Last Wednesday, the House Judiciary Committee advanced a version of the federal reconciliation bill that would arguably enact the most significant Congressional limit on states’ interstate taxing power since 1959. The proposal would expand the protections afforded to businesses by a longstanding federal law (P.L. 86-272) that prohibits states from imposing a net income tax on a business whose activities in the state are limited to soliciting orders for sales of tangible personal property.
In its current form, P.L. 86-272 does not define protected “solicitation of orders.” The measure approved by the Committee incorporates proposed H.R. 427 (the Interstate Commerce Simplification Act of 2025), and would specify that protected solicitation includes “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.”
History of the law.
Congress has rarely intervened in general state tax policy. The Interstate Income Act of 1959 (better known as Public Law 86-272 or P.L. 86-272) is a major exception. As noted scholar Walter Hellerstein and his co-authors observe in State Taxation, the law was enacted in the middle of the last century amid “predictions of dire consequences to business and, indeed, the entire nation,” after the U.S. Supreme Court ruled in Northwestern Cement Co. v. Minnesota that states can subject interstate businesses to income tax if the tax is nondiscriminatory and fairly apportioned.
Treatment of internet activities.
In our era of remote transactions and electronically delivered goods and services, how far the protections of P.L. 86-272 extend is one of the most contentious questions in state tax today. The answer — whether determined by Congress, the federal courts, or the states themselves — will have enormous implications for businesses and state coffers alike.
In 2021, the Multistate Tax Commission (MTC) issued a revised statement on the federal law, effectively recommending that states treat many commonplace internet activities (including certain installations and use of cookies, repair of digital products, and online hiring practices) as a breach of P.L. 86-272 immunity for businesses. A number of major state tax agencies — in California, New Jersey, and New York — have moved to substantially adopt the portions of the 2021 revised statement relating to internet activities.
Litigation has heated up in all three states. California’s guidance was invalidated on procedural grounds last year. In February, New Jersey issued proposed regulations that would formalize and expand on the state’s previously issued guidance. A New York judge granted a partial order of summary judgment order last week, in American Catalog Mailers Association v. Department of Taxation and Finance, that the New York State Department of Taxation and Finance regulation on internet activities was not preempted by P.L. 86-272 and did not violate the U.S. or New York Constitution, but could not be applied retroactively. (Although the regulation was adopted in December 2023, the Department had announced the intention to apply it retroactive to tax years beginning in 2015.)
Other states are also moving toward adopting at least some portion of the statement. In April, Massachusetts announced a proposed regulation amendment that would incorporate aspects of the revision. The Minnesota Department of Revenue also confirmed to Checkpoint Catalyst late last month that the Department is working on draft guidance that would incorporate aspects of the 2021 MTC approach to internet activities, and indicated that it will circulate the document for public comment when ready. In 2023, the Department informally shared with the Minnesota Society of CPAs and Minnesota State Bar Association an earlier draft Revenue Notice along these lines.
Checkpoint Catalyst’s survey of state tax agencies, released last year, found that a number of states are applying the statement without formal adoption. These results track with off-the-record reports from state tax advisors that the MTC’s approach is sometimes applied on audit in states that have not ruled on the interplay between P.L. 86-272 and internet activities. The federal proposal would greatly restrict, and could in many cases preclude, states from imposing income taxes on businesses who sell tangible property into the state and whose activities with customers in the state are limited to internet activities.
Implications for activities involving physical presence.
Based on their plain language, the proposed amendments would also prohibit states from imposing a net income tax on businesses with employees or representatives physically engaged in the state in “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.” In the decades since P.L. 86-272 was enacted, many states that impose a corporate income tax have developed a nuanced and significant body of jurisprudence interpreting solicitation in the traditional physical-presence context, and many state court rulings on the issue could potentially be invalidated if the reconciliation bill advanced by the House Judiciary Committee were to pass.
For example, the U.S. Supreme Court in December declined to review an appeal of an Oregon Supreme Court ruling that a tobacco manufacturer breached the protection of P.L. 86-272 because the manufacturer’s representatives took “prebook orders” in addition to more conventional “sell sheet orders” on behalf of the manufacturer’s wholesaler customers. According to the court, the scheme essentially required wholesalers to sell the tobacco products and facilitated prebook order sales, activities which exceeded the solicitation protected by the federal law. The tobacco manufacturer’s petition to the U.S. Supreme Court characterized the MTC’s revised statement as a “source of confusion and controversy” amid recurring “conflicting and inconsistent interpretations” nationwide, and argued that the statement represents an attempt to rewrite the law rather than to interpret it.
Niki Ford, a partner with Baker McKenzie, told Checkpoint Catalyst that if P.L. 86-272 were amended as proposed, many states would need to rethink what types of activities they consider to exceed Public Law 86-272 protections. Contrary to current approaches, the law as amended would protect not just solicitation and ancillary activities but also activities that ‘facilitate’ solicitation of orders, “even when those activities have an independent business purpose.” Taxpayers might “look to the proliferation of marketplace facilitator laws and how widely those have been applied” in the sales tax context for the argument that “‘facilitating’ an activity is something much broader than directly conducting that activity.”
Implications for other taxes.
By its plain language, P.L. 86-272 operates only to restrict state taxes measured by net income. Taxes imposed on gross receipts or business activity — such as Texas’ franchise (margin) tax, Washington’s business and occupation tax, Ohio’s commercial activity tax, Nevada’s commerce tax, Tennessee’s business tax, and Oregon’s corporate activity tax — are subject to substantial nexus requirements, but not to the solicitation protection of the federal law. Nevertheless, Ford says that if the P.L. 86-272 amendments were adopted, she wouldn’t foresee states shifting to gross receipts tax schemes, “particularly because so many large corporate taxpayers do sell services and intangibles which are already outside the scope of 86-272.” But if states did see revenue shortfalls, she speculates that they might attempt to layer gross receipts-type “onto existing corporate income tax regimes,” and notes an emerging trend in “digital advertising and data severance taxes.”
Potential challenges to P.L. 86-272 itself.
Some scholars contend that P.L. 86-272 could itself be vulnerable to a challenge by states, following the U.S. Supreme Court’s 2018 ruling in Murphy v. NCAA, a non-tax case that invalidated a federal ban on sports betting as an infringement on state regulatory authority under the anti-commandeering principle of the 10th Amendment to the U.S. Constitution.
The Court observed that the 10th Amendment reserves to the states all powers not conferred on Congress. “Absent from the list of conferred powers is the power to issue direct orders to the governments of the States. The anti-commandeering doctrine… simply represents the recognition of this limitation.” Thus, “Congress may not simply ‘commandeer the legislative process of the States by directly compelling them to enact and enforce a federal regulatory program.’ ” An expansion of the federal law could potentially bring new challenges under the reasoning of Murphy.
Checkpoint resources.
As discussed above, Checkpoint Catalyst’s survey of state tax agencies’ approaches confirms that many states are following the MTC statement informally or preparing to follow it formally in whole or in part. Few agencies conclusively ruled out the possibility that they are following the revised statement. A detailed overview of the survey findings appears in Cornett and Newton-Clarke, Multistate Survey: Income Tax Immunity Erodes as States Follow MTC Statement on P.L. 86 – 272, State Tax Update, 08/06/2024.
Two Nexus Assistant Charts incorporate the findings of Checkpoint Catalyst’s survey for each state, alongside the state’s relevant laws, regulations, rulings, guidance, and historical approach:
- P.L. 86-272 and MTC Conformity–Conformity to MTC Statement on P.L. 86-272 (2021 Revision); and
- P.L. 86-272 and MTC Conformity–Conformity to MTC Statement on P.L. 86-272 (Any Version).
Checkpoint Catalyst subscribers may preview these charts in Catalyst Topic #1002: Nexus (Corporate Income and Business Activity Tax), Quick Look. Filtering, sorting, and other deeper chart functionalities are available only in the Nexus Assistant charts tool itself.
In-depth overviews of each state’s approach to P.L. 86-272 and nexus are available in Catalyst Topic #1002: Nexus (Corporate Income, Gross Receipts, and CAT Taxes).
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
