A Strategic Look at the House’s “Big Beautiful Bill” and Its Impact on State Income Tax Rules
🗓️ As advanced to the U.S. Senate on May 22 | 🔍 Public Understanding Edition
📌 The Big Picture
A quietly placed provision in a new federal budget bill could dramatically reduce states’ ability to collect corporate income taxes from businesses operating across state lines.Why this matters: If passed, this would be the biggest federal limitation on state income taxation in over 60 years—especially for online and service-based companies.
🧭 A Quick Guide: What’s P.L. 86-272?
P.L. 86-272
A 1959 federal law that protects businesses from paying state income tax if their only activity in a state is soliciting sales of physical products.
Soliciting Sales
Activities that involve trying to get customers to place orders—usually by sales reps, mailers, or more recently, websites.
Tangible Personal Property
Physical goods you can touch—like books, tools, electronics. Not services or digital products.
🆕 What the Proposal Would Change
📘 Expanded Definition of “Soliciting Orders”
The new provision would broaden this concept significantly:
🔍 New Rule: Activities that help solicit orders—even if they also serve other purposes—would be protected from state income tax.
| 🏢 Current Standard | 🏛️ New Proposed Rule |
| Only direct sales-related actions are protected | Broader protections for all business activities that support sales, even if they also benefit the company in other ways |
👨💻 Examples That Could Now Be Protected:
- Chatbots or customer service portals answering pre-sale questions
- Online product configurators or calculators
- Product videos, tutorials, or demos hosted online
- Company reps giving product training or promotional talks in-person
⚖️ Clash with States & Tax Authorities
❗ Conflict with State Practices
The proposal would override a widely promoted state-level approach pushed by the Multistate Tax Commission (MTC). The MTC had advised that:
👉 Many common digital activities = taxable presence
That includes:
- Interactive websites
- Accepting returns or processing online orders
- Post-sale customer engagement
🎯 Impact: This federal change would invalidate those positions and significantly reduce states’ power to collect tax from out-of-state businesses.
🗺️ Not All Benefits Are Equal
- ⚠️ What’s the Catch?
- 💼 Employers can reimburse employees for buying personal health insurance
- 🔐 Officially codified in law
- 🧾 Eligible for tax-preferred treatment
- Businesses may save taxes in some states—but owe more elsewhere due to so-called “throwback rules.”
- 🧾 What Are Throwback Rules?
- If a business sells into a state where it isn’t taxed, some states require the sale to be “thrown back” and taxed in the business’s home state instead.
- 📍 Think of it like this: If no one claims the tax, your home state will.🧠 Implication: Companies with untaxed out-of-state sales could see higher tax burdens in their home state.
🧑⚖️ Legal & Legislative Uncertainty
- 🔍 Stronger Oversight on Earned Income Tax Credit (EITC):
- 📬 IRS will notify taxpayers of duplicate child SSN use
- 🕒 Refund delays until October 15, 2025 for🔒 The Byrd Rule May Block It
- A Senate procedure called the Byrd Rule may prevent this tax provision from surviving in the final law. The Byrd Rule stops “non-budget” items from being included in budget bills.
- 🧩 This provision was tucked into “Other Matters” by the House Judiciary Committee, raising flags about whether it truly fits within budget-focused legislation.🎓 The Senate parliamentarian will decide whether this clause can stay in the final bill.
💼 Summary for Business Owners & Advisors
| 🔍 What You Should Know | 📊 Why It Matters |
| New federal rule would shield more out-of-state activities from state income tax | Especially helpful for e-commerce, SaaS, remote service providers |
| Could conflict with current state tax enforcement trends | Risk of noncompliance drops in some states, but rises in “throwback” states |
| Legal uncertainty remains due to Senate procedural rules | Don’t rely on the change until it survives reconciliation |
🧠 Bottom Line
This proposed change would reduce multistate tax complexity for businesses—but could also create new planning risks. Whether you’re an advisor, CFO, or business owner, stay alert:📅 Key Date: Monitor progress as the Senate takes up the full budget reconciliation bill.
🛠️ Action Tip: Review your multistate sales model and digital customer engagement tools to identify exposure.
