The Tax Foundation recently joined NTUF in recommending that Congress address the steady erosion of an important protection for smaller businesses that ship products to customers in other states.
The Interstate Income Act of 1959, more often known by its public law number (P.L. 86-272), is a federal preemption law that bars states from assessing business income tax obligations purely on the basis of “solicitation of orders” within that state. In other words, a business located physically in Florida cannot be held liable for New York business income tax solely by virtue of shipping products to New York-based customers.
In practice, P.L. 86-272 has little impact on states’ ability to collect income tax from the largest multistate businesses—these have nexus in other forms, from in-state inventory warehouses to retail outlets to offices. These larger multistate businesses also have the economies of scale to handle the enormous compliance burden of navigating the thousands of different business income tax jurisdictions at the state and local levels.
Smaller businesses, on the other hand, do not, and without P.L. 86-272, they would be expected to handle the same tax compliance burden as Amazon or Walmart or any other major retailer. Filing taxes is always a headache, but an obligation to file in thousands of states and localities is a threat to shove small businesses out of the e-retail market entirely.
Unfortunately, that hasn’t stopped some states from trying to create just such an obligation, under the aegis of the Multistate Tax Commission (MTC). In 2021, the MTC’s working group on the issue released updated recommendations for how states should handle the interaction between various online activities and P.L. 86-272. The gist—most online retail businesses with modern websites would not be able to benefit from P.L. 86-272’s protections.
Since then, California, New York, Massachusetts and New Jersey have all implemented language adopting this hyper-narrow interpretation of P.L. 86-272, though California’s language was struck down in court under the state’s Administrative Procedures Act.
Fortunately, bills have been introduced in Congress by Sen. Ron Johnson (R-WI) and Rep. Scott Fitzgerald (R-WI) to curb these state-level end-arounds on federal law. A version of the language in these bills even appeared in the House-passed version of the reconciliation bill that became the One Big Beautiful Bill Act, though it was not included in the Senate version due to Byrd Rule constraints.
The language in these bills is straightforward, clarifying the phrase “solicitation of orders” to reflect that it also includes activities that facilitate solicitation. That was always rather obviously intended by the original P.L. 86-272, as the former requires the latter.
The Tax Foundation correctly points out that while these bills would go a long way towards reining in aggressive states bent on avoiding pro-taxpayer constraints, they fail to address the fact that P.L. 86-272 only covers the sale of physical goods, not digital goods such as software licenses or streaming. Including protections for these products should absolutely be part of the conversation for future reforms of P.L. 86-272.
Nevertheless, Congress should recognize the rising drumbeat of tax experts recommending that it take action to prevent certain tax-happy states from endangering the broader retail market by attempting to shrug off federal interstate commerce protections without any corresponding efforts to promote simplification and uniformity. Simple language clarifying the definition of “solicitation of orders” would be an excellent place to start.