Tom Cornett and Rebecca Newton-Clarke
Sixty-five years ago, Congress enacted Public Law 86-272 to prevent states from imposing net income taxes on businesses whose in-state activities are limited to soliciting orders for sales of tangible personal property. The law, conceived in a physical-presence world, fits uneasily onto increasingly remote modern business practices. In August 2021, the Multistate Tax Commission sought to remedy this disjunction by amending its model Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272 to address the activities of “internet sellers” whose business activities with customers increasingly occur online. The MTC’s 2021 Revised Statement takes the position that a business can breach P.L. 86-272 protection by conducting many commonplace activities over the internet, including but not limited to: selling streaming entertainment, providing post-sale assistance to customers by electronic chat or e-mail, using internet cookies for purposes exceeding solicitation, transmitting code or other electronic instructions for or fixes to previously purchased products, and inviting viewers in the state to apply for non-sales jobs through the business’ website.
Over the ensuing four years, state tax agencies in California, New Jersey, and New York have effectively followed the MTC’s approach. As discussed in more detail below, however, the California guidance was voided by a state court for procedural reasons; New York’s regulations are being challenged; and a 2023 New Jersey Tax Court ruling reaffirms that nexus must be established before narrowed interpretations of P.L. 86-272 protection come into play. Other states have been reported to apply the principles of the MTC’s 2021 Revised Statement statement on audit, without formal adoption. In many jurisdictions, uncertainty prevails.
Checkpoint Catalyst’s multistate survey on approaches to P.L. 86-272 after the MTC’s 2021 Revised Statement finds states informally following the statement or anticipating adoption, with some states taking an even more aggressive approach. This article summarizing the survey findings is offered as a companion to Checkpoint Catalyst’s Nexus Assistant charts, which capture state responses to the P.L. 86-272 survey alongside laws, regulations, rulings, guidance, and historical approaches.
California guidance voided.
In early 2022, the California Franchise Tax Board became the first state tax agency to essentially implement the MTC’s approach, issuing two guidance documents closely tracking the 2021 MTC Revised Statement. However, the California Superior Court voided the guidance in December 2023, ruling that it constituted invalid “underground regulations” because the Franchise Tax Board did not comply with the state’s Administrative Procedure Act (state APA) in issuing them. The court did not reach the legal question of whether the guidance conflicted with the statutory language of P.L. 86-272, but strongly criticized the Franchise Tax Board in ruling on the agency’s further appeal to uphold the guidance in 2024.1 The Franchise Tax Board’s approach to P.L. 86-272 following these rulings is unclear. 2
New York regulations challenged.
In December 2023, the New York Department of Taxation and Finance adopted regulations, generally retroactive to tax years beginning on or after January 1, 2015, that substantially incorporate the approach of the 2021 MTC Revised Statement. The regulations have been challenged in the Albany County Supreme Court by an advocacy organization for remote sellers and direct marketers. 3 The complaint contends that while the regulations “were adopted under the guise of interpreting and applying P.L. 86-272,” they “effectively erase longstanding protection against overreach by state tax agencies, such as the Department,” and “directly [conflict] with the controlling federal statute.” The lawsuit also takes issue with the effective date of the regulations, noting that “taxpayers who learned for the first time in December 2023 that the Department now may believe they were required to file tax returns as early as 2015” may “suddenly find themselves at risk of audits by the Department stretching back nearly a decade,” and pointing out that the MTC did not issue the 2021 Revised Statement until six and a half years after the Department’s announced effective date. The litigation is unlikely to be resolved soon.4
New Jersey guidance, and dispute on interplay between nexus and P.L. 86-272.
In 2023, the New Jersey Division of Taxation issued guidance effective for tax periods ending on or after July 31, 2023, establishing that the agency generally follows the 2021 MTC Revised Statement.5 The guidance also specifies additional unprotected internet activities: offering, soliciting, selling, accepting, or buying digital assets, such as cryptocurrency and non-fungible tokens (NFTs), or offering services related to those assets; and selling targeted internet advertising services that rely on data mined from software or ancillary data, such as apps or cookies, placed on devices in New Jersey.6 In addition, by law, for tax years ending on and after July 31, 2023, New Jersey asserts nexus against an out-of-state corporation if the corporation derives receipts exceeding $100,000 from sources in New Jersey during the fiscal or calendar year, or the corporation has 200 or more transactions delivered to the customer during the calendar or fiscal year.7 For service transactions, “delivered to a customer” for nexus purposes means the location where the benefit of the service is received for sourcing purposes.
As previously reported by one of the authors of this article, a December 2023 order of the New Jersey Tax Court serves as an affirmation that nexus continues to be both a distinct inquiry from P.L. 86-272 protection and the preliminary and paramount consideration.8 The case involved a freight forwarder that provided less-than-truckload (LTL) services to customers in New Jersey by coordinating with its customers remotely and arranging pick-up of the customers’ temperature-controlled LTL shipments by independently owned trucking companies or carriers.9 The third-party trucking companies transported the shipments to the taxpayer’s consolidation centers in one of seven states (other than New Jersey) for redistribution by the taxpayer’s employees, and then collected the shipments for delivery to the taxpayer’s customers, some of whom were in New Jersey. The court declined to issue summary judgment in favor of the taxpayer or the Division, finding that the freight forwarder was engaged in activities exceeding the protection of P.L. 86-272 in New Jersey but that the record did not establish whether the freight forwarder had nexus with the state. The order illustrates that nexus remains a highly fact-specific question that can spark protracted (and potentially costly) disputes. The interplay between economic nexus and P.L. 86-272 protections is likely to be contested in New Jersey and beyond for years to come.
Some states are considering formal adoption of the 2021 MTC Statement.
In response to the survey, representatives from some state tax agencies, including in Colorado, Minnesota, Maine, and Tennessee, informally indicated that the agency was studying the 2021 MTC Revised Statement with an eye toward potential future action. A representative of the Colorado Department of Revenue replied that the agency has “not yet undertaken rulemaking to formally adopt the revised statement, but we are likely to do so in the future.”10 A representative of the Minnesota Department of Revenue noted that the agency “has been reviewing the Multistate Tax Commission’s August 2021 revisions to its Statement on Public Law 86-272 and intends to provide guidance through the publication of a Revenue Notice.”11 A Maine Revenue Services representative stated that the agency “continues to review the various State tax issues in relation to P.L. 86-272 and has not yet determined to what extent Maine will conform” to the MTC Statement.12 Similarly, a Tennessee Department of Revenue representative reported that “The Department is still analyzing the provisions included in the most recent MTC statement — but we have not formally adopted the most recent statement at this time.”13
Some states essentially follow the 2021 MTC Statement position.
A number of states informally indicated general agreement with the principles articulated in the MTC’s statement. For example, a representative of the Kansas Department of Revenue replied that the agency has “[n]o official position regarding that statement, and Kansas has not issued its own advice regarding the current application of PL 86-272. However, we can say our current understanding of the application of PL 86-272 is consistent with the MTC’s [revised] statement.”14 A representative of the Utah State Tax Commission stated that, based on the phrasing of Checkpoint Catalyst’s inquiry, “Utah would currently follow the revision.”15 An Alaska Department of Revenue representative noted that the MTC’s Revised Statement “is consistent with positions the Department has taken in applying the law.”16
Some states follow portions of the 2021 MTC Statement.
A few state tax agencies informally indicated that they follow portions of the 2021 MTC Statement but not others. For example, in a non-binding reply, a representative of the North Carolina Department of Revenue analyzed the agency’s approach to each portion of the Internet Activities portion of the statement and informally reported that while the agency agrees that “regularly providing post-sale assistance to in-state customers via either electronic chat or email that customers initiate through the business’ website” and “inviting viewers through the business’ website to apply for non-sales positions with the business and enabling them to fill out and submit an electronic application” are activities exceeding the protections of P.L. 86-272, “North Carolina does not currently require taxpayers to file a tax return based solely on [these activities].”17 A representative from the Michigan Department of Treasury observed that the agency’s 2014 guidance “essentially incorporates the Third Revision of the MTC’s Statement regarding P.L. 86-272. While Michigan hasn’t adopted the Fourth Revision, there is some overlap in that version with the positions already taken” in the 2014 guidance.18
Some states reach beyond the 2021 MTC Statement.
Among the states tax agencies informally indicating that they follow some portion of the MTC’s Revised Statement, but that they also deviate in some respects, some representatives indicated that the state would reach beyond the statement. For example, a representative of the Wisconsin Department of Revenue responded with an informal, non-binding voicemail, indicating that “We do generally agree with their conclusions [on the listed activities conducted over the internet], “except for example #11,” which focuses on making sales of tangible personal property to an in-state customer through a business’ website. The representative indicated the possibility that this “could give the taxpayer nexus and they would not be protected by [P.L. 86-272]” because the activities described (enabling customers to search for items, read product descriptions, select items for purchase, choose among delivery options, and pay for the items) would exceed solicitation.19 The representative noted that the answer would depend on the facts and circumstances, however.
As previously noted by one of the authors of this article, Hawaii appears to be a significant outlier.20 For tax years beginning in and after 2020, Hawaii law establishes a presumption that a person lacking a physical presence in Hawaii is systematically and regularly engaging in business in the state and subject to Hawaii income tax if, during the current or preceding calendar year, the person engages in 200 or more business transactions with persons within the state, or the sum of the value of the person’s gross income attributable to sources in Hawaii equals or exceeds $100,000 or, for a person that does business within and outside the state, the numerator of the person’s sales factor for the state equals or exceeds $100,000.21 Furthermore, although Hawaii is a member state of the Multistate Tax Commission (MTC), in 2020 the Hawaii Department of Revenue issued guidance establishing its position that making sales or engaging in transactions in Hawaii that meet or exceed the economic nexus threshold will breach the immunity of P.L. 86-272, a position that appears to push well beyond the MTC’s approach.22 In other words, engaging in 200 transactions with Hawaii customers not only establishes nexus for an out-of-state company, it negates the company’s ability to claim P.L. 86-272 protections. The Department informally confirmed the agency’s continued adherence to this position in response to the survey, observing in a non-binding response that, “Generally, the Department looks at nexus to determine whether or not Public Law 86-272 protection is available.”23
Only two states explicitly confirm they are not following 2021 MTC Statement.
Of all the agencies that impose a corporate income tax and replied to the survey, representatives of only two explicitly (if informally) replied that the agency was not following the current statement. A representative of the New Mexico Taxation and Revenue Department observed that the Department adopted the Phase II Statement and indicated that the agency has not adopted the MTC’s Revised Statement.24 A representative of the Oregon Department of Revenue informally reported that “we are still following the July 27, 2001 version. The MTC currently recommends that states consider adoption of the MTC Model Statute on Factor Presence Nexus (Addendum II in the link you provided) prior to adopting the revised P.L. 86-272 statement ‘to shield from taxation small businesses or businesses that have minimal contacts with the state.’ We are currently evaluating the Factor Presence Nexus model statute and whether to request legislative change prior to making decisions about the updated P.L. 86-272 statement.”25
Informal guidance unavailable in many states.
Many state tax agencies, including in Arizona, Connecticut, Georgia, and Virginia, did not reply. Some, including in Louisiana and Maryland, acknowledged receipt but to date have not followed up with a substantive response. Others explicitly or implicitly indicated that they do not have a position on the MTC’s Revised Statement. For example, a Massachusetts Department of Revenue representative replied on background that the agency “has no position on the MTC revised guidelines.” A Pennsylvania Department of Revenue representative likewise informally established that the agency has “not adopted the MTC Statement on P.L. 86-272, nor taken a position on it,” and pointed to the agency’s existing guidance.26A representative of the Florida Department of Revenue emphasized the agency’s fact-oriented approach, noting that “Florida follows Public Law 86-272 in administering the Florida corporate income/franchise tax and bases decisions on the law and the facts and circumstances of each taxpayer situation.” 27
The broader takeaway.
Four years after the MTC’s 2021 Revised Statement, many states’ positions on P.L. 86-272 and commonplace internet activities continue to evolve. Even in states that have offered detailed formal guidance, challenges and uncertainties abound. Checkpoint Catalyst’s multistate survey lends credence to reports that many states may be following the statement informally or preparing to follow it formally in whole or in part. These issues are likely to remain a frequent subject of state tax litigation for years to come.
Checkpoint resources.
Two Nexus Assistant Charts incorporate the findings of Checkpoint Catalyst’s survey, alongside laws, regulations, rulings, guidance, and historical approaches:
- P.L. 86-272 and MTC Conformity-Conformity to MTC Statement on P.L. 86-272 (2021 Revision); and
- P.L. 86-272 and MTC Conformity-Conformity to MTC Statement on P.L. 86-272 (Any Version).
Checkpoint Catalyst subscribers may preview these charts in Catalyst Topic #1002:000 Nexus (Corporate Income Tax and Business Activity Tax), Quick Look. Filtering, sorting, and other deeper chart functionalities are available in the Nexus Assistant product itself.
Checkpoint Catalyst offers detailed state-by-state overviews of the following related topics, among others:
- Catalyst Topic #1002: Nexus (Corporate Income and Business Activity Tax);
- Catalyst Topic #1010: Electronically Delivered Goods and Services (Corporate Income and Business Activity Tax);
- Catalyst Topic #1007: Sales Factor.
For recent reporting on and analysis of developments and disputes related to P.L. 86-272, see
- Newton-Clarke, The 200-Transactions Threshold Creeps into State Corporate Income Tax, State Tax Update, 01/30/2024; and
- Ford, Another Deference Blow: In Rebuke, California Court Voids Non-Compliant Tax Regulations, State Tax Update, 02/21/2024.
1 See Ford, Another Deference Blow: In Rebuke, California Court Voids Non-Compliant Tax Regulations, State Tax Update, 02/21/2024.
2 Despite this lack of clarity, businesses and tax advisors should be aware that the California legislature recently enacted a law effectively overturning a decision of the California Office of Tax Appeals that had rejected Franchise Tax Board guidance mandating inclusion of certain foreign affiliate dividends in the sales factor denominator. Notably, the law explicitly negates the requirements of the state APA for purposes of any agency guidance implementing the law. See Ford, California Legislature Overturns APA Decision, Negates APA Requirements, Raising Broader Deference Questions, State Tax Update, 07/30/2024.
3 American Catalog Mailers Association v. Department of Taxation and Finance, Index No. 903320-24, Supreme Court of the State of New York, County of Albany, Verified Complaint, 04/05/2024.
4 Among other things, the dispute arises at a time when judicial deference to tax agency regulations and guidance is in flux. See Ford, The Shifting Deference Landscape: California and New York Decisions Reject Tax Agency Guidance, State Tax Update, 03/13/2024; Ford, U.S. Supreme Court Overturns Chevron; Future of Federal and State Tax Guidance in Question, State Tax Update, 06/28/2024.
5 New Jersey Division of Taxation Technical Bulletin No. TB-108(R), 01/18/2024 (revising the 2023 guidance to correct a typographical error).
7 N.J. Rev. Stat. § 54:10A-4.16, eff for tax years ending on or after 07/31/2023; New Jersey Division of Taxation Technical Bulletin No. TB-108(R), 01/18/2024.
8 See Newton-Clarke, The 200-Transactions Threshold Creeps into State Corporate Income Tax, State Tax Update, 01/30/2024.
9 Re: H&M Bay Inc. v. Dir., Div. of Taxation, N.J. Tax Ct., Dkt. No. 012545-2021, 12/18/2023.
10 Email from Colorado Department of Revenue to Checkpoint Catalyst, on File with Checkpoint Catalyst, 11/16/2023.
11 Email from Minnesota Department of Revenue to Checkpoint Catalyst, on File with Checkpoint Catalyst, 11/27/2023.
12 Email from Maine Revenue Services to Checkpoint Catalyst, on File with Checkpoint Catalyst, 11/30/2023.
13 Email from Tennessee Department of Revenue to Checkpoint Catalyst, on File with Checkpoint Catalyst, 11/02/2023.
14 Email from Kansas Department of Revenue to Checkpoint Catalyst, on File with Checkpoint Catalyst, 12/07/2023.
15 Email from Utah State Tax Commission to Checkpoint Catalyst, on File with Checkpoint Catalyst, 11/20/2023.
16 Email from Alaska Department of Revenue to Checkpoint Catalyst, on File with Checkpoint Catalyst, 11/26/2023.
17 Email to Checkpoint Catalyst from North Carolina Department of Revenue, on File with Checkpoint Catalyst, 12/08/2023.
18 Email from Michigan Department of Treasury, on File with Checkpoint Catalyst, 11/20/2023.
19 Voicemail Left for Checkpoint Catalyst by Wisconsin Department of Revenue Representative, on File with Checkpoint Catalyst, 11/17/2023. The representative noted that voicemail is the preferred method of informal communication of this kind because Wisconsin law would bind the agency to any opinion offered in writing.
20 See Newton-Clarke, The 200-Transactions Threshold Creeps into State Corporate Income Tax, State Tax Update, 01/30/2024.
23 Email From Hawaii Department of Revenue to Checkpoint Catalyst, On File With Checkpoint Catalyst, 11/21/2023.
24 Email from New Mexico Taxation and Revenue Department to Checkpoint Catalyst, Email on File With Checkpoint Catalyst, 01/02/2024.
25 Email to Checkpoint Catalyst from Oregon Department of Revenue, on File with Checkpoint Catalyst, 11/17/2023.
26 Email to Checkpoint Catalyst from Pennsylvania Department of Revenue, on File with Checkpoint Catalyst, 11/22/2023.
27 Email to Checkpoint Catalyst from Florida Department of Revenue, on File with Checkpoint Catalyst, 11/15/2023.
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