86-272, Oh My!

The signing of the One Big Beautiful Bill Act provides an opportunity to evaluate the current status of Public Law 86-272.

Although the Senate amendments removed the expanded protections that had been part of the House bill – thus leaving the law unchanged – there has been significant recent activity surrounding this law that was originally enacted in 1959.

P.L. 86-272 states that “No state, or political subdivision thereof, shall have power to impose…a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State…are…the solicitation of orders…in such State for sales of tangible personal property…” That’s a lot of ellipses, but that’s the crux of the matter. It is important to note that franchise, gross receipts, and minimum taxes are not restricted by this law, and states may impose them if a company is “doing business” in the state.

This law provides important protection for companies with minimal contact in a state. States have every incentive to impose as much tax as possible on businesses located outside the state – for obvious reasons – and they have been increasingly aggressive in trying to find ways to invalidate that protection.

The key issue in 86-272 litigation involves which activities constitute the solicitation of orders and which exceed that definition. Things like performing services in the state, delivering property in the company’s vehicles, having non-sales employees in the state, etc. have been held to exceed solicitation and they open a company to taxation in a state.

As interstate commerce has been entirely transformed from the shape it took in 1959 – often a traveling salesperson going door-to-door with a sample case – litigation has struggled to encompass the new activities that we’re all now familiar with. In 2021, the Multistate Tax Commission published a revised interpretation of P.L. 86-272 which held that a whole host of electronic activities would exceed solicitation. Having a live chat help function on a website or leaving “cookies” on a user’s computer in the state, among other activities, was deemed to invalidate a company’s protection.

This would be a seismic shift in the taxation of interstate commerce if it became widely adopted. As you might expect, California and New York were the first two states to add regulations incorporating this new interpretation. California’s rule was suspended by the CA Superior Court on technical grounds and appears not to be currently applicable (although I did just have an auditor refer to it as though it were). New York’s rule has been challenged and upheld, although the nine-year lookback that was originally proposed was struck down, and it can only be applied to activities occurring after the publication of the rule in December 2023. Several other states have proposed rules adopting the new framework, but none have become final as of this writing.

The House version of the One Big Beautiful Bill Act contained section 70301, which would have expanded and clarified the definition of solicitation to include “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.” While this would not immediately neuter state’s efforts to get around P.L. 86-272, it would have provided a powerful tool for companies to use in arguing that they did not exceed solicitation. Unfortunately (if you are a company engaged in interstate commerce and you don’t like paying tax), the Senate amendments did not include this provision. And since the House voted to adopt the Senate amendments, and the President signed the bill with those amendments, the law remains unchanged.

You can expect to see more states adopting the MTC interpretation unless and until federal law is changed. If you have traditionally claimed 86-272 protection in various states, this would be a good time to reexamine your activities in those states and potentially make changes to those activities to preserve that protection or possibly to file without claiming that protection in the future.

We are ready to assist you as you navigate this rapidly-evolving landscape

As states continue to reinterpret and challenge the boundaries of P.L. 86-272, now is the time to evaluate your business’s activities and exposure. Our experienced team at Meaden & Moore is ready to help you assess your current filing positions and develop strategies to remain compliant while minimizing your tax burden. Contact us today.