Federal Law Public Law 86-272 historically provided protections against income tax filing requirements for out-of-state companies if the only activities engaged in the state were soliciting sales of tangible personal property. However, actions by the Multistate Tax Commission in 2021 may have changed this.
Does Public Law 86-272 still apply?
In August 2021, the Multistate Tax Commission (“MTC”) passed the fourth revision regarding practices in relation to P.L. 86-272, most notably with respect to internet sales. These proposed regulations seek to provide a more modern interpretation of P.L. 86-272 with the increase in internet sales and what is still protected under this law. The MTC offered the proposed regulations as its own interpretation of how the public law should be applied by the states, but adoption of the proposed regulations is up to the states. The states can elect to adopt these in whole, in part, or not at all.
Proposed law lessens tax protections for online businesses
The MTC’s proposed regulation on internet-based activities effectively eliminates the public law protections for most businesses with a website. Included in these unprotected internet services are having an active chat feature and if the business provides upgrades or fixes products previously purchased by an in-state customer. Placing internet “cookies” on the computers or other software devices is also an unprotected internet service if the information gathered is used to inform production processes or is completely ancillary to the solicitation of orders.
States begin to implement new tax regulations for internet sales
Currently California and New York are the only states that have laws enacted regarding internet sales and how language on a company’s website could impact nexus in those states. Neither state has issued final regulations regarding the implementation and may change when officially adopted. Other states including New Jersey and Oregon are currently developing regulations regarding internet transactions but have not issued draft regulations yet.
It is noteworthy that some states may not announce they have adopted formally or informally the regulations but may still enforce compliance with them.
This is an evolving topic and will need monitoring and active tax planning as more states consider implementing these regulations imposing income tax requirements on out-of-state businesses due to their internet activities.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.