For years, Public Law 86-272 prohibited states from imposing income taxes on out-of-state businesses if their only activity within the state is soliciting sales of tangible personal property. The Multistate Tax Commission recently revised this to reflect the impact of e-commerce and removed a portion of this protection for sellers that weave online support services into their e-commerce models.
The commission presented various scenarios that may or may not qualify for the income tax protections afforded under the federal law. For instance, businesses providing post-sale assistance through a list of frequently asked questions would still qualify for federal protections. But electronic chat functions aimed at helping customers trouble shoot problems wouldn’t qualify.
Nineteen states and the District of Columbia supported the new legal interpretation of the federal law during the commission’s annual meeting on August 4. But those states will still have to take steps to incorporate it into their tax codes. States do not have to adopt the new legal interpretation.
E-commerce businesses will need to monitor the guidance and enforcement initiatives coming out of state revenue agencies to avoid potential penalties for failing to file income tax returns in a particular state.