When it comes to filing income tax returns in states where a taxpayer has no operations, taxpayers have historically been able to rely on an obscure federal law known as Public Law 86-272 to avoid filing such tax returns. However, recent events make it more likely that states will argue that taxpayers are no longer entitled to this protection.
Public Law 86-272 (P.L. 86-272) prohibits a state from imposing income tax on a taxpayer if the taxpayer’s only activity within the state is the solicitation of orders for sales of tangible personal property when those orders are approved and fulfilled from outside the state. Since a federal law trumps any state law, P.L. 86-272 was relied upon by e-tailers and other sellers/wholesalers to avoid filing income tax returns in states where they earn income from customers but have no activity in that state other than shipping goods to customers.
In applying P.L. 86-272, states generally look to guidance put forth by the Multistate Tax Commission (MTC), an intergovernmental state tax agency that promotes uniform and consistent tax policy and administration among the states. The MTC’s guidance, known as the “Statement,” lists activities that exceed the protections of P.L. 86-272 and create an income tax filing responsibility. In 2021, the Statement was updated to say that when a business interacts with a customer via its website or app, it is an unprotected activity that subjects the seller to state income tax. Of course, in today’s economy nearly every business interacts with their customers over the Internet, meaning that any state that follows the revised Statement could argue that such sellers are liable for that state’s income tax.
To date, most states have remained silent on whether they will follow the revised Statement’s guidelines, but California has already said that they would adopt this approach and New York has drafted proposed regulations that would track closely to the Statement’s revised language. How and when these and other states will apply the Statement’s new language to taxpayers remains unclear. Taxpayers should review their overall state income tax filings to understand where there are risks and how they wish to handle those risks.
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