Enacted by Congress in 1959, Public Law 86-272 (P.L. 86-272) is a federal law that many companies rely on to protect them from having to pay a state’s income tax.
There have always been specific criteria that a company has to meet to fall within the parameters of the law’s protection; however, since 2018, we have seen states and the Multistate Tax Commission (MTC) seek to interpret P.L. 86-272 in new ways that limit its protection or make it void.
P.L. 86-272 prohibits a state from imposing a net income tax on the income of a person derived within a state from interstate commerce if the only business activities within the state conducted by or on behalf of the person consist of the solicitation of orders for sales of tangible personal property. The protections provided by P.L. 86-272 only apply to orders that are sent outside of the state for acceptance or rejection. If the orders are accepted, they must be filled by shipment or delivery from a point outside the state to maintain P.L. 86-272 immunity.
In essence, P.L. 86-272 is attempting to limit when a company has nexus (a taxable presence) for income tax purposes (i.e., an obligation to pay income tax). A state may require a company to still file an income tax return but not pay any income tax. The company would still owe any minimum taxes, franchise taxes or gross receipts taxes.
In South Dakota v. Wayfair, Inc., the United States Supreme Court decided that an internet seller “may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term.”  The Court in Wayfair was not addressing the application of P.L. 86-272 or income tax nexus, rather Wayfair involved the threshold for determining whether the taxpayer had nexus for sales tax purposes. As a result of Wayfair, every state that imposes a sales tax has enacted “economic nexus” thresholds.
Despite the sales tax focus of Wayfair, the MTC and state departments of taxation are increasingly questioning whether P.L. 86-272 protections can be removed simply by conducting non-solicitation activities remotely via the internet.
Before we dig into the recent attacks on P.L. 86-272, lets cover the key aspects of P.L. 86-272.
Key Aspects of P.L. 86-272
- The protection only applies to sales solicitation (and activities ancillary to sales solicitation) for the sale of tangible personal property. It generally does not apply to services or intangible property.
- Orders cannot be approved or accepted within the state.
- Orders must be fulfilled by shipment or delivery from outside the state.
- The protection only applies to income taxes or taxes based on income. The protection does not apply to sales tax, franchise tax, gross receipts taxes or minimum taxes.
- L. 86-272 only applies to interstate commerce. It does not apply to foreign commerce or US activities of non-US companies unless a state explicitly elects to do so.
- Merely registering to do business in a state, without more activity in the state, will generally not forfeit P.L. 86-272 protection.
- L. 86-272 protection is determined on a tax year by tax year basis. The loss of protection at any time during a tax year results in the loss of protection for the entire tax year.
The Multistate Tax Commission’s Statement
The MTC is an intergovernmental state tax agency whose mission is to promote uniform and consistent tax policy and administration among the states, assist taxpayers in achieving compliance with existing tax laws and advocate for state and local sovereignty in the development of tax policy. The MTC is not a governmental agency and does not make law but rather creates tax policy that member states can choose to adopt by enacting their own laws.
On August 4, 2021, the MTC revised its statement of Information Concerning Practices of Multistate Tax Commission and Supporting States under Public Law 86-272. The revised statement asserts that the following activities result in the loss of P.L. 86-272 protection:
- Providing post-sale assistance to in-state customers via either electronic chat or email that customers initiate by clicking on an icon on the business’ website.
- The business solicits and receives online applications for its branded credit card via the business’ website. The issued cards will generate interest income and fees for the business.
- The business’ 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 upload a cover letter and resume.
- The business places internet cookies onto the computers 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.
- Note: Cookies that gather customer information that is only used for purposes entirely ancillary to the solicitation of orders for tangible personal property such as: 1) to remember items that customers have placed in their shopping cart during a current web session, 2) to store personal customer information customers have provided to avoid the need for the customers to re-input the information when they return to the seller’s website and 3) to remind customers what products they have considered during previous sessions do NOT result in the loss of P.L. 86-272 protection.
- Business remotely fixes or upgrades products previously purchased by its in-state customers by transmitting code or other electronic instructions to those products via the internet.
- Business offers and sells extended warranty plans via its website to in-state customers who purchase the business’s products.
- The business contracts with a marketplace facilitator that facilitates the sale of the business’ products on the facilitator’s online marketplace. The marketplace facilitator maintains inventory, including some of the business’s products, at fulfillment centers in the state.
- Business contracts with in-state customers to stream videos and music to electronic devices for a charge (streaming is not considered by the MTC to be the sale of tangible personal property).
Despite the above, hope is not lost. The MTC statement does state that when a business presents static text or photos on its website or FAQs, the company is still within the parameters of P.L. 86-272. Additionally, when a business offers for sale only items of tangible personal property on its website, the website enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options and pay for the items, P.L. 86-272 protection remains intact.
State Adoption of MTC Statement
On February 14, 2022, California published Technical Advice Memorandum (TAM 2022-01) which adopted the MTC statement. On August 19, 2022, the American Catalog Mailer’s Association filed suit challenging California’s TAM; the case is still pending.
The New York Department of Taxation and Finance released draft regulations in 2022 which would follow the MTC statement. New Jersey and Oregon have indicated they would follow suit as well.
In April 2023, Minnesota issued a draft revenue notice proposing to adopt the MTC statement.
Flip-side Protection Created by MTC Statement (Refund Opportunity)
If a state applies the MTC statement, then the same rules that result in the loss of P.L. 86-272 protection in the destination state also affect the determination of whether the state from which tangible property is shipped (“origin state”) may subject the related receipts to that state’s throwback rule. For example, if a California-based company has been throwing back sales into the numerator of its California sales apportionment factor because it was protected by P.L. 86-272 in the destination state and California adopts the MTC statement, then the company may not have to throwback those sales to California if it exceeds the P.L. 86-272 protection in the destination state according to the statement.
Recent Minnesota Tax Court Case
On June 23, 2023, the Minnesota Tax Court evaluated the application of P.L. 86-272 to Uline, Inc’s activities in the state. The good news is that the tax court reviewed Uline’s activities one-by-one to determine if they exceeded P.L. 86-272 protection and did not look at Uline’s internet activities as described by the MTC statement. The bad news is that the tax court held that Uline’s activities exceeded the protection of P.L. 86-272. Specifically, Uline had ten instances during the 2-year audit period where sales representatives accepted product returns and despite this activity being unprotected, held the activity to be de minimis because Uline did not have a written policy requiring sales reps to perform this activity. Uline sales reps prepared “Market News Notes” which involved obtaining information from customers about competitors’ products and business practices. The tax court held this activity to not be protected and not to be de minimis because Uline had a company policy requiring the preparation of the Market News Notes.
P.L. 86-272 is not dead for the moment, but it is under attack. The MTC statement impacts all companies with a website and could result in all companies that rely on P.L. 86-272 to lose that protection.
The MTC statement goes beyond Wayfair by not only asserting physical presence doesn’t matter but asserting that activities done remotely are the same as doing them in person. Wayfair didn’t reach that conclusion. Thus, we may see more companies and other organizations challenge a state’s adoption of the MTC statement in the future.
The MTC statement has not been adopted by all states; California’s TAM is currently being litigated, and New York’s draft regulations and Minnesota’s draft revenue notice are still in “draft” form. Consequently, companies may not have a historical liability or immediate concern; however, companies that are relying on P.L. 86-272 protection should continue to monitor the situation and evaluate their websites and electronic interactions with customers and prospective customers to ensure P.L. 86-272 protection will not be forfeited.
Regardless of the potential for interpreting or applying P.L. 86-272 differently, all companies that currently rely on it or companies that have never applied its protection should review their activities to determine if there are any risks of exposure or refund opportunities.
 138 S. Ct. 2080, 2095 (2018).
 Uline, Inc. v. Comm’r. of Revenue, File No. 9435-R (Minn. Tax Ct. June 23, 2023).