Concerned that the Multistate Tax Commission work group charged with updating national guidance on P.L. 86-272 was headed in the wrong direction, an official from the Texas comptroller’s office last spring proposed an alternative approach.
Ray Langenberg, the Texas comptroller’s special counsel for tax litigation, was not involved in the group’s earliest discussions. After the U.S. Supreme Court decided South Dakota v. Wayfair Inc., the MTC’s Uniformity Committee wanted to explore whether the sales and use tax decision has implications for income tax nexus and P.L. 86-272 purposes. The committee formed the work group to consider whether the MTC should update its statement of information on the application of P.L. 86-272 to address modern business activities, primarily those conducted over the web.
By February 2019 the work group was discussing cookies — what they are, how they work, and whether an internet seller’s use of them might constitute business activity exceeding P.L. 86-272 protection from income taxation by a customer’s state. At that time Martin I. Eisenstein of Brann & Isaacson, one of the lawyers who represented the companies in Wayfair, reminded the work group that whatever the Court said in terms of interpreting the constitutional substantial nexus standard for sales and use tax purposes “is different than determining the legislative intent of Congress when it adopted Public Law 86-272 in 1959.”
In an April 2019 status update to the Uniformity Committee, MTC Counsel Brian Hamer explained that in considering hypothetical modern business scenarios, the work group first determined whether the internet activity constitutes the solicitation of orders for tangible personal property — that is, the type of business activity statutorily protected by P.L. 86-272. If the business activity extended beyond solicitation, the group then determined whether that internet activity takes place inside or outside the customer’s state; this step was needed because a seller would retain its P.L. 86-272 immunity if the non-solicitation internet activity occurs entirely outside the customer’s state.
Hamer has since said that the big question for the work group was not so much whether an internet activity constitutes solicitation — that could often be answered by consulting the MTC’s existing statement of information — but where that internet activity is taking place. Notably, regarding where a business activity takes place, the work group early on started informally making a distinction between business activities conducted over the phone and those conducted over the internet. Generally, the group took the position that activities conducted over the phone were taking place outside the customer’s state, while those conducted over a seller’s website were taking place within the customer’s state.
Hamer wrote that the work group’s reasoning behind this distinction was based in key part on the following considerations:
(1) When a customer engages a seller’s website, the website transmits software or code to the user’s computer, which is stored in the user’s computer for some period of time. The code serves to facilitate the interaction between the customer and seller.
(2) The interaction between the customer and the seller’s website is substantial in nature.
(3) The analysis in Wayfair speaks to the "continuous and pervasive virtual presence of retailers" in the states where their customers are located.
This is when Langenberg entered the picture.
Echoing Eisenstein’s comments months earlier, Langenberg said his impression was that the work group’s analysis distinguishing types of business activity for P.L. 86-272 purposes seemed tied to concepts of physical presence. “Activity is not the same as physical presence,” Langenberg said in a memo outlining his thoughts on P.L. 86-272 post-Wayfair.
“After Wayfair, perhaps this way of thinking is obsolete for the reasons stated in Wayfair,” Langenberg wrote. “This way of thinking results in arbitrary distinctions — telephone communications and internet communications may have the same business purpose.” In addition to objecting to differentiating business activities based on the medium or the degree of physical presence in a customer’s state, Langenberg said he doesn’t like “the idea of making all-or-nothing decisions” about whether an activity defeats a seller’s P.L. 86-272 immunity “based on small distinctions” in the hypothetical scenarios.
Langenberg proposed an alternative approach. He suggested that the work group start from the premise that “any communication directed to a state constitutes a business activity within the state” and focus on whether that activity is solicitation of sales of tangible personal property, is ancillary to solicitation, or is de minimis.
Next, and importantly, Langenberg proposed expanding the concept of de minimis non-solicitation activities in a customer’s state that qualify for P.L. 86-272 protection and making a seller’s purposeful direction of such contacts a key part of that determination. Instead of spending time deciding where non-solicitation internet activities take place, Langenberg wanted the group to develop a list of factors that could be included in the statement of information to provide guidance on making qualitative assessments about a seller’s non-solicitation activities in a customer’s state and whether, when considered in their totality, such contacts would be de minimis for P.L. 86-272 purposes. He added that his proposed approach “leaves room for the possibility that large quantities of low-quality activities might constitute substantial nexus.”
The factors used in determining purposeful direction of a non-solicitation internet activity might include which participant — the seller or the customer — initiated the activity, Langenberg said. Other possible factors could include the extent of the interaction and the extent to which the location of the participants is known. For example, non-solicitation communications in which the location of the customer is known would be qualitatively more significant than a similar communication in which the location of the potential customer is not known, Langenberg said. Likewise, if a customer with a known service address visits a company’s website, “that communication is qualitatively more significant than an internet interaction with an unidentified surfer,” he said.
Langenberg’s approach became the work group’s main minority position. Work group members often described the different reasoning they were applying when casting straw votes on whether a seller engaged in a hypothetical scenario would retain its P.L. 86-272 immunity. At one point former MTC Chair Bruce Johnson, now with Taxometry LLC, said that even though the members often reached the same conclusion, the different means by which they got their result should be disclosed.
The work group’s draft revisions to the MTC’s statement of information on P.L. 86-272 do not include notes about the votes, which were informal, or discussion of the members’ competing analyses. The MTC in late June or early July will likely hold a public hearing on the draft revisions and, according to General Counsel Helen Hecht, could schedule more than one to accommodate the amount of comments expected to be submitted.
‘Proxy for Nexus’
“Codification of the physical presence requirement was not the impetus for 86-272,” Langenberg wrote. “Public Law 86-272 did not protect any particular form of activity; it protected a type of activity — solicitation.”
At the same time, Langenberg said that consideration of the question of what is de minimis for P.L. 86-272 purposes draws into focus implied thresholds for substantial nexus.
Citing Wisconsin Department of Revenue v. William Wrigley Jr. Co., Langenberg included the Supreme Court’s comment that “whether in-state activity other than ‘solicitation of orders’ is sufficiently de minimis to avoid loss of the tax immunity conferred by [P.L. 86-272] depends upon whether that activity establishes a nontrivial additional connection with the taxing State.” The Wrigley Court also said it had little difficulty concluding that the company’s non-solicitation activities in Wisconsin, when considered collectively, constituted more than a trivial connection with the state for P.L. 86-272 purposes.
“Isn’t the de minimis standard a determination of whether an entity has substantial nexus from unprotected activities?” Langenberg asked rhetorically. He then argued that it must be so. “Non-solicitation communications and other unprotected activities directed to a state will disqualify the taxpayer [from P.L. 86-272 protection] if the activities are more than de minimis, i.e., they amount to substantial nexus,” he wrote.
Langenberg argued that the description of de minimis activities in the MTC’s current statement of information on P.L. 86-272 also “is a proxy for substantial nexus.” That description reads as follows:
De minimis activities are those that, when taken together, establish only a trivial connection with the taxing State. An activity conducted within a taxing State on a regular or systematic basis or pursuant to a company policy (whether such policy is in writing or not) shall normally not be considered trivial. Whether or not an activity consists of a trivial or non-trivial connection with the State is to be measured on both a qualitative and quantitative basis. If such activity either qualitatively or quantitatively creates a non-trivial connection with the taxing State, then such activity exceeds the protection of P.L. 86- 272. Establishing that the disqualifying activities only account for a relatively small part of the business conducted within the taxing State is not determinative of whether a de minimis level of activity exists. The relative economic importance of the disqualifying in-state activities, as compared to the protected activities, does not determine whether the conduct of the disqualifying activities within the taxing State is inconsistent with the limited protection afforded by P.L. 86-272.
Langenberg then discussed the evolution of the concept of purposeful availment in the contexts of personal and state tax jurisdiction.
He said that when Congress adopted P.L. 86-272 and for years after, the nexus inquiry focused on whether a seller had property or personnel in a customer’s state. “No attention was given to purposeful availment because it could be assumed that taxpayers purposefully placed their assets in a state,” Langenberg said. He later added that “the discussion of unprotected activities under 86-272 naturally focused on activities resulting from physical presence in the state.”
Meanwhile, in the context of personal jurisdiction, the Supreme Court started recognizing “that modern commercial life was rendering the traditional physical presence standard obsolete, and that activities ‘purposefully directed’ towards residents of another state may be enough for nexus,” Langenberg wrote. “However, for state tax purposes, the importance of physical presence lingered on, as exemplified by Quill,” he said, and alluded to the Quill Court’s bifurcation of due process and commerce clause nexus.
“Wayfair has now confirmed that activities conducted by electromagnetic methods may also constitute substantial nexus,” Langenberg said. The Wayfair Court did not use the phrase “electromagnetic methods,” but Langenberg included in that category activities conducted by phone, email, internet, and radio. He said that unlike when a seller has property or personnel in a state, it’s not necessarily appropriate to assume that a seller performing activities through electronic means is purposefully directing those activities to a state. At the least, the degree of purposeful direction may vary, he said.
Discussion
It took the work group several meetings to nail down the approach that Langenberg was proposing.
Michael Fatale, deputy general counsel for the Massachusetts DOR, said it sounds like Langenberg is equating business activity with the seller’s purposeful direction into the state — that is, with the due process nexus standard.
Langenberg clarified by saying that he wasn't proposing that purposeful direction should be a factor in determining whether something constitutes business activity within a state. Purposeful direction would become a consideration only at the stage of evaluating whether a seller’s non-solicitation business activities in a customer’s state are de minimis for P.L. 86-272 purposes, he said.
When work group members asked where Langenberg would draw the line between protected and unprotected de minimis internet activities, he said the work group would not need to do that. The MTC’s long-standing statement of information on P.L. 86-272 doesn’t provide standards or thresholds for protected de minimis non-solicitation activities, Langenberg said. Instead, Langenberg said the group should be articulating the factors to be used by state taxing authorities and taxpayers in determining the qualitative and quantitative importance of the non-solicitation activities in assessing whether, taken together, those activities are de minimis.
But Fatale pressed: If customers in one state initiated 1 million service calls to a remote seller to ask how to use a product they bought, would that exceed de minimis activity for P.L. 86-272 purposes? “I’m giving you the facts,” Fatale said, adding that these are the kind of cases that would come up. “It’s a million calls. Where does it come out under the line?” he asked.
Langenberg said that if he were at the tax agency making this determination, he might think 1 million phone calls is more than de minimis. “But the work group does not have to draw that line,” he repeated.
Fatale said that the work group majority’s focus on determining where hypothetical internet business activities are taking place “is admittedly a line-drawing exercise” — but one that he said is probably closer to what P.L. 86-272 requires than looking at purposeful direction.
Also, Fatale disagreed that the majority’s analysis of where a non-solicitation activity takes place relied on concepts of physical presence. The reason the group spent so much time discussing hypotheticals involving a seller placing cookies or software on a customer’s device is because of the business activities that those cookies or software enable, he said.
“The thing about cookies and software is they perform activities that you can then attribute back to the vendor,” said Fatale. He argued that a key difference between online sales and traditional sales made by phone over a public utility line is that internet sellers have a property interest in the cookies, software coding, or apps that enable the transactions.
Langenberg was not convinced. “Even though you may give lip service to the idea that physical presence is not the test, in fact the committee was drawing lines based on the extent to which an activity resulted in the company having some sort of a physical presence in the state,” he said.
At that point, two of the work group’s members publicly admitted that — as Langenberg had suspected — they had been thinking in terms of physical presence in the straw votes. That is, the members said they had been asking themselves whether a given hypothetical scenario involved the seller placing cookies or code on a customer’s computer; they hadn’t been thinking in terms of the business activities that such coding enables.
By early summer, Langenberg was winning over some of the work group members.
“We could dispense with six weeks of parsing all these different hypothetical website scenarios and simply say, ‘Yes, if you have customers in the state using your website, that’s business activity in the state,’” said Phil Skinner, lead deputy attorney general for Idaho. He agreed that it might make sense for the work group to instead focus on whether such business activity is protected by P.L. 86-272 because it constitutes solicitation of sales of tangible personal property, is ancillary to solicitation, or is de minimis.
And then Joe Huddleston of EY, a former MTC executive director, entered the conversation. “So basically what you’re saying is: In the internet age, P.L. 86-272 is meaningless,” Huddleston said.
Members rushed to emphasize that they were speaking informally and on the fly about hypothetical scenarios. And yet, after the commotion, one participant said that if the group were to get on board with Langenberg’s proposed approach, then yes, it would seem P.L. 86-272 is basically dead in the internet era.
That was not Langenberg’s view, however.
“To give some meaning to P.L. 86-272 in the internet era, my idea is we revise the de minimis calculation to consider the extent to which a communication is purposefully directed to a state,” Langenberg said at the MTC’s 2019 annual meeting.
Langenberg showed the audience a slide illustrating what he believed to be one of the flaws of the majority’s approach. The slide described a hypothetical scenario — the example is still among those in the draft revised statement of information — involving an internet seller inviting customers to apply on its website for the company’s branded credit card; the credit card generates interest income and fees for the company. The consensus of the work group is that this is a business activity that defeats the seller’s P.L. 86-272 immunity because it does not constitute, and is not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property.
Langenberg told the audience that under the majority’s approach, the question the work group considered is where that non-solicitation activity occurs. But he said the real-world answer would depend on small distinctions in how a seller implemented this invitation. Langenberg then ticked off four possible variations of the same scenario: One company hires people to go into the state to solicit customers to apply for its branded credit card; another company does a mass mailing into the state soliciting applications for the credit card; a third company sends a mass email soliciting the same applications; and a fourth company hires telemarketers to place calls into the state soliciting applications for the card.
The problem is that the work group’s majority is distinguishing the same communication based on the manner or method in which it is communicated to customers in a state, Langenberg told the audience. He again pitched starting from the premise that whenever a seller directs a communication to a customer in the state, that communication is business activity taking place in the customer’s state.
“If someone wants to come up with a different rationale, I need to know what it is and why it applies,” Langenberg said. He argued that the work group's focus should be on whether the activity falls into a protected category and on expanding the statement's concept of de minimis to make P.L. 86-272 relevant in the internet era.
Jeffrey A. Friedman of Eversheds Sutherland (US) LLP said he appreciated Langenberg’s acknowledgment of P.L. 86-272’s de minimis exception but still took issue with the work group’s approach, saying there seemed to be a lack of consideration of the types of internet activities that might be ancillary to solicitation.
Dealbreakers?
Ben Clough, the Iowa DOR's policy director for corporation income tax, said that while Langenberg’s approach might streamline the work group’s discussions, “in the real world we’d have to defend it.” Under Langenberg’s approach, any communication the seller directed to a customer would be business activity in the customer’s state.
“That definitely has not been the history of P.L. 86-272,” Clough said. “That doesn’t mean the history has always been right, but it seems like a big jump there.”
Also, in arguing that phone and web communications alike can be business activity within the customer’s state, Langenberg made the case that even phone calls could exceed solicitation or its ancillary activities and defeat the seller’s P.L. 86-272 immunity post-Wayfair.
“Put another way, 86-272 never protected telephone calls; it protected solicitation calls and other solicitation activities,” Langenberg said. “Therefore, finding that non-solicitation calls are not protected is not an undermining of 86-272. Rather, it is an acknowledgment that traditional physical presence in the taxing state is no longer required for nexus.”
That was a step too far for most group members.
Telephone calls historically have been considered protected by P.L. 86-272, said Fatale. “The federal statute hasn’t changed, and the contacts that we’re now pointing to have been in place for 100 years,” he said. “And you want to say that because a case came down last year, those contacts suddenly have new meaning under the statute?”
New Votes
After hearing Langenberg’s position, the work group went back and conducted another round of straw votes on each of the hypothetical scenarios it had considered up to that point.
For example, the work group reconsidered a scenario involving a seller posting a list of static frequently asked questions on its website. Fatale argued that the activity is protected because there is no interactivity with the customer; Langenberg countered that the activity would be unprotected except that it qualifies as de minimis because the communication is not directed toward any particular state. Six members voted that posting static FAQs would be a protected business activity, while three voted that it would be generally unprotected but qualifying as de minimis.
Another scenario the work group revisited involved a seller including how-to videos on its website, with one member arguing that the example is the epitome of an in-state service and thus not protected by P.L. 86-272. But another participant questioned whether posting how-to videos is different from preparing a transcript of the video for inclusion among the FAQs. Langenberg argued that the activity is not purposefully directed to the state if the seller does not know who is looking at the how-to videos; therefore, in his view, posting a how-to video would be de minimis for P.L. 86-272 purposes.
On revote, members were equally divided on whether posting a how-to video is protected or unprotected by P.L. 86-272. Specifically, five members voted that it is protected; one member voted that it is generally an unprotected non-solicitation activity that could be protected as de minimis; and six members voted that it is a type of business activity that exceeds P.L. 86-272 protection. The work group did not include this scenario in its proposed draft revised statement of information.
The work group also held a new vote on a scenario involving an internet seller inviting website visitors to apply for non-sales employment online. Initially the example stated that the seller’s human resources team is located outside the customer’s state; this part of the scenario has been deleted from the proposed draft revisions. One work group member argued that this scenario would be protected because it takes place outside the customer’s state — the seller has no employees in the state and the job is not located in the state. Two members argued that the scenario involves highly interactive non-solicitation activity that is taking place in the customer’s state.
On revote, 10 members agreed that the activity is unprotected; one member voted that it is protected; and one member voted that it is unprotected but likely de minimis.