Public Law 86-272: What Is Protected from State Income Tax?

Public Law 86-272 is a federal statute enacted in 1959 that restricts states from levying a net income tax on businesses whose activities within that state are limited to the solicitation of orders for tangible personal property. For this protection to apply, orders must be sent outside the taxing state for approval, and if approved, filled by a delivery that originates from outside the state.

This law was a response to a U.S. Supreme Court decision that upheld a state’s ability to tax an out-of-state company based solely on its sales staff’s regular solicitation. Congress enacted P.L. 86-272 to create a defined safe harbor for businesses, ensuring they would not be subject to complex income tax obligations in every state where they simply had a sales presence.

Qualifying for Protection

A business must meet several specific criteria to qualify for the tax immunity granted by Public Law 86-272. The foundational requirement is that the business must exclusively sell tangible personal property. This stands in contrast to intangible property, such as digital downloads, streaming services, or software as a service, which are not protected.

The sale of services is also explicitly outside the scope of P.L. 86-272’s protection. If a company’s representatives perform activities like installation, maintenance, or repair services with the sale of goods, the business will likely forfeit its tax immunity. The presence of any sales related to services or intangible items can disqualify a business from protection.

Another requirement is the mandate for out-of-state order approval. All orders solicited by sales representatives within a state must be transmitted to a location outside that state’s borders for the final act of acceptance or rejection. This ensures that the core business decision of approving a sale happens beyond the reach of the taxing state’s jurisdiction.

Finally, the fulfillment process must originate from outside the state. The tangible personal property must be shipped or delivered from a facility located outside the customer’s state. P.L. 86-272 only limits a state’s ability to impose a net income-based tax and does not offer protection from other taxes like sales, franchise, or gross receipts taxes.

Protected Business Activities

The protections of Public Law 86-272 extend beyond the direct act of asking for a sale to include activities considered entirely ancillary to the solicitation of orders. The U.S. Supreme Court, in its 1992 decision Wisconsin Department of Revenue v. William Wrigley, Jr., Co., clarified that ancillary activities are those that serve no independent business purpose apart from their connection to soliciting orders.

Under this framework, various activities are accepted as protected:

• All forms of advertising, whether through print, broadcast, or other media.
• Carrying product samples and promotional materials for display or for free distribution.
• Providing sales representatives with a company car for use in their sales-related travel.
• Passing along customer inquiries or complaints to their home office for resolution.
• Recruiting, training, and evaluating sales representatives using in-state facilities.
• A salesperson maintaining a small, personal office within their home, provided it is not held out to the public as a company office.

Unprotected Business Activities

A business will lose the income tax protection of Public Law 86-272 if it engages in activities within a state that go beyond the mere solicitation of orders or ancillary activities. These unprotected activities create what is known as nexus, or a taxable connection, with the state. Engaging in any of these activities can subject the company’s entire net income attributable to that state to taxation.

Providing services such as repairs, maintenance, or installation, even if offered for free, is a common example of an unprotected activity. The act of collecting on current or delinquent customer accounts through in-state employees also exceeds the bounds of solicitation. Conducting investigations into the creditworthiness of customers within the state is not a protected function.

The physical presence of company property is another factor. Maintaining any inventory or stock of goods in a state, whether in a public warehouse, on consignment, or otherwise, is a clear unprotected activity. This includes the use of “pick and pack” fulfillment services that store products in the state.

Other unprotected activities include:

• Providing technical assistance or training to customers after a sale has been completed.
• Maintaining any form of office or place of business that is accessible to the public.
• Repossessing property.
• Securing deposits on sales.

Modern Interpretations and Digital Activities

The rise of the internet and e-commerce has presented challenges to the application of a law drafted in 1959. In response, the Multistate Tax Commission (MTC) issued a revised statement in August 2021. This guidance interprets how P.L. 86-272 applies to modern digital business activities, asserting that when a business interacts with a customer through its website or app, it is engaging in activity within the customer’s state.

The MTC’s statement details several internet-based activities it considers unprotected. Providing post-sale assistance to customers through electronic chat or email that a customer initiates is deemed an unprotected service. The MTC also takes the position that soliciting and receiving online applications for branded credit cards from in-state customers exceeds mere solicitation of tangible goods.

A significant part of the guidance addresses the use of “cookies” placed on customers’ computers. While cookies that are solely used for shopping cart functionality may be permissible, the MTC views cookies that gather data for purposes like product development or market analysis as an unprotected activity. Other activities the MTC deems unprotected include remotely upgrading or repairing previously sold software or products, offering extended warranty plans online to in-state customers, and operating a website that allows customers to apply for non-sales positions within the company.

While the MTC’s guidance is not federal law, it has proven to be highly influential. Several states have already formally adopted its interpretations, creating a new compliance environment for online sellers. This shift means that businesses relying on P.L. 86-272 protection must now analyze their web-based interactions with the same scrutiny as their physical activities.