It’s been more than 60 years since Public Law 86-272 was enacted. The text of the federal law has remained constant, protecting companies from income tax liability in states where the taxpayers’ in-state activities are limited to soliciting sales of tangible personal property, with the orders being approved and shipped from out of state. Despite the fact that the text of Public Law 86-272 has remained unchanged since 1959, attacks on the federal law by states have increased in recent years.
Multistate Tax Commission
The Multistate Tax Commission (MTC) is an organization formed by state tax administrators in 1967, partially in response to P.L. 86-272. It has been issuing guidance regarding the law’s meaning since 1986. Most recently, in August 2021, the MTC revised its Statement of Information regarding P.L. 86-272, which, to many practitioners, seemed an attempt to eviscerate the federal law’s protections by vastly narrowing its scope in light of the internet age. However, the MTC’s guidance is not authoritative and is arguably self-serving. Because Public Law 86-272 shields a company from income tax liability in a state, states (and state organizations) have a desire to interpret the federal law as narrowly as possible.
The August 2021 Revised Statement proclaims that certain website features constitute unprotected “in-state activities” by a taxpayer. Many of these activities involve a company “interacting” with its customers through its website, a task which was often accomplished by telephone before the internet age. When these activities occurred over the telephone, no one argued that such activities created “in-state” activities. Why should similar activities conducted over the internet be treated differently?
Although the MTC’s guidance is fraught with issues, states have begun to adopt it. The first state to do so was California by way of administrative guidance. The guidance was immediately challenged on two grounds: 1) California’s administrative guidance violates P.L. 86-272; and 2) the Franchise Tax Board (FTB) failed to properly follow the California Administrative Procedure Act (APA) in enacting it. On Dec. 13, 2023, the trial court granted summary judgment on the grounds that the FTB did not follow the state’s APA. However, it is doubtful we have seen the end of this case; it is likely the decision will be appealed to the Court of Appeals.
Meanwhile, in May 2023, Minnesota circulated a draft revenue notice indicating that it was also considering following the MTC’s revised guidance, but a final notice has not yet been issued. Additionally, on Sept. 5, 2023, New Jersey issued guidance related to its interpretation of P.L. 86-272. Although it has some nuances, the New Jersey guidance largely follows the MTC’s guidance. Finally, effective Dec. 27, 2023, New York formally adopted regulations that would largely adopt the MTC’s guidance.
In addition to states that have officially adopted revised interpretations of Public Law 86-272, some states are adopting similar positions for the first time on audit. Taxpayers should be aware of the increasing aggressiveness of states towards the federal law, as well as the overreach of states in this area. This coming year should bring additional challenges from states and corresponding Public Law 86-272 litigation from taxpayers challenging the overly broad interpretations of the federal law.