What Activities Are Protected Under PL 86-272?

Public Law 86-272 is a 1959 federal statute that shields businesses from a state’s net income tax under specific circumstances. The law protects companies whose only business activity within a state is the solicitation of orders for tangible personal property. For this protection to apply, orders must be sent outside the state for approval, and the goods must be shipped from outside the state.

The law was a response to complexities businesses faced with varied state tax laws as interstate commerce expanded. The protection is narrowly focused, applying exclusively to net income taxes and the sale of tangible goods, not services or intangible property. It establishes a minimum threshold of activity that a business must exceed before a state can impose its income tax.

Core Protected Activities Under the Law

The law protects the “solicitation of orders,” a term that includes any speech or conduct that invites an order. It also covers activities that are “entirely ancillary” to the request for a purchase. Ancillary activities are those that serve no independent business purpose for the seller apart from their direct connection to soliciting orders.

Protected sales activities include all forms of advertising and carrying samples or promotional materials for free distribution. The use of a company-provided vehicle for sales-related travel is also a protected activity. Sales representatives may maintain an in-home office, provided the company does not directly pay for or reimburse the cost of that specific office space.

Checking a customer’s inventory levels to suggest reorders is protected because it is directly tied to generating a new sale. A company can also recruit, train, and evaluate its sales representatives within a state without forfeiting protection. The “de minimis” principle means that activities beyond solicitation might not forfeit tax protection if they are trivial and not conducted on a regular or systematic basis.

Unprotected Activities That Forfeit Protection

Engaging in activities that extend beyond the narrow scope of solicitation forfeits the law’s protection, creating income tax nexus for the business. If a company performs even one unprotected act during the tax year, it loses protection, and all of its sales into that state for the entire year become subject to income tax. The nature of the activity, not its volume or financial impact, is the determining factor.

Unprotected activities that create income tax nexus include:

• Making repairs, providing maintenance, or offering technical assistance to property after it has been sold.
• Collecting on current or delinquent customer accounts within the state.
• Investigating the creditworthiness of potential customers.
• Maintaining any company office or place of business, other than a qualifying in-home office.
• Accepting or approving customer orders within the state.
• Holding inventory in the state, including goods in a public warehouse or on consignment.
• Installing or supervising the installation of property after delivery.
• Conducting training courses for any personnel other than sales representatives.

Application in the Digital Age

The rise of e-commerce has challenged the application of this 1959 law. In response, the Multistate Tax Commission (MTC) issued guidance, which several states have adopted, on how P.L. 86-272 applies to internet-based activities. The MTC’s stance is that when a business interacts with a customer through its website, it is engaging in business activity within the customer’s state, which must be analyzed to see if it exceeds solicitation.

Unprotected internet activities include:

• Providing post-sale customer assistance through an electronic chat or email.
• Placing cookies on a customer’s device to gather data for purposes like product development or inventory management.
• Offering remote repairs or technical upgrades by transmitting code to a customer’s device.
• Allowing customers to apply for non-sales positions through the company website.
• Contracting with a marketplace facilitator to handle sales.
• Offering and selling extended warranty plans online.

Conversely, some internet activities are still considered protected. Displaying static text or photos on a website is analogous to traditional advertising. A website that posts a list of frequently asked questions (FAQs) without offering interactive support is also permissible. The use of cookies is protected if their sole purpose is ancillary to solicitation, such as remembering items a customer has placed in their virtual shopping cart.

Distinctions from Other Nexus Standards

The protection from Public Law 86-272 is strictly limited to state and local net income taxes. It provides no immunity from other types of taxes that a state may impose on a business.

The primary distinction is with sales and use taxes. A business protected by P.L. 86-272 from income tax may still be required to collect and remit sales tax in that same state. This is due to the separate “economic nexus” standard for sales tax established by the Supreme Court’s decision in South Dakota v. Wayfair, Inc. That ruling allows states to require sales tax collection based on exceeding a threshold of sales revenue or number of transactions, such as $100,000 in sales or 200 transactions.

The law’s protections also do not extend to non-income-based taxes. These can include franchise taxes, which are often based on a company’s net worth, and gross receipts taxes, which are calculated on a company’s total revenue. Other business and occupation (B&O) taxes are similarly unaffected. A business must analyze its nexus for each tax type separately, as the activities that shield it from income tax have no bearing on its other tax obligations.