Are the Protections of P.L. 86-272 For Remote Sellers of Tangible Personal Property Dwindling?
P.L. 86-272 was enacted in 1959 to protect sellers of tangible personal property from the imposition of state income taxes outside of its home state. It was intended to be a temporary provision of the law; however, it remains unchanged for the sixty years since its enactment.
Although the law remains unamended, there have been multiple legal disputes over the years due to many key elements that lack clarity and terms that are not clearly defined. In an effort to assist taxpayers in achieving compliance with their application of P.L. 86-272 to their business activity, the Multistate Tax Commission (MTC) issued the original version of the Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 on July 11, 1986. The statement has been revised four times since then, with the latest revision being adopted on August 4, 2021.
Many sellers who are in the business of selling tangible personal property have relied on the protection of P.L. 86-272 (Public Law 86-272 – September 14, 1959) that prevents a state, outside of their home state, from imposing state income tax when the following conditions are met:
- The only activity “within” a State by the taxpayer or their representative in the state, are for the solicitation of orders of tangible personal property.
- Orders received are sent outside of the State for approval or rejection.
- Approved orders are filled by shipment or delivery from a point outside the state.
The Statement of information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272 describes how states in agreement with the way they interpret the law would apply it to various activities that a business may have in said states. Included in the statement is a list of activities that are deemed to be protected under P.L. 86-272 and a list of those activities that are not protected under P.L. 86-272.
The most recent version adopted on August 4, 2021 was issued to revise the statement to address modern business activities including:
- Telecommuting Employees:
Revision of Section A of Article IV – Unprotected Activities: “Activities performed by an employee who telecommutes on a regular basis from within the state unless the activities constitute the solicitation of orders for sales of tangible personal property or are entirely ancillary to such solicitation.”
- Business activities conducted via the internet
Addition of Section C to Article IV“As a general rule, when a business interacts with a customer via the business’s website or app, the business engages in a business activity within the customer’s state. However, for the purpose of this Statement, when a business presents static text or photos on its website, that presentation does not in itself Constitute a business activity within those states where the business’s customers are located. “The Statement includes eleven (11) examples of scenarios between an internet seller and its customer where the orders are approved or rejected as well as the products are shipped from a point outside of the customer’s state. The examples given indicate whether internet activities are protected by P.L. 86-272 as being merely a solicitation of sales, an activity entirely ancillary to the sale, or whether the internet activity exceeds the protection afforded by P.L. 86-272.
- Independent Contractors:
Expansion of Article V pertaining to Independent Contractors to include: “Performance of unprotected activities by an independent contractor on behalf of a seller, such as performing warranty work or accepting returns of products, also removes the statutory protection.”
- Foreign Commerce:
P.L. 86-272 is only applied to “interstate commerce” as Congress does not have authority to regulate foreign commerce. Revision of the language in Section VII eliminates the language that says “This state will apply….” as it may be construed that Congress was attempting to protect business activities pertaining to foreign commerce.
- Application of Joyce Rule:
Article VII.E was deleted as the Statement is no longer taking a position on the sourcing of sales
If your business is one of the many that continues to look to the protection that P.L. 86-272 affords from being imposed state income taxes outside of your home state for the sale of personal tangible personal property, now is the time to re-examine the presumptions that have been made in the past. DiSanto, Priest & Co. can assist you in analyzing your business activities and determining any state compliance that needs to be addressed regarding the applicability of P.L. 86-272, as well as other areas of state tax nexus. Give us a call at (401)-921-2000, or fill out our online contact us form to get started.