Public Law 86-272 Nexus: What Businesses Need to Know

Public Law 86-272, the Interstate Income Act of 1959, is a federal statute that protects businesses from state income taxation. It establishes a minimum threshold of activity, known as “nexus,” that a business must exceed before a state can impose a tax on its net income. The law was designed to shield companies whose only business activity within a state is soliciting orders for tangible goods.

The purpose of P.L. 86-272 is to prevent states from taxing businesses with only a slight or casual presence. For a business to be protected, its activities must be limited to soliciting orders for tangible personal property. These orders must then be sent outside the state for approval, and if approved, the goods must be shipped from a location outside the state.

Core Protections of the Law

The protections afforded by Public Law 86-272 are specific and apply only under a narrow set of circumstances. The statute exclusively limits a state’s ability to impose a net income tax. It does not offer any protection from other forms of state and local taxation, such as sales and use taxes, franchise taxes, or gross receipts taxes. A business may be shielded from income tax in a state but still have obligations to collect and remit other types of taxes.

Another condition for protection under P.L. 86-272 relates to the nature of what is being sold. The law’s safe harbor applies only to businesses engaged in the sale of tangible personal property, meaning physical goods. The law does not extend to companies that sell services, real estate, or intangible property like software or digital goods. Consequently, a service provider or a software-as-a-service (SaaS) company cannot claim protection under this federal statute.

The law centers on the definition of “solicitation of orders.” This term encompasses more than just the explicit act of asking for a sale. Activities considered ancillary to solicitation, and therefore protected, include carrying samples and promotional materials for display, using a personal vehicle for business purposes if not used to deliver goods, and conducting in-home demonstrations. These activities are permissible because they are directly related to the effort of requesting an order.

Activities That Forfeit Protection

Numerous actions can cause a company to forfeit the protection of Public Law 86-272. Engaging in activities that go beyond the mere solicitation of orders for tangible personal property can create income tax nexus. These unprotected activities often relate to establishing a more significant physical presence or performing functions not directly tied to requesting a sale.

Common examples of activities that exceed the law’s protections include:

• Maintaining any form of office in the state, even a home office used for more than just soliciting orders.
• Owning or leasing real or tangible personal property, such as a warehouse, a storefront, or equipment.
• Performing services like repairs, maintenance, or installation, even if related to a product sold.
• Collecting on customer accounts or investigating the creditworthiness of potential customers.
• Accepting or approving orders within the state’s borders.

A narrow exception exists for “de minimis” activities, which are actions so trivial or insignificant that they do not, by themselves, cause a business to lose protection. For example, a salesperson making a minor, incidental repair during a sales call might be considered a de minimis activity. However, if a company regularly provides repair services or has employees dedicated to that function, these activities would be considered non-trivial and would create income tax nexus. The distinction between a de minimis and a non-trivial activity is often a matter of degree and frequency, and a pattern of such activities would likely establish nexus.

Modern Interpretations and Digital Activities

The rise of e-commerce and remote work has presented challenges to the application of a law drafted in 1959. In response, the Multistate Tax Commission (MTC) issued updated guidance in 2021 on how Public Law 86-272 should be interpreted in the digital age. The MTC’s statement provides a framework for states to analyze whether a business’s internet-based activities exceed the protections of the federal law.

The MTC’s guidance identifies several digital activities that it considers unprotected business functions that go beyond solicitation. These include:

• Providing post-sale customer assistance through electronic chat or email.
• Soliciting and receiving applications for branded credit cards online.
• Placing internet “cookies” on customer devices to gather data for product development or marketing analytics.
• Remotely fixing or upgrading a customer’s previously purchased products.
• Offering extended warranty plans online.

The rationale behind the MTC’s interpretations is that these digital activities are not merely facilitating the request for an order. Instead, they represent other ways of doing business and deriving economic benefit from a state’s market. The employment of remote workers in a state who perform business activities beyond solicitation, such as customer support or product development, is another area where businesses may forfeit P.L. 86-272 protections.

State-Level Adoption and Compliance

The guidance issued by the Multistate Tax Commission is not federal law and is not automatically binding on all states. It serves as a model policy that each state can choose to adopt through new legislation, regulations, or administrative rulings. This has led to a fragmented legal landscape where the application of Public Law 86-272 to digital activities varies significantly from one state to another.

The adoption of the MTC’s guidance has been inconsistent. For example, while California’s tax agency issued guidance aligned with the MTC, a court invalidated it for not following proper administrative procedures. In New York, a court upheld a similar regulation but ruled it could not be applied retroactively before its publication date in late 2023. These developments underscore that the rules can be subject to legal challenges, complicating tax compliance for businesses that sell nationwide.

Given this complex and evolving area of tax law, businesses should examine the specific income tax nexus rules for every state in which they have customers. Relying on the original 1959 law without considering modern interpretations and state-specific adoptions can lead to unexpected tax liabilities. The responsibility falls on each business to understand its activities and how they are viewed by tax authorities in each jurisdiction.