Some may have missed the House Judiciary Committee recently approving H.R. 427, the Interstate Commerce Simplification Act, which would shore up a decades-old business taxpayer protection law that states have increasingly ignored as a relic of the past. Where Congress can prevent states from imposing burdensome obligations on out-of-state businesses who lack the electoral recourse of in-state businesses, doing so is anything but outdated.
The National Conference of State Legislatures (NCSL) disagrees, penning a letter to Congress urging it to drop the bill. Why the sudden concern?
H.R. 427 clarifies an earlier law, P.L. 86-272, the Interstate Income Act of 1959. That law protects businesses from facing income tax obligations in a state if their only activity in that state is the solicitation and fulfillment of sales orders. P.L. 86-272’s protections are particularly important to small- and medium-sized businesses. The largest businesses, like Amazon or Walmart, already exceed P.L. 86-272’s protections. More to the point, they have the in-house accounting expertise and capacity to comply with different state tax codes around the country.
Smaller businesses do not. For these businesses, the actual change in tax obligations from owing tax to another state is less burdensome than the difficulty of familiarizing itself with another state’s tax code. It is hard enough for small business owners to be knowledgeable enough to correctly comply with their home state’s tax code—let alone those of dozens of states.
Unfortunately, a handful of states have increasingly sought to bypass the shield that P.L. 86-272 provides by narrowing their interpretation of activities that “solicitation of orders.” For instance, a few states, including California, New York, and New Jersey, have adopted an interpretation of P.L. 86-272 that defines basic website functions like offering customer service in the form of virtual chats, enabling prospective employees to submit job applications, and the use of digital “cookies,” as outside the scope of “solicitation of orders” and therefore unprotected by P.L. 86-272. In another example, Minnesota claimed that a Wisconsin-based business owed Minnesota income tax because its sales representatives gathered “market research notes” in the course of their sales efforts.
In other words, state officials claim that “solicitation of orders” means only the act of asking a customer to purchase a product, and nothing else. If a company does something more, they lose all protections. That is a rather patently absurd interpretation—no business in the world could survive and grow if their website only allowed customers to purchase products, with none of the other basic functions of a modern website that customers have come to expect.
In response, Rep. Scott Fitzgerald (R-WI) introduced H.R. 427, a concise bill that simply amends P.L. 86-272 by adding the following:
“the term ‘solicitation of orders’ means any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.”
This common-sense clarification should spark no outcry. So the NCSL letter claims with some hyperbole that states “have historically been free from federal intervention”—a claim that is, ironically, debunked by the very existence of P.L. 86-272. The Commerce Clause gives Congress the power to regulate interstate commerce, particularly when states are misusing their taxing powers to place burdens upon out-of-state taxpayers to the detriment of the country.
NCSL’s letter also claims that the Supreme Court has upheld states’ aggressive workarounds, pointing to the Court’s decision not to grant certiorari in one recent case, Santa Fe v. Oregon. But that very wrongly misinterprets the Supreme Court’s choice not to take up a case as an explicit blessing of a lower court’s decision—the Supreme Court receives about 8,000 appeals each year and only takes up about 80 of them. The court regularly reminds everyone that if they don’t take a case, that means nothing about whether they think the decision was rightly or wrongly decided.
What’s more, it is hardly surprising that the Court declined to take up Santa Fe v. Oregon, a tax case with extremely narrow and specific facts that would be hard to apply elsewhere. The case was over a New Mexico-based tobacco company that “pre-booked” orders between Oregon-based retailers and wholesalers, filling out and submitting orders from the retailer that the wholesaler was contractually obligated to fulfill. Whether or not such specific, contractually-mandated “pre-book orders” constitute “solicitation of orders” is not a question many businesses have ever had to ask themselves.
Observers have said for years that the scope of “solicitation” needs clarification, and that should involve more than input from state tax administrators. Rep. Fitzgerald’s short clarification bill restores the original meaning of the 1959 law while leaving plenty of room for states to tax activity that is legitimately in-state. These ground rules are needed to rein in the handful of states determined to run amok over interstate commerce.