MTC Adopts Online Business Tax Shield Guidance

After two years of work, the Multistate Tax Commission adopted guidance Wednesday on when internet business activities exceed federal protections against state income tax.

With all 19 member states and the District of Columbia that were present voting yes, the MTC at its annual business meeting adopted an updated statement on the Interstate Income Act, more commonly known as P.L. 86-272. The act, passed in 1959, insulates businesses from tax on net income when soliciting tangible personal property orders is their only connection to a state.

The MTC last updated guidance on P.L. 86-272 in 2001, when widespread use of the internet was only a few years old. Since then, commerce has increasingly shifted online, prompting the commission to reexamine the issue. The new guidance, like all the MTC's work product, is not binding, even on its member states. But it provides a blueprint for states to follow if they wish.

Brian Hamer, the MTC counsel in charge of the work group that produced the updated guidance, told Law360 after the vote that the commission looks "forward to working with state revenue agencies around the country who must decide whether to adopt the revised statement. ... The revisions will provide notice and guidance to taxpayers and tax administrators on how this 60-year-old statute applies to modern business activities including activities conducted via the internet."

Echoing language from P.L. 86-272, the updated guidance says soliciting orders for tangible personal property is the same whether it is done over the internet or by another method.

"Thus, an internet seller is shielded from taxation in the customer's state if the only business activity it engages in within that state is the solicitation of orders for sales of tangible personal property," the newly adopted guidance said.

In addition, a business can "present static text or photos on its website," without that counting as business activity, and thus subject to taxation, in states where customers are located.

Beyond that, the guidance becomes more nuanced according to specific situations. For example, concerning the placement of internet "cookies," which are identifying pieces of data on the browser of a customer, anything used only for soliciting orders of tangible personal property is shielded from taxation. This includes storage of personal information so the customer does not have to enter it again if they leave the website and then return.

But other uses of cookies do not shield the business from taxation. If the business acquires information that "will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale," the business is not shielded because those activities are not directly related to soliciting orders for tangible personal property.

Other common online interactions between the customer and the business that would not shield the business from taxation, according to the new MTC guidance, include: remotely fixing or updating products, via the transmission of code, that the customer has purchased; offering and selling extended warranty plans for a product the customer has purchased; and selling streamed music and videos to the customer.

--Additional reporting by Paul Williams. Editing by Roy LeBlanc.

For a reprint of this article, please contact reprints@law360.com.