Is it War?

August 17, 2021

Congress in 1959 restrained the ability of states to tax out-of-state businesses with Public Law 86-272. The law prevents states from taxing businesses who do no more in state than solicit orders which are approved out of state and fulfilled by shipment from out of state. 

61 years and several Supreme Court decisions later, states continue to seek ways to work around these limits. The Multistate Tax Commission, a group of state tax authorities, took another stab at it earlier this month when it voted to update its “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272.”  The update has already triggered furious reaction.

Two state tax attorneys from Brann & Isaacson argue:

The most significant revision to the policy is the addition of a new section on “Activities conducted via the Internet,” which provides 11 separate examples of activities conducted via the internet that will be considered either protected solicitation or unprotected activities. These additions would defeat the core protection of P.L. 86-272. They are based on the unsupportable conclusion that if a business’s interactive website is accessible via the internet to customers located in a taxing state, that company’s interactions with customers via its website should be deemed business activities occurring “within” the taxing state. Thus under the revised MTC statement, an out-of-state company whose website includes a clickable link by which an in-state customer can email a question or comment to the company would result in that company being treated as engaged in unprotected customer services activities within the taxing state, and thereby subject to the state’s net income tax, even though no employee or agent of the company has ever set foot in the taxing state.

Amy Hamilton of Tax Notes reports that the MTC plans to hold its ground:

No public comments were offered before the vote, but the revisions have been controversial almost from the start of the MTC’s nearly two-year effort, with prominent practitioners having accused the MTC of overreach and promising litigation should states apply the approaches.

One week before the vote, MTC Uniformity Counsel Helen Hecht publicly addressed the continuing criticism.

“The revisions to the statement on P.L. 86-272 in particular have generated a number of opinion pieces,” Hecht said during the Uniformity Committee’s July 28 virtual meeting. She said that in some respects, she understands why some in the private sector are not happy with the results of the project. “I don’t expect that what I’m going to say is going to change their minds necessarily, but as Uniformity Counsel, I think it’s important to defend the process.”

While the MTC itself doesn't legislate, it's positions influence how states enforce their own rules. We can expect states to attempt to impose income tax on out-of-state businesses based on their internet presence. We can also expect many companies to fight these attempts in court, with yet another Supreme Court case likely down the line.

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