Emboldened by the Wayfair Ruling, State Policymakers Seek to Interpret Away the Federal Limits on the Taxation of Remote Sellers

One of the few remaining protections against state tax for remote sellers (i.e., businesses making sales into states in which they have no physical presence such as property or employees) is a federal law, the Interstate Income Act of 1959, also known as Public Law 86-272 (P.L. 86-272). The law prohibits a state from imposing income tax on an out-of-state business engaged in interstate commerce if its only business activity within the state is limited to the solicitation of orders for the sale of tangible personal property, and the orders are approved outside the state, and delivery of the property originates from an out-of-state location. Congress enacted the law as a stopgap measure to limit state taxing power on remote sellers until it could look at the issue more closely. More than sixty years later Congress has yet to act.

From the time P.L. 86-272 was enacted in 1959, there has been little guidance on how key aspects of the law should be interpreted despite profound changes to modern business practices such as the rise of digital commerce. An organization seeking to fill this gap is the Multistate Tax Commission (MTC), a U.S. intergovernmental state agency whose mission is to promote uniform and consistent tax policy and administration among the states. As part of its mission, the MTC issued the Statement of Information Concerning Practices of the Multistate Tax Commission and Signatory States under Public Law 86-272. This statement, last updated in 2001, is intended to serve as general guidance to taxpayers and to provide notice as to how states that choose to adhere to its guidance will apply the statute.

The state tax landscape for remote sellers changed dramatically after the U.S. Supreme Court’s landmark 2018 decision in South Dakota v. Wayfair. In Wayfair, the Court overturned the so-called physical presence requirement, under which states were prohibited from imposing sales and use tax collection requirements on sellers that did not have a physical presence within the jurisdiction’s borders. For income tax, the Court has never explicitly held that a physical presence requirement applies. As a result, for the past 20 years, many states have successfully enforced income tax obligations against sellers without a physical presence.

Multistate Tax Commission Amendments

Shortly after the decision in Wayfair, the MTC formed a committee to review and recommend updates to the statement. The scope of the project was to consider how P.L. 86-272 applies to modern business activities and was limited to statutory interpretation, not policymaking. It primarily focused on business activities conducted by remote sellers over the internet, and to what extent solicitation of orders covered activities that neither explicitly nor implicitly propose a sale. In November 2020, the MTC committee proposed amendments to the statement that eliminate much of the protection afforded under P.L. 86-272 for any company with an interactive website, based on a customer’s activity with a company’s website.

The proposed revisions to the statement generally conclude that if a remote seller interacts with a customer via the business’s website, the remote seller would be engaged in an activity within that customer’s state. A remote seller’s website that only presents static text or photos would not be sufficient to be an activity within a taxing state. The revisions also include 11 factual scenarios, 10 of which provide that the remote seller’s website alone violates the protection of P.L. 86-272. The scenarios indicate that P.L 86-272 protection would not apply to a remote seller using a website that is used to perform any of the following functions or activities:

• Offers post-sale assistance to in-state customers via either electronic chat or email that customers initiate by clicking on an icon on the business’s website.
• Solicits and receives on-line applications for its branded credit card via the business’s website.
• Invites viewers in a customer’s state to apply for non-sales positions with the business. The website enables viewers to fill out and submit an electronic application, as well as to upload a cover letter and resume.
• Places internet cookies onto the computers or other electronic devices of in-state customers. These 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.
• Remotely fixes or upgrades products previously purchased by its in-state customers by transmitting codes or other electronic instructions to those products via the internet.
• Offers and sells extended warranty plans via its website to in-state customers who purchase the business’s products.

These activities and functions are common for businesses selling tangible personal property over the internet. As a result, if the MTC’s amendments take effect, they would eviscerate the protections under P.L. 86-272 that are currently afforded to remote sellers. In comments submitted to the MTC concerning the amendments, the Council On State Taxation (COST), an advocacy group representing business taxpayers, noted that the MTC’s proposed list of unprotected activities makes no sense unless one assumes the unprotected activity takes place in the customer’s state. “Otherwise, virtually any customer-related or employee-related activity by the seller, with or without physical presence in the customer’s state, would exceed the protection of P.L. 86-272, making the statute a nullity.” Many of these same activities are currently deemed as protected by P.L 86-272 when conducted by out-of-state sellers over the telephone, COST said.

Other proposed changes by the MTC committee include:

• Specifying that activities performed by an employee who telecommutes on a regular basis are not protected (unless only performing solicitation of orders of tangible personal property);
• Stating that unprotected activities provided by an independent contractor on behalf of a seller would remove the seller’s protection;
• Removing language requiring the state to apply P.L. 86-272 to foreign commerce; and
• Removing the endorsement of the Joyce rule when applying P.L. 86-272.

On November 20, 2020, the MTC’s Executive Committee voted to move forward on the amendments to the statement and it will now conduct a survey of the states. The amendments eliminate much of the protection afforded under P.L. 86-272 for any company with an interactive website, based on a customer’s activity with a company’s website. It is important to remember, however, that the guidance included in the statement is not law and even if approved by the MTC following the survey, the positions are likely to be challenged.

The Takeaway

After the Court overturned the physical presence requirement for purposes of states requiring remote sellers to collect sales and use tax, the MTC is moving to interpret away most of the remaining tax protections afforded to remote sellers. With this in mind, it is important for businesses to reassess whether the solicitation activities they are conducting in states for which they otherwise lack a physical presence could come to the attention of state auditors.