The Next Frontier in State & Local Tax After Wayfair: Expansion of Income Tax via P.L. 86-272

In June 2018 the Supreme Court held in South Dakota v. Wayfair (Wayfair) that physical presence in a state is not required in order to establish nexus for sales tax purposes. In the aftermath of Wayfair, the Multistate Tax Commission (MTC) has targeted one of the remaining lifelines businesses have to shield them from income tax economic nexus; P.L. 86-272.

The federal law known as P.L. 86-272, was passed over 60 years ago, and it prohibits a state from imposing income tax on businesses that only sell tangible personal property (“TPP”) AND its activities in a respective state do not exceed the solicitation of orders.


For many years, even preceding the Wayfair case, for income tax, it has been generally accepted that economic nexus has been the law of the land, unless a business was otherwise protected by satisfying P.L. 86-272. This has left many service providers exposed to state income tax liabilities, while remote sellers of product, such as retailers and wholesalers are immune from income tax provided their activities don’t exceed the solicitation of orders for tangible goods.

Put simply, the federal limitation only applies if the following conditions are satisfied:

  1. the state tax being applied is a net income tax;
  2. the business being taxed is an out-of-state business;
  3. the only activity of the business in the state is the solicitation of orders;
  4. all orders are accepted by the business outside the state;
  5. the product being sold is shipped from outside the state; and
  6. the product being sold is tangible personal property.

Due to the ambiguity of a lot of the key elements to the law, over the years the Multistate Tax Commission (MTC) has issued a “Statement of Information”, attempting to address some of this uncertainty, with the objective to provide clear interpretation of what business activities may be “protected” vs. “unprotected”. The MTC issued its original guidance in 1986, and has revised the guidance over the years, with the most recent iteration being revised in 2001.

The MTC was formed in 1967 by states to promote uniformity in state taxation. According to the MTC, the organization acts as a “voice for preserving the authority of states to determine their own tax policy within the limits of the U.S. Constitution.”

MTC Proposal

Soon after Wayfair was decided, the MTC launched a Work Group to examine the application of P.L. 86-272, considering that 1) service providers without physical presence that conducts business remotely are generally subject to income tax, while at the same time remote sellers of tangible goods may be immune to income tax; and 2) remote sellers of tangible goods are now generally subject to sales tax, while remote sellers of tangible goods are generally immune from income tax. As such, the MTC formed the Work Group to address these contradictions and reexamine the federal law for remote sellers doing business through the internet, as there has been significant “changes that have occurred during the past two decades in the economy and the way that business is conducted.”

In February 2020, about a year after commencing this initiative, the MTC released a proposed revised statement, establishing that a business could lose P.L. 86-272 protection based on routine interactions with customers through the internet. The proposed revised statement explains that “as a general rule, when a business interacts with a customer via the business’s website or app, the business engages in an activity within the customer’s state,” resulting the loss of P.L. 86-272.

As such, under this so called “internet rule”, the seller is deemed to perform a business activity in a state only when it “interacts” with a customer in that state, but when a business presents a static text or photos on its website, that presentation alone would not result in loss of P.L. 86-272 protection. With the proposal, the revised statement illustrates 11 examples of certain internet-related activities that are considered protected and unprotected.

MTC’s draft guidance provides examples of when the use of an interactive website will tarnish P.L. 86-272 protection, even if the business has no physical presence in the state. Such activities include:

  • Providing post-sale customer assistance via an electronic chat or website email;
  • A career or employment page that accepts applications for non-sales positions;
  • The use of “cookies” on a customer’s device to gather information on shopping trends or to track inventory;
  • Transmission of remote product patches, upgrades or updates via the internet;
  • The offering of extended warranty plans;
  • Use of marketplace facilitators, such as the fulfillment center which maintains inventory;
  • Other interactive internet related activities.

What is interesting is that the proposed revised statement relies on the Wayfair case to reason that with the lack of physical presence in a state, when a business interacts with customers in a state through the internet, this would not be deemed to be solicitation, and would result in the loss of P.L. 86-272 protection. However, critics argue that the Wayfair case did not interpret or make mention of the federal law, and its reliance is improper. The Council On State Taxation in its letter to the MTC, stated that “if the additions to the list of unprotected activities in the Proposed Revised Statement of Information are adopted by the MTC and the individual states, P.L. 86-272’s protections will be effectively eviscerated.”

Although almost all states are members of the MTC, there are different levels of membership, and its policies and directives are not always adopted by the states. As such, even if the MTC were to adopt this revised interpretation, not all states would automatically implement these new directives. That being said, from a practical standpoint, states that don’t automatically adopt the MTC guidance for P.L. 86-272, in most cases indirectly codify significant components of the guidance into its provisions. For example, New York may not adopt the MTC statement, but its provisions still generally conform to the substance of the statement.

Let’s Talk

On November 20, 2020, the MTC’s Executive Committee accepted the hearing officer’s report and decided to advance the proposed revisions, which the next step includes surveying the state members before voting on final adoption of the proposed guidance on P.L. 86-272. Assuming acceptance of this revised statement, many states that are members of the MTC would likely adopt the guidance, and many states that are not compact member states could still separately adopt the guidance in the months and years to come.

The adoption of the proposed revised statement could result in significant income tax liabilities for many remote businesses, as many of these businesses use a website or app to interact with its customers. As such, it’s important that businesses continue to monitor how these proposals may impact their state filing positions.

If you would like to discuss how the MTC P.L. 86-272 proposal may impact your business, then contact Withum’s State and Local Tax Group for a deeper discussion.

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