Updated guidance from the Multistate Tax Commission (MTC) could mean new income tax nexus for manufacturers – and while states must first adopt the guidance before it becomes law, the time to map the potential impact is now.
Public Law 86-272 – the backstory
In 1959, Public Law (PL) 86-272 was enacted to prevent sellers of tangible personal property (TPP) from having net income tax imposed by a state when the following criteria were satisfied:
- The only activity in the state was soliciting sales of TPP,
- Sales were approved by a location outside of the state, AND;
- TPP was shipped to the customer outside of the state.
Manufacturers have relied on PL 86-272 to avoid income tax nexus in states. It’s important to note that this did not provide protection from gross receipts, franchise taxes, or other types of taxes.
Of course, when PL 86-272 came into effect, the internet didn’t exist – and with the massive groundswell of e-commerce and other internet-based commerce, there’s been increasing demand for the MTC to update PL 86-272 to reflect those internet-based activities – and help states gain new sources of revenue.
What’s protected – and what’s not – under the new guidance
On August 4, 2021, the MTC updated its guidance on PL 86-272 to address certain internet-based activities. The following items are protected under PL 86-272:
- A static list of frequently asked questions on website to offer post-sales assistance to customers
- Placing “cookies” on customers’ computers that are ancillary to soliciting orders for TPP such as saving the customer’s cart if the purchase is not completed
- Allowing customers to search for items, review product descriptions, make purchases, or select delivery options if the website only offers sales of TPP
The following items are not protected under PL 86-272:
- Post-sales assistance to customers that is not static – such as a live chat feature
- Soliciting or receiving online credit card applications
- Placing “cookies” on customers’ computers to gather customer information
- Inviting and receiving resumes for non-sales positions
- Offering extended warranties for products
- Contracting with a marketplace facilitator to sell the company’s products through the facilitator’s online marketplace
- Contracting with in-state customers to stream content for a charge
What happens next – and what to do now
As noted above, states will first have to adopt the updated MTC guidance before it becomes law, but understanding what the impact could be to your organization is key – especially since early state adopters like California and New York are already in the process of updating their rules.
While states are acting, companies have the opportunity to review their activities to see if any changes should be made. Have a question of what the impact will be on your company? Contact us for a free consultation with one of our top manufacturing tax professionals. We’re here to help.