Basics of Public Law 86-272
Federal Public Law 86-272 (P.L. 86-272) was enacted in 1959, designed to protect the interstate commerce of out-of-state businesses. It prevented states from imposing income taxes on certain sellers of tangible personal property (i.e., goods) where the business’s only activity performed in the state is the solicitation of orders for sales of tangible personal property. These orders are sent outside the state for approval and filled by shipment or delivery from a point outside the state.
However, P.L. 86-272 does not define the phrase “solicitation of orders,” and has not been amended by Congress since its passage more than 65 years ago, despite the emergence of digital services and e-commerce that dominate the current business landscape. The ambiguity surrounding the meaning of “solicitation of orders” has led to a myriad of interpretations at the state level regarding business activities that fall within and outside the scope of protection afforded by P.L. 86-272.
Model Rule Leads to Confusion
In 2021, the Multistate Tax Commission (MTC) was drafted, and some member states later adopted those revisions to the interpretation of P.L. 86-272 with examples of protected and unprotected activities occurring over the internet. Many of the common interactive website and mobile platform activities cited in the MTC’s updated interpretation, such as post-sale assistance with customers via chat or email, certain “cookie” enabled features, and the ability for a prospective non-sales employee to upload a resume on a company’s careers page, may exceed P.L. 86-272 protection and as a result, expose out-of-state sellers of tangible personal property to the imposition of income taxes by a state that adopted the MTC’s 2021 revisions.
Recent Legislative Developments
Recent federal legislative developments are aimed at bringing P.L. 86-272 to the digital age by expanding the definition of “solicitation” to include business activity that “may also serve some independently valuable business function apart from solicitation.” The effect of the expanded definition would significantly broaden the protections afforded by P.L. 86-272 and curtail the ability of states to adopt the MTC’s 2021 interpretation of P.L. 86-272 to impose income taxes on out-of-state businesses using many common website and application features.
Your Guide Forward
Businesses should carefully consider their state operational footprint and laws that can minimize their exposure to income taxes, such as Public Law 86-272, on an annual basis at a minimum and with special consideration during periods of rapid growth when entering new markets or utilizing a remote workforce.
Cherry Bekaert’s State & Local Tax (SALT) team helps businesses operating in the multi-state environment utilize the protections provided by the federal law with a consultative approach that navigates the various state interpretations of P.L. 86-272 and applies them to their operations across multiple jurisdictions.
