Chat boxes, online recruiting and cookies all override the income tax protections of P.L. 86-272 for online companies, according to the Multistate Tax Commission.
Since P.L. 86-272 was enacted by Congress in 1959, ecommerce has changed the way business is conducted beyond what Congress could have anticipated when the law was passed. In the absence of modernization efforts from Congress, the Multistate Tax Commission (MTC) has adopted a Statement on P.L. 86-272 that states can use to apply the statute to modern business activities.
The adopted statement removes most protections of P.L. 86-272 afforded to remote sellers. The activities isolated by the MTC as “unprotected” under P.L. 86-272 gives states free rein to impose nexus and tax on remote sellers for a broad range of online activities. The list (below) presumes that a business can isolate unprotected and protected in-state customer activities taking place online, which is a big lift, if not impossible, for business taxpayers.
The MTC is a U.S. intergovernmental state agency, which is an influential source for policymaking at the state tax level. The MTC has been debating a framework for states to incorporate ecommerce into tax policy since 1986, finally adopting a modernization statement in August 2021.
In the statement, the MTC provides instruction on modern business activities, 11 examples in all, addressing protected and unprotected activities taking place online. Any interaction with a customer via the business’s website or app is considered a business activity within the customer’s state, except for static website text and photos.
Passive websites with no direct customer interaction should be protected activities. This includes frequently asked questions that sit on a website. Post-sale chat boxes and emails, however, cross the line into an unprotected activity.
Internet cookies are divided by how the company uses the information gathered. Customer information from cookies that is used to improve business operations (i.e., supply chains, inventories) are unprotected while cookies used to track customer purchases are protected.
It remains to be seen when, how, or if states, even MTC member states, will incorporate this new modernization statement into their laws. However, taxpayers that have filed income tax returns under the traditional P.L. 86-272 protections should certainly review their website activities and be prepared to pay more income tax.
We’ll keep you posted on this one as well. As questions come up, contact your TaxOps advisor for guidance.