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March 02, 2023

How the Multistate Tax Commission’s Guidance on Public Law 86-272 in the Aftermath of South Dakota v. Wayfair Frustrates the Law’s Fundamental Purpose

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Public Law 86-272—enacted by Congress more than 50 years ago—protects purely interstate businesses from net income taxes imposed by states where the interstate business’s only connection with the state is soliciting orders for tangible personal property. But in the aftermath of South Dakota v. Wayfair, 585 U.S. ___, 138 S. Ct. 2080 (2018)—a Supreme Court decision that applied only to the imposition of sales taxes on interstate businesses—the Multistate Tax Commission (the “Commission”) has given states the green light to aggressively pursue net income taxes from purely interstate businesses. And, in the process, ignore Public Law 86-272’s fundamental purpose.

1. The Multistate Tax Commission.

To better understand how to respond to state taxing authorities’ and the Commission’s attack on Public Law 86-272, it is helpful to understand the Commission’s history. The Commission is a multi-state agency that attempts to promote uniformity in state tax laws. The Commission was formed in 1966, and its formation was a response to the passage of Public Law 86-272. See U.S. Steel Corp. v. Multistate Tax Comm’n, 434 U.S. 452, 455 (1978).

In 1959, Congress passed Public Law 86-272 to set forth minimum standards for states’ exercise of their taxing power over interstate businesses. Following the passage of Public Law 86-272, the administrators of several state taxing authorities drafted the Multistate Tax Compact, which formed the Commission and charged the Commission with promoting uniformity and assisting states in implementing tax laws and collecting taxes. But, clearly, the Commission’s formation in response to the passage of Public Law 86-272 suggests a deep bias against interstate businesses that seek the law’s protection.

Importantly, the Commission’s actions are advisory only. And, the Commission’s guidance is only binding in states that expressly adopt the Commission’s guidance.

2. The Commission’s Guidance.

Public Law 86-272 insulates specific activities from interstate taxation, and in the wake of Wayfair, the Commission’s guidance provides a list of internet-based activities that it considers protected and unprotected by Public Law 86-272. See Multistate Tax Commission, Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272, 4 (2021).

In the Commission’s view, if a business’s website presents static text or photos, the presentation does not in itself constitute a business activity within the states where customers are located because there is no interaction with customers in the taxing state. Id. at 8. Similarly, the Commission states that posting static FAQs does not defeat the Public Law 86-272 immunity. And, placing Internet “cookies” onto in-state customers’ computers does not defeat the business’s Public Law 86-272 immunity when the cookies are used to gather information that is used only for purposes entirely ancillary to the solicitation of orders. Id. at 9.

But, the Commission suggests, Public Law 86-272 immunity is defeated if a website places cookies onto in-state customers’ computers to gather customer search information that is used to adjust production schedules, develop new products, or identify new items to offer for sale. Id. Handling customer service requests via instant messenger and email, according to the Commission, also defeats Public Law 86-272 immunity. The Commission reasoned that instant messaging and email occur within the customer’s state because the seller’s website or email transmits software or code to the user’s computer to facilitate the interaction. See Summary of March 28, 2019 teleconference (Apr. 9, 2019) Memorandum of Members of P.L. 86-272 Work Group.

Basically, the Commission’s guidance says that any modern interstate business that conducts any business activities over the internet is not protected by Public Law 86-272. But the Commission’s guidance—which does not carry the force of law—loses track of Public Law 86-272’s fundamental purpose.

3. The Commission’s Guidance Frustrates Public Law 86-272’s Fundamental Purpose.

The fundamental purpose of Public Law 86-272 is creating certainty and predictability for interstate businesses and providing better outcomes for interstate consumers. Congress’s primary goal was to “define clearly the lower limit” of state taxing power, and “provide clarity that would remove the uncertainty” created by prior Supreme Court decisions. Wisconsin Dept. of Rev. v. Wm. Wrigley, Jr., Co., 505 U.S. 214, 221-23, 112 S. Ct. 2447 (1992) (citing Heublein, Inc. v. South Carolina Tax Comm’n, 409 U.S. 275, 280, 93 S. Ct. 483 (1972)).

The Commission’s guidance frustrates Public Law 86-272’s fundamental purpose because it reduces certainty about interstate income tax liability. And the reduced certainty may lead to worse outcomes for consumers of products produced and sold in interstate commerce because many interstate sellers will shut down online chat support and email functionality—which consumers now rely on—to insulate themselves from net income taxes in aggressive tax jurisdictions. Consumers will lose the benefits of technological progress and free markets that Public Law 86-272 was enacted to protect. The Commission’s guidance has lost sight of Public Law 86-272’s fundamental purpose and may produce worse outcomes for both businesses and consumers.

As aggressive state taxing authorities continue attempts to expand their taxing power at the expense of clarity and certainty, we will continue to work with businesses to protect themselves—and their consumers—from government overreach.


Vince Nardone

Vince serves as a business advisor to owners and executives of closely-held businesses by counseling them on business planning, tax planning and controversy, mergers and acquisitions, succession planning, and legal issues that may arise in business operations.


Sorice_mike_cropped2022 Mike Sorice

Mike advises middle-market business owners on matters of business and management succession. He provides corporate and partnership tax advice to business owners and in-house accounting departments about federal income tax, state and local income tax, sales taxes, and excise taxes. In addition, Mike has represented taxpayers before the Internal Revenue Service and Ohio Department of Taxation related to federal, state, and local tax obligations.

Please view the site disclaimer regarding the advice on this blog.


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