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“Flexing State Tax Muscle: The Evisceration of Public Law 86-272"

June 7, 2023

Jennifer Karpchuk’s article, “Flexing State Tax Muscle: The Evisceration of Public Law 86-272” in PICPA’s CPA Now


Reprinted with permission from CPA Now, the blog of the Pennsylvania Institute of Certified Public Accountants.

Flexing State Tax Muscle: The Evisceration of Public Law 86-272

By: Jennifer W. Karpchuk, Esq.

Over the years, states have challenged companies’ claims of Public Law 86-272 protection – which provides protection from income tax in a state where a company limits its activities to solicitation within the state of tangible personal property, where orders are sent outside of the state for approval and shipped from outside of the state.  Public Law 86-272’s protection can be enormous because a taxpayer that can fall within the federal law’s protection cannot be subject to that particular state’s income tax.  Because of this immense protection, taxpayers and taxing authorities have different motives in interpreting Public Law 86-272: taxpayers want to interpret it as broadly as possible, while taxing authorities want to interpret it as narrowly as possible.

There has been a recent uptick in states challenging a taxpayer’s claim under of Public Law 86-272 protection on audit.  This may be attributable to the Multistate Tax Commission’s (“MTC”) revised guidance related to the federal law and what may be viewed as an attempt to eviscerate it.  The MTC is an organization that was formed by state tax administrators in 1967 – in part as a response to Public Law 86-272.  The MTC has been issuing “guidance” regarding the federal law’s meaning since 1986 when it issued its first “Statement of Information,” which was subsequently revised in 1993, 1994, 2001, and 2021. With each revision, the MTC has tried to further limit the applicability and scope of the law’s protections.  This is consistent with the different motives at play – the MTC is essentially a state organization.  Thus, its inherent motive is to interpret Public Law 86-272 as narrowly as possible. 

The MTC’s Statement of Information is just guidance, although some states have adopted it over time and incorporated it into their laws.  The guidance provides a list of “unprotected activities”.  During November 2018, shortly after the decision in South Dakota v. Wayfair and spurred in part by some of the language in Wayfair, the MTC decided that the changing technological landscape required substantial revisions to its Statement of Information, culminating in its latest revisions in 2021 (“Revised Statement”). 

The revisions attack the modern business and internet, finding that essentially any interaction with a customer on a website eviscerates the protections of Public Law 86-272.  The guidance provides that when a business “interacts” with customers via a business’s website or app, the business engages in activity within the customer’s state.  This is despite the fact that many of these interactions are no different than those that may be achieved via telephone or mail and should be viewed as protected.  However, according to the Revised Statement, the presence of static text or photos on a company’s website does not constitute business activity in a given state. 

California was the first state to adopt the MTC’s Revised Statement via a technical memorandum in February 2022. See TAM 2022-01.  California’s attempt to adopt the Revised Statement was immediately met with litigation.  The American Catalog Mailers Association (“ACMA”) filed an action for declaratory relief, claiming: (1) California’s recently issued administrative guidance violates Public Law 86-272; and (2) the FTB did not properly follow the California Administrative Procedure Act.  The case is currently pending.

Additionally, during April 2022, the New York Department of Taxation issued a draft rule that adopts select portions of the Revised Statement.  The draft rule does not have an effective date and has not been finalized.

While California and New York are openly discussing the issue and opining on the Revised Statement in terms of adopting or attempting to adopt it into law, other states are more quietly challenging the federal law.  On audit, an increasing number of states throughout the country are challenging taxpayers’ claims of Public Law 86-272 protection.  Taxpayers should consider their options when approached by Departments of Revenue.  The MTC’s position is guidance – it is not binding law.  The only binding law in existence (i.e., Public Law 86-272) has not changed since its enactment over 60 years ago.  The MTC’s Revised Statement is wrought with issues and reflects the motives of states to try to limit the application of Public Law 86-272 to the point of evisceration – an attempt taxpayers should not accept without a fight.

Jennifer Karpchuk is co-chair of the State and Local Tax (SALT) Controversy and Planning practice at Chamberlain Hrdlicka. She can be reached at jennifer.karpchuk@chamberlainlaw.com.