity on State Income Tax

Written by: Emma Raivio, CPA and David Martinson, CPA

 

The rise of e-commerce has revolutionized the way businesses operate. However, it has also introduced new complexities in tax compliance, particularly for those engaged in interstate commerce. One such complexity arises from the Multistate Tax Commission’s (MTC) revised interpretation of P.L. 86-272, which addressed businesses’ loss of protection from state income tax obligations based on their internet activities. 

Understanding P.L. 86-272 

Public Law 86-272, enacted in 1959, protects businesses that sell tangible personal property from paying state income tax in states where their activities are limited to soliciting sales of tangible personal property. While this does not necessarily protect a business from filing a tax return and other compliance obligations, it does protect them from state income tax assessment.  

What is Tangible Personal Property? 

Tangible personal property refers to movable physical items that can be touched and seen. This includes products that are sold or transported across state lines. An example of tangible personal property is a piece of office equipment, such as a computer. This item is a physical, movable asset that a business owner can see, touch, and use during business operations. 

The December 2021 Amendment: Internet Activities in Focus 

In August 2021, the MTC issued a revised statement on P.L. 86-272 addressing internet activities. This amendment acknowledges the significant shift in how businesses operate online and how these activities could now affect tax obligations. 

Previously, businesses were mainly concerned with physical presence standards to determine state nexus. However, post-Wayfair, the landscape has changed dramatically, making it essential to revisit and understand your state activities and their potential tax implications. Businesses must evaluate their state nexus before determining if they can apply public law 86-272. If it has been determined that a business that sells tangible personal property has nexus with a state, they can assess whether they are shielded from that state’s income tax. State jurisdictions can adhere to MTC statements, partially adopt MTC statements, or make their determinations. However, it is important to note that the MTC sets precedents for states.  

Internet Activities That Could Affect Your P.L. 86-272 Protection 

The MTC has identified specific internet activities and whether they impact the state income tax protections federal law provides. 

• Providing Post-Sale Assistance via posting a static list of FAQs with answers: Posting static FAQs on a business website will not result in losing P.L. 86-272 protection. 
• Providing Regular Post-Sale Assistance via Electronic Chat or Email: Offering support through chat or email results in losing P.L. 86-272 immunity.  
• Soliciting and Receiving online applications for branded credit cards: If your business solicits and accepts applications for its branded credit cards on its website, it will lose PL 86-272 protection.
  
• The business’s website allows online applications for non-sales positions: Enabling website users in a customer’s state to fill out and submit an electronic application for a non-sales position will result in a loss of protection from state income tax assessment.
  
• Using Cookies to Collect Data: Gathering customer data through cookies may lead to the loss of P.L. 86-272 protection, depending on how the data is used.
  
• Remote Diagnostics: Remotely fixing or upgrading a customer’s previously purchased item defeats P.L. 86-272 immunity
  
• Offering and selling extended warranty plans: Offering and selling extended warranty plans to customers online negates mere solicitation of sales and, therefore, P.L. 86-272 protection.
  
• Contracting with a marketplace facilitator for the sale of their products on the facilitator’s online marketplace: If the facilitator maintains the business’s inventory at its fulfillment centers in the state where a customer is located, the business is not protected under P.L. 86-272. 
  
• Contracting with in-state customers to stream videos and music for a charge:  As this does not constitute the sale of tangible personal property, P.L. 86-272 does not apply.
  
• Offering for sale items of only tangible personal property on their website: Pursuant to the limitation of the type of activities involved, PL 86-272 protection still applies.   

Who Is Impacted? 

This revised interpretation impacts all US businesses engaged in interstate commerce of tangible personal property. These businesses must reassess their online operations to determine if they are still protected from state income tax under P.L. 86-272. 

While P.L. 86-272 applies to all domestic entities, states have the authority to determine if they allow it to be applied to non-US entities. Suppose a foreign entity has been able to claim PL 86-272 protection in the past for certain states. In that case, it must also reevaluate whether the protection still applies based on its internet activities.  

Implications for Tax Planning and Compliance 

Re-evaluate Your State Activities 

Businesses that have previously claimed pl 86-272 protection must analyze their state internet activities in light of these new standards. As noted previously, even states that do not adopt MTC revisions still use them to inspire updates to their regulations. Understanding whether your internet activities could negate P.L. 86-272 protections is vital to state income tax exposure. 

Prepare for Potential Tax Obligations 

If it has been determined that your business conducts internet activities that a state deems beyond the scope of activities that afford PL 86-272 immunity, you may need to prepare for potential corporate income tax liabilities. This preparation includes setting aside funds and updating your financial planning to accommodate possible state taxes and increases in state tax obligations. 

Policy Setting and Employee Awareness 

Set clear policies regarding your business activities, especially those conducted online. Educate your employees about activities that could subject the company to state income tax. 

Compliance and Risk Management 

Non-compliance with state tax obligations can lead to significant risks, including interest and penalties and the administrative burden of amending past returns. Ensuring compliance is essential to avoid these costly consequences. It’s crucial to have concrete documentation and support to demonstrate whether P.L. 86-272 applies to your business activities. There should be an annual evaluation of whether PL 86-272 protection is still applicable.  

Final Thoughts & Next Steps 

The MTC’s revised interpretation of P.L. 86-272 highlights the importance of scrutinizing internet activities and the ever-narrowing applicability of the law. With states free to adopt and enforce their standards, businesses must stay informed and proactive in their tax planning and compliance efforts. 

You can navigate these changes by closely analyzing your activities and communicating openly with your tax advisor. Remember, P.L. 86-272 protections may no longer apply as they once did, and vigilance in compliance is more important than ever.  

If you would like assistance evaluating your business’s state tax exposure and applicability of PL 86-272, VSH is a trusted tax advisor for personalized advice. Understanding and adapting to these changes will help safeguard your business against unexpected tax liabilities and keep you ahead in the ever-evolving landscape of interstate commerce.