SALT Provision Buried in House’s “Big Beautiful Bill” Would Curtail State Income Taxation Under P.L. 86-272

A proposed amendment buried under “Other Matters” in the House reconciliation proposal (the “One Big Beautiful Bill”) that advanced to the U.S. Senate on May 22 would arguably enact the most significant congressional limit on states’ interstate taxing power since 1959.

As previously reported by Checkpoint Catalyst, the proposal would expand the protections for businesses afforded by a longstanding federal law (Public Law 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.

At present, protected “solicitation of orders” is not defined by federal statute. The bill approved by the House would amend P.L. 86-272 to 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.”

The resulting expansion of P.L. 86-272 protections for businesses would put to rest ongoing disputes over the Multistate Tax Commission’s recommended approach — followed formally or informally by an increasing number of states — which treats a variety of commonplace internet activities as sufficient to override the protections afforded by the law.

Not only would the new understanding of solicitation invalidate the MTC’s approach, it 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, courts in many states that impose a corporate income tax have issued a nuanced body of rulings on issues that arise in the traditional physical-presence context, and many of these rulings could potentially be invalidated if the amendment were to pass.

The expansion of protected solicitation activities, although generally advantageous to business interests seeking to limit their multistate tax footprint, could create new tax exposure for businesses in some states, perhaps most notably those with “throwback rules.” Throwback states require sales of tangible personal property that are not taxed in the destination state to be “thrown back” into the origin state’s sales factor numerator.

Whether the P.L. 86-272 proposal, originally added by the House Judiciary Committee, is appropriate to the reconciliation process is an open question.

The Senate points of order include a provision known as the Byrd rule, which prohibits inclusion of matter “extraneous to the instructions to a committee.” The rule is intended to, as Frequently Asked Questions compiled by the Congressional Research Service explain, restrict reconciliation legislation to the changes necessary to bring federal fiscal policy into compliance with the levels agreed to in the associated budget resolution. If an objection is raised on these grounds, the Senate parliamentarian will make the determination whether the provision comports with the rule or should be struck from the legislation.

Leaders of The National Conference of State Legislatures (NCSL) in an open letter on May 14 had urged House Budget Committee leaders to reject inclusion of the P.L. 86-272 provision in the final budget reconciliation measure, arguing that it would have adverse fiscal ramifications for states and that it lacks the “direct fiscal impacts… stipulated by the Congressional Budget Act.” Asserting that “states have the inherent right to maintain fiscal sovereignty and have historically been free from federal intervention,” the letter characterizes the P.L. 86-272 expansion as “an incursion on a state’s taxing power as upheld in challenges to P.L. 86-272 under the U.S. Supreme Court case Wrigley and the Oregon State Supreme Court decision in Sante Fe Natural Tobacco Company v. Department of Revenue, which the U.S. Supreme Court let stand.”

Checkpoint resources. For a more detailed consideration of the federal reconciliation proposal as it relates to P.L. 86-272, see Newton-Clarke, House Bill Would Expand Protection from State Income Taxation Under P.L. 86-272, Invalidating State Protections, State Tax Update, 05/07/2025.

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).