MTC Draft Policy on P.L. 86-272: Electronic Communications Concerns

Although P.L. 86-272 is probably unconstitutional,¹ the Multistate Tax Commission is working on a project to draft a new policy statement interpreting it.² This statement will update the MTC’s statement dated July 27, 2001, in light of changes in technology, changes in the way business is conducted, and case law reflecting those changes.

It is ironic that P.L. 86-272’s legislative history indicates that Congress intended to provide temporary protection (a safe harbor) from the uncertainty of a (then) recent Supreme Court decision and its denial of certiorari in other cases because of widespread fear that the surprise and confusion about the implications of those cases would interfere with and discourage interstate commerce.³ Now, changes over the last 60 years make P.L. 86-272 as confusing as nexus was before P.L. 86-272’s enactment.

All laws have ambiguities; P.L. 86-272 is no exception. Some of these ambiguities remain constant. However, the increased use of marketplace facilitators has made the ambiguities that were present when P.L. 86-272 was enacted more important, and the ability to communicate and perform other activities electronically have added to these ambiguities.⁴

Federal legislation restricting state taxation not only raises problems regarding constitutionality, sovereignty, and federalism, but these statutes in general, including P.L. 86-272, also raise practical problems, especially for small businesses. There is no federal agency with the power to issue regulations, rulings, or informal advice that taxpayers can rely on. These problems are exacerbated when the law remains unchanged for decades, but the businesses it concerns change drastically.

This article and the next one will discuss the MTC’s draft attempt at dealing with the ambiguities inherent in P.L. 86-272 and changes in technology and the way business is done. This part will first discuss a couple of underlying issues the MTC does not consider, and will then consider the difficult and controversial issues that arise from electronic communications and the internet. Part 2 will consider the MTC’s positions on marketplace facilitators, extended warranties, and some less controversial issues. Our comments and any answers we may suggest are arguable, but the issues we raise should be ones with which the courts, taxpayers, taxpayer representatives, and states wrestle.

Individual states can issue their own guidance; however, they have no particular credibility and deserve no deference to their interpretation of federal law, and to the extent that the guidance differs between the states, they lose the persuasive authority of state agreement. Further, their guidance is of little comfort to taxpayers. To the extent individual states offer guidance that is more taxpayer-friendly than the MTC’s position (assuming many states agree with it), taxpayers have no assurance that the Supreme Court will not issue an opinion that retroactively contradicts it.⁵ So businesses that want guidance they can rely on must be willing to accept litigation costs, including time, money, and the distraction of their executives.

The MTC’s guidance is important and timely. Small businesses, in particular, want reasonable guidance. They cannot afford to litigate all, or any, of the myriad issues that P.L. 86-272 presents. To the extent that guidance covers as many of the issues small businesses might encounter, and to the extent it is consistent from state to state, small businesses save administrative and compliance costs, and their advisers and decision-makers can spend their time on more productive activities. Broad federal legislation tends to get more ambiguous over time. Changes in the economy, technology, ways of doing business, language, and so forth will increase whatever ambiguities were inherent in the law when it was first proposed. State law may be amended, or guidance issued to clarify how the law applies to these changes. Federal law has no mechanism for guidance and is much more difficult to amend. All federal laws restricting state taxation have a constituency — they lower taxes and often administrative burdens for some taxpayers. There will always be lobbying to keep or enlarge the law’s advantages for some taxpayers and states lobbying against such changes. Even if the law is no longer relevant to any significant taxpayers, it won’t change because no one will spend the time, money, and effort to get it changed.

So guidance developed by the MTC and uniformly adopted by all, or a substantial number of, states can be greatly beneficial to taxpayers, especially taxpayers too small for lobbying or litigation efforts.

That being said, there are some disadvantages of the MTC developing guidance for federal legislation.

Biases. Litigators and auditors representing states, and litigators representing taxpayers, often take aggressive and sometimes unreasonable positions. Litigators, whether they work for the state or taxpayers, are not afraid to litigate. It is what they enjoy and why they get paid. They often believe they can win any case and take immense pride in winning a case most people didn’t believe they could. But there are constraints on how aggressive litigators can be.

Practitioners representing taxpayers always want their clients to pay the minimum taxes legally possible, but their clients constrain them. Litigators must help them understand the risks that various positions have and the cost of defending their positions in both administrative disputes and possibly litigation. Some taxpayers are more risk adverse, and some cannot afford the administrative, financial, and sometimes emotional drain of tax disputes and litigation. For many, the time and attention of owners and executives would be better spent improving their business. On the other hand, other clients have executives whose jobs are to oversee litigation, have sufficient funds to fight as long as it takes, and may even be better off financially if the dispute is not resolved for years, and even if their position is weak, perhaps they can settle it prospectively, or at least favorably.

Governors and state legislators are not “out to get” taxpayers, and although they may support taxes to provide services, none want those taxes to be interpreted in a way that is unfair to taxpayers or to tax persons or activities that they did not intend.⁶ When drafting guidance, a revenue department is representing the legislature, attempting to divine its purpose — what the legislature at the time the law was enacted would have decided to do if it had considered the issues involved in the dispute.

Jack Cummings has written an excellent article on the IRS’s policies in issuing guidance.⁷ Everything he says is applicable to the revenue department guidance process. As a whole, a Department of Revenue attempts to arrive at guidance that is fair to the taxpayers whom it affects, that is, all taxpayers. Tax laws and guidance directly affect some taxpayers, and they indirectly affect all other taxpayers by affecting total collections, which in turn affect the need for additional revenue and the services provided to taxpayers. States do not have the authority to run unlimited deficits or borrow unlimited funds. These conflicting tensions temper a DOR’s response.

The MTC’s process is not as constrained. The state representatives don’t have the constraints inherent in their individual state’s political process. And the MTC must represent the states as a whole, making it more difficult to take a position that would be contrary to, and less aggressive than, some individual states. On the other side, private practitioners aren’t constrained by the particular circumstances of their clients. Consistent with their speeches and writings, they are discouraged from being less than aggressive because they don’t want to be seen as pro-tax and they want to make sure they don’t take a position that might harm a client or discourage business from a potential client. It is important for them to be seen as knowledgeable, confident, and very pro-taxpayer.

Although everyone on both sides is being reasonable by their lights, some on each side think the other side is anything but reasonable. Some private practitioners think that insatiable money-hungry states mistreat them and their clients, and some state representatives think taxpayers and their representatives are greedy and will do anything to get around the law.⁸

None of these perceptions should be taken to indicate that taxpayer representatives and states, and by extension the MTC, should agree. Taxpayer representatives have the duty to inform their clients of legal ambiguities, advise them of the risks, and then, as long as their position would not be unethical or illegal, fight for them. Likewise, state representatives have the responsibility to represent taxpayers as a whole, and that means insisting that taxpayers who owe taxes account for and pay them. So they need to concede when the taxpayer is correct; refuse to concede (or settle) when the taxpayer is clearly wrong; try to fairly settle those cases that will not affect other taxpayers, unless they publicly offer those taxpayers the same settlement; and litigate (not concede) those issues that affect multiple taxpayers and need an answer. This means they will not concede those issues on which the taxpayer may be right (win), because if they do, they have decided the issue against the indirectly affected taxpayers and denied them of the ability to contest the issue. Also, taxpayers chosen for audit and litigation for these issues should be taxpayers who can afford the process, including competent counsel and appeals, so the system has every chance of coming to the correct conclusion.

P.L. 86-272 — The Basics

In summary, P.L. 86-272 prohibits any state from imposing a net income tax on the income derived from within its borders from interstate commerce if the only business activity of the company within the state consists of “the solicitation of orders [for sales of tangible personal property], which orders are sent outside the [taxing] State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State.”⁹

The term “net income tax” includes any tax, including a franchise tax imposed on or measured by net income. It does not include gross receipts, sales, or value added taxes.¹⁰

Only the solicitation to sell tangible personal property is afforded immunity under P.L. 86-272; therefore, the leasing, renting, licensing, or other disposition of tangible personal property, or transactions involving intangibles, such as franchises, patents, copyrights, trademarks, service marks, and the like, are not protected activities under P.L. 86-272. Also, income derived from the selling or providing of services and the selling, leasing, renting, licensing, or other disposition of real estate is not immune from taxation by reason of P.L. 86-272.

In Wisconsin Department of Revenue v. Wrigley Co., the Court considered, among other issues, the meaning of the phrase “solicitation of orders” and established a “proper standard” for application of the phrase. The Court’s opinion states:

Therefore, solicitation means (1) speech or conduct that explicitly or implicitly invites an order, and (2) activities that neither explicitly nor implicitly invite an order, but are entirely ancillary to requests for an order. Activities that seek to promote sales are not necessarily ancillary because P.L. 86-272 does not protect activities that facilitate sales; it protects activities that facilitate the request for an order. “Solicitation of orders” does not include activities apart from the invitation of orders that the company has reason to do anyway (for example, repair or service activities).¹²

Ancillary activities are those activities that serve no independent business function for the seller apart from their connection to the solicitation of orders. Activities that a seller would engage in apart from soliciting orders are not considered as ancillary to solicitation and destroy P.L. 86-272’s protection.

P.L. 86-272 protection does not extend to corporations incorporated under the laws of the taxing state or to any individual who is domiciled in or a resident of the taxing state.¹³

Therefore, the protection of P.L. 86-272 is lost if a company engages in business activity other than solicitation of orders, the activity serves an independent business function other than the solicitation of orders, and the activity is not trivial. Further, any business activities, other than the solicitation of orders, are viewed in the aggregate, rather than separately.¹⁴

Important Underlying Issues

This section will point out that there are important issues to understanding the application of P.L. 86-272 that are not discussed in the MTC’s draft. These issues include the definitions of some words, and the relationship of P.L. 86-272 to constitutional nexus.¹⁵

Definitions — It is important to note that federal law, not state law, controls the definition of terms in federal statutes.¹⁶ This is important because states don’t all agree with each other on the definition of person or the definition of tangible personal property, and some states have different interpretations within the state for different purposes. For example, the term “sale” usually means something different for sales tax than it does for income tax. Although sales tax generally includes rent in its definition of sales for sales tax purposes, income tax generally excludes rental agreements from that term, except when the transaction in the form of a rental agreement is in substance a financing transaction. We haven’t included a discussion of “sale” because there seems to be a general understanding among states consistent with the MTC’s original interpretation of P.L. 86-272.

Person. P.L. 86-272 concerns “business activities within” a state “by or on behalf of [a] person.” Federal law provides that “words importing the singular include and apply to several persons, parties, or things.” In the same section, it defines “person” as including “corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.”¹⁷ Although this definition sounds specific, it is ambiguous. It includes words like partnerships, firms, societies, and associations. IRC section 7701(2) defines partnership, but nothing requires “person” to be interpreted consistently with the Internal Revenue Code, and even if it were, the definition in section 7701 is ambiguous. All it really says is that a partnership can’t be one trust, one estate, or one corporation. It doesn’t say that more than one of those entities can’t form a partnership with others. It also seems to perhaps hint that it should carry on a business or financial operation; but this issue appears to have been resolved by the IRS allowing charitable entities to be partners with other charities and with non-charities. The dictionary is of no additional help. So a person can apparently be an individual, any type of entity, or any combination of entities that are somehow connected.

P.L. 86-272 doesn’t solve the problem of whether a unitary business is a person. Someone may argue that it isn’t a person because the statute doesn’t list it. But 1 U.S.C. section 1 only states that “person . . . include[s]” and then lists examples, so the definition isn’t limited to the list. We don’t think anyone will seriously argue that a limited liability company (also not listed)¹⁸ is not a person for purposes of P.L. 86-272. So the question is whether a unitary business that is made up of more than one state law entity is a person, several persons, or, analogous to a partnership, a person made up of separate persons. Considering the discussion in the previous paragraph, a unitary business may be a constitutional limitation on the entities that can make up a person. The MTC’s original guidance adopted the Joyce rule for P.L. 86-272 purposes. The MTC’s current draft doesn’t adopt Joyce or Finnigan,¹⁹ perhaps because more states are using unitary combined reporting, and perhaps because some states have repealed their throwback rules. Until the federal law is clarified, states can choose whether they believe, or whether it’s in their best interest, that a unitary business is a person under federal law. Although anything but clear, when we read between the lines, it seems to us that the Supreme Court does consider a unitary business to be a person. If a unitary business is a person, then Finnigan should control (although nothing prevents a state from collecting less taxes than it has the power to collect), and since it’s federal law, it doesn’t matter whether the state has adopted unitary combined reporting or not. On the other hand, although the Supreme Court treats a unitary business as a person for federal constitutional law purposes, it doesn’t mean it would hold that Congress necessarily intended a unitary business to be a person for purposes of P.L. 86-272.

Tangible personal property. Tangible personal property is also defined by federal law. Unfortunately, federal law does not include an applicable definition. “Tangible personal property” is defined in a few federal code sections and a few Supreme Court cases but usually as including or not including specific items, and the examples are generally ones with which no one is likely to disagree. The better definitions are found in legal and nonlegal dictionaries, which tend to define “tangible” as capable of being touched, or touched and seen, or in any way perceptible to the senses. Some definitions exclude currency, stocks, and bonds, which we view as tangible representations of intangible things that are valuable not in and of themselves, but because of what they represent. Electrical current and software are detectable by the senses.²⁰ Therefore, they are arguably tangible personal property. However, the argument for not including them within the definition of tangible personal property is that the legislative body that enacted the law did not intend them to be when the law was enacted. The problem that arises for taxpayers and states is that no one knows if software, or electrons arranged in a pattern that may include directions for computer operations, or sounds, or pictures, are tangible personal property for purposes of P.L. 86-272.²¹ States don’t agree on the definition of tangible personal property among themselves, and some states have different views depending upon whether they’re considering sales taxes, property taxes, or something else. Whether downloading software, books, pictures, movies, music, and so forth is the transfer of tangible personal property is important to the interpretation of P.L. 86-272.

The Relationship of P.L. 86-272 to Nexus — States cannot tax income from activities that have no nexus with the state or compel persons to pay taxes if they have no nexus with those persons.²² P.L. 86-272 prevents states from collecting taxes based on net income from activities and persons with nexus.²³ A taxpayer can have hundreds of employees, cars, and various other equipment in the state without paying state income tax if they are only performing protected activities.

On the other hand, P.L. 86-272 and nexus depend on some of the same concepts. Nexus can be provided in different ways, including by (1) persons, whether employed by the business or not; (2) tangible property; or (3) intangible property, including contractual relationships that are in, or partially in, the state, “on behalf of” the taxpayer.²⁴ Likewise, P.L. 86-272 is concerned with “business activities [other than protected activities] within a State by or on behalf of” the taxpayer. Like nexus, these “activities” can be performed by (1) the taxpayer, or any individual or entity; (2) tangible property; or (3) intangible property on “behalf of” the taxpayer. The key questions, discussed further below, are whether the activities occur “within the state” and whether they are “on behalf of” the taxpayer.

The Three Basic Questions Raised by P.L. 86-272

The following are the three basic P.L. 86-272 questions:

1. Are the activities solicitation or entirely ancillary to solicitation as defined by Wrigley?

2. Are the unprotected (non-solicitation) activities de minimis?

3. Are the unprotected (non-solicitation) activities on behalf of the taxpayer and within the state?

For simplicity, we will use the term “seller” to mean the person who will or will not owe income taxes depending upon whether P.L. 86-272 protects it; “seller’s state” to indicate a state where the seller pays income taxes and where part of the relevant transaction takes place; and “customer’s state” to indicate a state where the seller has nexus and will or will not owe income taxes depending upon whether P.L. 86-272 protects it.

Wrigley helps define solicitation and de minimis for purposes of P.L. 86-272. Although questions concerning those terms still exist, the most controversial of these three issues is whether a communication or other activity that crosses a state line is an activity by or on behalf of the taxpayer (seller or service provider) that goes beyond solicitation and occurs “within the customer’s state.”

Background. As stated above, P.L. 86-272’s legislative history indicates that Congress intended to provide temporary protection (a safe harbor) from the uncertainty of a (then) recent Supreme Court decision and its denial of certiorari in other cases that may have interfered with and discouraged interstate commerce.²⁵ Consistent with that purpose, the Supreme Court’s decision in Wrigley prevents surprise income tax assessments, and therefore does not interfere with businesses’ ability to continue or increase interstate business by defining “solicitation” to include ancillary activities that facilitate the request for an order.

Of particular note to the issue at hand is Wrigley’s statement that P.L. 86-272 does not protect activities that facilitate sales; it only protects activities that facilitate the request for an order. And that:

The “de minimis” concept is applicable to due process nexus and commerce clause nexus, as well as P.L. 86-272. As Wrigley held, “[w]hether a particular activity is a de minimis deviation from a prescribed standard must, of course, be determined with reference to the purpose of the standard.”²⁷

Business activities within the state. The key to losing the protection of P.L. 86-272 is whether there are non-solicitation business activities within the customer’s state by or on behalf of the seller. Although lawyers get paid better than cashiers because nothing in the law is completely clear, we will make two assumptions in order to get to the more ambiguous issues. The first assumption is that we can tell business from nonbusiness activities.²⁹ And the second is that a business cannot do anything (including any activity) directly; someone or something is always acting on its behalf.³⁰

So the key to our issue becomes what is an “activity,” is it “within the customer’s state,” and is it “on behalf of” the seller?

Even though some taxpayer representatives still claim that physical presence is necessary for income tax nexus,³¹ physical presence is irrelevant for purposes of P.L. 86-272. Therefore, the activity may be something that a physical individual or object does, or it can also be something that intangible property does. So whether or not software is intangible, if it performs a non-solicitation activity within the customer’s state on behalf of the seller, protection is lost. But there must be an activity. The word “activity” contains the word “act,” and the dictionary definition seems to indicate that something has to happen or be done.³² So the MTC’s conclusion that static FAQs are not sufficient to destroy P.L. 86-272’s protection appears to be correct.³³

The Most Controversial Issue — Electronic Activities, Including Communications

The most controversial issue in the MTC’s draft appears to concern its handling of electronic activities, including communications. These issues concern the third basic question listed above: Are there (1) unprotected (non-solicitation) activities, (2) on behalf of the taxpayer, (3) within the customer’s state? We will first consider the MTC’s less controversial examples and then extrapolate from that discussion to consider the MTC’s more controversial electronic communication examples. The least controversial electronic communication issues are static FAQs discussed above; internet “cookies,” which the MTC discusses; and telephone communications, which the MTC does not directly discuss in its draft.

The MTC’s draft provides that cookies used for purposes entirely ancillary to the solicitation of orders for tangible personal property do not prevent P.L. 86-272’s protection. However, the draft further provides that cookies used for any other purpose, like to adjust production schedules, develop new products, or identify new items to offer for sale, do.³⁴ These conclusions make sense. Cookies are placed on the customer’s computer by someone (or something) on behalf of the seller and they perform an activity there (in the customer’s state). It doesn’t matter if cookies are considered tangible, or intangible, or magic. And it doesn’t matter if some other type of software performs the same activities; the result would be the same.

On the other hand, interstate phone conversations between the customer’s and seller’s states do not destroy P.L. 86-272’s protection no matter what they are about. But why? The nontechnical reason appears to be the purpose of P.L. 86-272, which was to provide temporary protection to businesses from having to pay what to them would be surprise taxes. If telephone conversations and communication by mail could destroy the protection, any telephone conversations about credit or bills, or merely mailing a bill to the customer, would destroy the protection. Therefore, P.L. 86-272 would have provided no protection to any business when it was first enacted. The Court in Wrigley acknowledged this conclusion by allowing sales personnel to mediate credit disputes to “get the account and [Wrigley’s] credit department communicating.”³⁵ The Court went so far as to “correct” Wrigley’s brief. Wrigley’s brief said:

The Court, recognizing that solicitation was protected, but non-solicitation activities to increase sales were not, helped Wrigley by concluding in its opinion that

More technically, this means that telephone calls (and sending letters) are activities, but the part of those activities on behalf of the seller occurs in the seller’s state, and the consequences of those activities that occur in the customer’s state either weren’t activities after they crossed the border, or they were activities but on behalf of the customer, not the seller. Most likely, the activities on behalf of the seller occur in the seller’s state, and the activities that occur in the customer’s state are on behalf of the customer.

Wrigley appears to acknowledge that communications concerning billing, credit, returns, and so forth necessarily have to take place. And therefore, communications, at least those like mail and telephone conversations that crossed state lines through a common carrier, do not prevent P.L. 86-272 from protecting the taxpayer from income taxes. Some taxpayers are complaining that the MTC’s draft would destroy P.L. 86-272, but of course, the MTC’s views don’t control federal law. However, taxpayers’ business practices may require them to pay income taxes in the customers’ states. Businesses’ choices remain the same — use business practices that improve sales and lose the protection of P.L. 86-272, or limit business practices to those that will allow them to save income taxes. The legal question is, does a particular business practice remove the protection? If the protections have, as a practical matter, been eliminated by the practical necessity of today’s technology, businesses’ costs, and competition, there is nothing wrong with that. However, in Wrigley, the Court recognized the statute’s purpose and interpreting it in a way that telephone calls and mail destroyed its protections would have made the law meaningless when it was enacted — a result that is absurd and therefore not consistent with normal statutory construction.

What conclusions can be drawn concerning other electronic transmissions from these preliminary determinations? Although nexus and P.L. 86-272 are not directly connected, they are analogous in some ways. They both depend on contacts with the customer’s state on the taxpayer’s (seller’s) behalf, although some (often substantial) contacts (solicitation) don’t make any difference for P.L. 86-272 purposes.

The MTC is correct that if a “business remotely fixes or upgrades products previously purchased by its in-state customers by transmitting code or other electronic instructions to those products via the Internet,” the business is not protected by P.L. 86-272.³⁸ The reasoning is the same as it is for some cookies being outside its protection. However, this conclusion may not be complete.

Also, the MTC’s draft concludes that streaming music and videos to electronic devices for a charge is not protected because it isn’t “the sale of tangible personal property.”³⁹ We assume the MTC would conclude the same for streaming software. This conclusion also appears correct but raises unanswered questions. Is it not protected because it is not a “sale” but rather a license to use property? Like the difference between buying a copy of a movie on a DVD and buying a ticket to see a movie in a theater. Rentals of and license to use property are not considered sales for federal or state income tax purposes, and as far as we know, the MTC’s conclusion in its first P.L. 86-272 policy document that they are likewise not sales for P.L. 86-272 purposes has never been challenged.⁴⁰

Another issue is whether what is being licensed is tangible or intangible property. This issue is important because if the music, video, or software is bought and downloaded, it would be within the protection of P.L. 86-272 if it is tangible personal property, but not protected if it isn’t. Music and videos are certainly perceptible to the senses, but this is an important unanswered question.⁴¹

So it is possible that software is tangible property. If it is, and it is downloaded and used to fix or upgrade software or fix or upgrade the firmware of computerized equipment like Wi-Fi routers, smart televisions, or motor vehicles, is P.L. 86-272 back in play? And if it makes hardware like a television work again, is that a forbidden repair or is the download merely the purchase of tangible personal property (software)? A company can sell spark plugs and be protected by P.L. 86-272 even if the purchaser uses them to “repair” his car. If software is tangible personal property, does the issue come down to who is doing the repair — does the seller’s software automatically make the repair, or is software just downloaded, and the customer then makes the repair with a click of his mouse?

Does all this confusion and line drawing support the argument that P.L. 86-272 is unconstitutional? The Supreme Court long ago tried to leave artificial rules behind and adopt a commerce clause jurisprudence based on practical effects. With this change of perspective in mind, should the interpretation of P.L. 86-272 exalt meaningless form over substance?

The MTC considers two other issues (in addition to streaming) for which electronic communication is relevant but chooses to rely on other arguments to support the position that they are not protected by P.L. 86-272. They are online applications for “branded” credit cards, and invitations to apply for jobs that are not sales related⁴² because they do not constitute, and are not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property.⁴³

These conclusions and their rationales appear to be correct, but does the MTC ignore their electronic communication aspect because it lacks confidence in its electronic communication theory?

This brings us to the most difficult issue regarding electronic communication. The MTC’s draft states:

And:

Assuming, as discussed above, that interstate telephone conversations that are not solicitation or entirely ancillary to it do not cause the seller to lose the P.L. 86-272 protection, are these statements correct? We think the answer is, it depends. P.L. 86-272 protection is lost only if there is an “activity” “on behalf of the seller” “in the customer’s state.” And for whatever reason, interstate telephone conversations lack at least one of these conditions.

For purposes of this discussion, assume that none of the activities discussed are solicitation or entirely ancillary to solicitation and are not de minimis. If we do that, this situation is analogous to due process nexus.⁴⁶ That is, we are considering contacts (activities) within the customer’s state on behalf of the seller.⁴⁷ Neither nexus nor P.L. 86-272 requires a physical presence in the customer’s state.⁴⁸ Both require an activity on behalf of the seller in the state, but it can be provided by an individual, tangible personal or real property, or intangible property. P.L. 86-272 says it requires an activity and the Court in Container states that apportionment requires “the out-of-State activities of the purported ‘unitary business’ be related in some concrete way to the in-State activities.” And “the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated.”⁴⁹ Whatever generates income is an activity.

The crucial question becomes to whom a common carrier’s activities are attributed. Are they working on behalf of the seller or on behalf of the customer?

The phrase “common carrier” is defined by Merriam-Webster’s Collegiate Dictionary: 11th Edition as “a business or agency that is available to the public for transportation of persons, goods, or messages.” A possible reason for not attributing the activities of common carriers to those who send goods or messages is that the common carrier can be viewed as working equally on behalf of the out-of-state taxpayer and the in-state customer. They are available on the same basis to any member of the public and merely transmit goods or messages.⁵⁰

“On behalf of” means that the activity of someone or something assists the seller to do business in the state.⁵¹

However, if activity in the customer’s state is for the benefit of the customer and it only incidentally aids the seller, P.L. 86-272’s protection should not be lost. For example, in the nexus context, see L.L. Bean v. Pennsylvania, in which the court found that:

Regarding communications, it makes some sense to consider common carriers to be working for each party in their respective states no matter which party initiated the communication. This conclusion is a recognition, at least in commerce clause matters, including statutes enacted in accordance with Congress’s commerce clause power, substance should matter more than form. Also, it will be difficult or impossible to determine who initiated the communication. If a customer called a seller because of information he viewed on the seller’s static website, who initiated the communication? If the customer called the seller and the seller returned the call the next day, who initiated the communication conducted during the second day?

We don’t understand the distinction the MTC draws between telephone conversations and internet chats. Both can be initiated by either party — Wrigley didn’t have a problem with sales personnel handing out business cards with their telephone numbers that were answered out of state, or having sales people put customers in communication with out-of-state non-soliciting personnel for reasons that were not entirely ancillary to solicitation.⁵³ Telephone and electronic communications both consist of information in the form of speech, video, text, or mouse clicks being translated into electronic signals and sent across state lines where they are translated back to text, video, or voice. Also, the MTC doesn’t distinguish between phone calls made over the internet and other phone calls.

It should be noted that the MTC doesn’t specifically say that telephone conversations are protected or not protected when they are not solicitation related. And it is our understanding that some state representatives believe they are not protected. Of course, if telephone communication is not protected, electronic communication wouldn’t be protected either.

But paragraph IV.B. 6. of the MTC’s draft states that “passing orders, inquiries and complaints on to the home office” are protected activities.⁵⁴ Since inquiries and complaints may concern billing, credit, how to repair the product, or instructions on the product’s use, the MTC appears to agree that at least telephone calls and mail across state lines for any purpose are protected. There is nothing to indicate that these inquiries and complaints can’t be made by email or otherwise over the internet. Further, this paragraph says more than that: It permits the seller’s representative to pass on this information to the home office. If individuals who are acting on behalf of the seller to solicit orders can pass on inquiries that are not ancillary to solicitation, websites and software representing the seller to solicit orders can also pass them on. And it would be unreasonable to allow the customer to inquire but forbid the seller from replying without losing its P.L. 86-272 protection.

It would be a misrepresentation for any state to adopt the MTC’s draft and then treat non-solicitation interstate telephone conversations as going beyond the protections of P.L. 86-272. The public will not trust state employees or agencies that would do that.

If a state announces that its position is that non-solicitation interstate telephone conversations go beyond the protections of P.L. 86-272, it is in effect arguing that Wayfair⁵⁵ overruled Wrigley. But this argument has problems. Wayfair is a commerce clause nexus case, while Wrigley is concerned with statutory interpretation. Both considered the intention of the drafters. Wayfair recognized that changes in business and commerce meant that the old rules were not consistent with the intent of the commerce clause. Therefore, the change Wayfair made was necessary to comport with the intention of the commerce clause. Wrigley is concerned with Congress’s intent in 1959. And while it is reasonable to argue that P.L. 86-272 no longer comports with the intent of the commerce clause and is therefore unconstitutional,⁵⁶ it is far more difficult to argue that the law is constitutional but means something that would have rendered it meaningless when it was enacted.

Therefore, it seems to us that the MTC’s “general rule” for electronic communications with a customer through a website or app, and its specific conclusions on post-sale chat or emails initiated from the seller’s website, are too broad.

Part 2

Part 2 of this article will discuss the MTC’s position on marketplace facilitators, independent contractors, extended warranties, and other less controversial issues.