🕊️ A federal proposal could dramatically reshape the way states tax out-of-state businesses. Here’s what you need to know.
🏛️ What’s Happening?
Last week, the House Judiciary Committee advanced a provision in the federal reconciliation bill that would dramatically broaden protections for businesses under Public Law 86-272 — a law originally passed in 1959 to shield businesses from state income taxes when their only activity in a state is soliciting sales of tangible goods.If enacted, this could be the most significant federal restriction on state tax power in over 60 years. 🚀
📜 A Quick Look Back: What is P.L. 86-272?
P.L. 86-272 was signed into law during a time when Congress feared states would overreach and burden interstate commerce.
🔹 Origin: Enacted after the U.S. Supreme Court ruled in Northwestern Cement Co. v. Minnesota (1959)
🔹 Goal: To limit state income taxation for businesses whose in-state activities are restricted to sales solicitation onlyFast forward to today — business has changed dramatically, and the law is struggling to keep up with the digital economy.
🌐 Internet Activities: The New Frontier
The Multistate Tax Commission (MTC) in 2021 issued new guidance stating that common online practices, like:
- Installing cookies
- Repairing digital products
- Online job recruiting
…could violate P.L. 86-272 protections. States like California, New Jersey, and New York are already enforcing this view. But businesses argue: “These are just digital extensions of sales solicitation!” 🧑💻
⚖️ States vs. Federal Government: The Clash
State tax agencies are moving forward, while lawsuits are flying:
- California‘s interpretation was struck down (procedural grounds)
- New Jersey is proposing regulations to formalize the MTC’s position
- New York courts say the rule isn’t retroactive — but uphold its legality moving forward
Other states like Massachusetts and Minnesota are also jumping on board.
🚚 What About Physical Presence?
Whether you’re a CFO, tax direcThe new bill proposes to shield even physical activities that “facilitate solicitation,” such as:
📦 Sales reps taking pre-orders
📋 Product demonstrations
🏢 Office visits for customer support (if related to sales)That’s a big shift. Under current interpretations, these activities might void tax immunity.
🧨 Potential Legal Fallout
This expansion could reignite the 10th Amendment debate over federal overreach. Critics cite the Supreme Court’s 2018 Murphy v. NCAA decision, which struck down a federal sports betting ban on anti-commandeering grounds.
Could states challenge P.L. 86-272 altogether? It’s not out of the question.
💼 Why It Matters to You
If your business:
- Sells tangible goods across state lines
- Uses digital tools to interact with customers
- Employs traveling salespeople
…this bill could reduce your state income tax exposure — or trigger new compliance complexities, depending on how the courts rule.
🧠 Quick Fact:
➡️ Over 60% of U.S. states are already applying MTC’s 2021 guidance informally, according to a Checkpoint Catalyst survey.
📊 Other Taxes Not Covered
P.L. 86-272 only restricts taxes based on net income. It doesn’t touch:
- Gross receipts taxes (WA, OH, TX)
- Corporate activity taxes (OR, TN, NV)
Still, tax experts speculate that if this bill passes, states might pivot to these taxes more aggressively, or expand taxes on digital ads and user data.
🔍 Key Takeaways
✅ The bill would strengthen business protections under P.L. 86-272
✅ Would roll back many aggressive state interpretations of the law
✅ Big implications for internet-based activities and physical presence
✅ Could trigger new constitutional challenges
✅ States may look for alternative tax bases in response
💡 Want to stay ahead of multistate tax developments?
Tools like Checkpoint Catalyst’s Nexus Assistant Charts and Topic #1002 provide in-depth tracking of state-by-state P.L. 86-272 application.
