The Multistate Tax Commission (MTC) is revising its guidance regarding the application of Public Law (PL) 86-272, which could increase the tax obligations for businesses with interactive web presences across states. For example, if a business has an interactive feature, such as a customer chat function, it could create presence in the state where a customer accesses its website.
This change creates new pitfalls for businesses attempting to provide good customer service through their online presence. However, it also could be an opportunity for businesses looking to decrease their tax exposure in high tax states.
On November 20, 2020, the MTC adopted revised guidance regarding PL 86-272 (the Statement). The Statement’s revision is a substantial expansion of the guidance that previously has guided states, practitioners, and taxpayers in their interpretation of PL 86-272 for more than 30 years.
Below, we outline what businesses should know.
In the revised Statement, the MTC seeks to address activities of a business conducted via the internet. The Statement adds significant new language asserting that activities of a business conducted over the internet with a customer are considered business activities in the customer’s state.
For example, businesses using the internet to deliver customer support via chat or other interactive functions will, under the revised Statement, lose PL 86-272 protection in states in which their customers access their internet chat function, regardless of whether the business itself has no other presence in the customer’s state. The revised Statement also deals with a number of other internet activities.
No state has yet adopted the revised Statement. However, the MTC adoption of the revised statement serves as a recommendation to states, many of which face significant budget deficits. The active participation of a number of state representatives during the revision process suggests that many states may consider adopting the revised statement in the near future.
Businesses with internet presence in states in which the business has asserted PL 86-272 protection should revisit their state tax filing profile. If not, these businesses may soon find themselves to now be exceeding the limits of particular states’ guidance if those states adopt the revised Statement.
Some businesses could see a net tax benefit by exceeding PL 86-272 protection in states with lower tax rates. However, this would also require businesses to register and report sales in lower tax states to avoid apportioned sales to be thrown back to higher tax states.
Taxpayers should consult with a state and local tax professional who is aware of and monitoring the MTC’s adoption in the various states. Modeling changes to a business’s tax filing profile may identify potential state tax increases and filing obligations while also reducing taxes in high tax states. Also, the revised Statement may factor into the decision to expand or contract internet functionality in various locations.
The proposed changes to the Statement may serve as a sea change to the application of PL 86-272.
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Moss Adams is following these changes closely. If you have questions about how they may affect your business, your state tax filings, or your operations, please contact your Moss Adams professional.