Public Law 86-272 Explained for Businesses

Public Law 86-272 is a federal statute enacted in 1959 that limits a state’s ability to impose a net income tax on a business whose only connection to that state is soliciting orders for tangible personal property. The law was a response to court decisions that expanded states’ authority to tax out-of-state companies, aiming to prevent burdens on commerce between states.

The law’s purpose is to create a uniform standard for businesses with a minimal presence. It was conceived for an economy of traveling salespeople and mail-order catalogs, long before the internet. To address the digital economy, the U.S. House of Representatives has proposed an expansion of the law to provide clearer guidelines for modern businesses.

Core Requirements for Protection

To qualify for protection under Public Law 86-272, a business must meet several precise conditions regarding its activities. Failing to meet any of these requirements means the protection is lost, and the business may be subject to that state’s net income tax.

The primary requirement is that the business’s activities within the state must be limited to the “solicitation of orders.” This term means the act of seeking or requesting an order, and any activity that goes beyond this can disqualify the business from protection.

Another condition is that all solicited orders must be sent outside the state for approval or rejection. The authority to accept a contract cannot be with an employee or agent inside the customer’s state.

If an order is approved, it must be filled by a shipment that originates from outside the state. A business cannot maintain a warehouse or inventory within the state to fulfill local orders and still claim protection.

The law’s protection applies only to the sale of tangible personal property, not services, real estate, or intangible property. A business that sells a mix of tangible goods and related services, like installation or maintenance, may forfeit protection for its entire operation in that state.

Protected Activities Under Solicitation

The U.S. Supreme Court has clarified that “solicitation” includes activities that are entirely ancillary to requesting orders. These are actions that serve no independent business purpose apart from facilitating the sale of tangible personal property.

Protected activities include various forms of advertising and allowing sales representatives to carry samples and promotional materials for free distribution. The use of a company-provided car by a sales representative is also a permissible activity.

Sales representatives can maintain an in-home office within the state without jeopardizing tax protection. They are also permitted to pass customer inquiries or complaints to their company’s main office outside the state.

These protected activities are viewed as part of inviting an order. They are minor, related actions that do not establish a significant economic presence and are secondary to the request for a customer to purchase goods.

Activities That Forfeit Protection

Certain actions go beyond mere solicitation and forfeit the law’s income tax protection. Engaging in even one unprotected activity can be enough to subject a business to a state’s income tax for the entire year.

Providing post-sale services forfeits protection. This includes making repairs, providing maintenance, or offering technical assistance and training to customers within their state, as these actions establish a local business presence.

Financial transactions within the state, such as collecting payments or repossessing property, will also nullify protection.

Maintaining a physical location other than a sales representative’s in-home office, such as a warehouse or retail store, is an unprotected activity. Similarly, keeping a stock of inventory or replacement parts within the state is not permitted. Supervising or performing the installation of property after the sale also exceeds the scope of solicitation.

Application to Digital Activities and Remote Work

The rise of e-commerce and remote work has challenged the application of this 1959 law. In response, the Multistate Tax Commission (MTC) issued a revised statement in 2021 interpreting how P.L. 86-272 applies to digital activities. This guidance is not federal law but an interpretation that states can choose to adopt, which suggests certain online interactions can forfeit tax protection.

Under the MTC’s interpretation, providing post-sale assistance to customers through an interactive website chat or email function is considered an unprotected activity. This is viewed as the digital equivalent of having a customer service representative physically present in the state.

Using internet “cookies” on a customer’s device can also forfeit protection. If cookies gather data for product development, inventory management, or other non-sales activities, they exceed solicitation. However, cookies used for purposes ancillary to the sale, such as remembering items in a shopping cart, may still be protected.

The presence of remote workers can also void protection. If a telecommuting employee performs duties other than soliciting sales of tangible personal property, their activities can subject the company to income tax. This includes employees in roles such as engineering, customer service, or management.