Oregon Delays Implementing MTC P.L. 86-272 Changes

The Oregon Department of Revenue (DOR) decided to take a step back from implementing the potentially overreaching provisions of the Multistate Tax Commission’s (MTC’s) statement of information on the application of P.L. 86-272 to internet activities.

Issued last fall, the MTC guidance broadened the definition of “business activity” and provided several scenarios to describe when a business does or does not defeat the protection provided by P.L. 86-272 when it interacts with customers through its website. The statement focuses on whether an out-of-state business using the internet to conduct in-state business activities is engaged in protected activities under P.L. 86-272. The general rule of the statement is that “when a business interacts with a customer via the business’s website or app, the business engages in a business activity within the customer’s state. This approach greatly expands the reach of tax departments to include many out-of-state businesses.

When the statement was first issued, the DOR explored adopting the entire statement and applying it to all periods open for examination. After business taxpayers objected to the changes, the DOR is reconsidering the approach and willing to include stakeholders’ input in their determination. One recommendation proposed was that any changes be made on a prospective basis only, as businesses claiming protection under P.L. 86-272 would generally not have filed tax returns for prior periods. Other objections were made to the statement, as it incorrectly attributes online activities of the customer to the seller.

The state has not released a draft of the proposed rule changes, nor is there any proposed legislation pending on these changes. The DOR maintains it will also be considering the MTC’s recommendation that factor presence nexus standards should be implemented along with its proposed guidelines. Historically, however, the Oregon Legislature has rejected factor presence nexus standards.

Although not the first state to consider adopting the updated MTC statement provisions, Oregon is the first to take the issue to a public forum to consider the impact of the changes. New York has published its proposed update in a regulations package of corporate tax reform. California only published internal guidance to the Franchise Tax Board to implement the MTC changes and is already facing legal challenge by the American Catalog Mailers Association,¹ claiming that the guidance is a “radical new interpretation” of the law and should be declared invalid.

¹ American Catalog Mailers Association v. Franchise Tax Board, Superior Court of California, San Francisco County. Case No. CGC-22-601363 (August 18, 2022).

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