P.L. 86-272 and the evolution of nexus in the digital age

Editor: Brian Myers, CPA

Public Law (P.L.) 86–272, enacted in 1959, was originally designed to protect sellers of tangible personal property from state income tax obligations when their in–state activities were limited to solicitation. In today’s digitized economy, however, that protection is under increasing scrutiny. As states modernize enforcement and the federal government proposes updates, CPAs must carefully evaluate their clients’ multistate activities against the evolving nexus landscape.

What P.L. 86-272 does — and does not do

At its core, P.L. 86–272, formally named the Interstate Income Tax Act of 1959, prohibits states from imposing a net income tax on out–of–state businesses whose only in–state activity is the solicitation of orders for tangible personal property, provided that orders are approved and fulfilled from outside the state. Critically, the law:

• Applies only to net income taxes (not to franchise, gross receipts, or capital stock taxes);
• Applies only to sales of tangible personal property, excluding services and digital goods; and
• Does not establish nexus; it only provides immunity from income tax if nexus exists.

In the post–Wayfair era,¹ where economic nexus thresholds based on sales volume now dominate, P.L. 86–272 remains a narrow but critical tool in multistate tax planning.

Constitutional and historical context

P.L. 86–272 was enacted in response to growing concern over state encroachment on interstate commerce. Under its authority under the Commerce Clause of the U.S. Constitution,² Congress enacted this statute to ensure uniformity in state tax treatment for interstate businesses. While rare, this exercise of federal preemption in the state tax arena has stood the test of time — though its relevance has eroded as the economy shifted from physical to digital operations.

Post-Wrigley landscape and the MTC’s 2021 update

The Supreme Court’s decision in Wisconsin Dept. of Revenue v. Wrigley³ clarified that only solicitation and ancillary activities are protected under P.L. 86–272. Activities that are nonancillary or serve an independent business function may subject the business to state income taxation.

In 2021, the Multistate Tax Commission (MTC) issued a revised statement expanding on this interpretation. It declared that various common internet–based activities constitute unprotected in–state business conduct, including:

• Post-sale assistance via chat or email;
• Website recruitment of in-state nonsales employees;
• Cookie-enabled customer profiling for marketing or inventory purposes; and
• Software updates or bug fixes delivered over the internet.

These reinterpretations were adopted by states such as California, New York, and New Jersey, sparking legal challenges and uncertainty among multistate businesses.⁴

Legal challenges and state court rulings

Recent cases show that courts may be inclined to interpret P.L. 86–272 narrowly:

• In Santa Fe Natural Tobacco Co. v. Oregon Dept. of Revenue,⁵ the Oregon Supreme Court held that in-state activities related to incentive agreements with wholesalers were not ancillary to solicitation and thus taxable.
• In Uline, Inc. v. Commissioner of Revenue,⁶ the Minnesota Supreme Court ruled that in-state market research conducted by company representatives was not de minimis or ancillary and therefore not protected.

The U.S. Supreme Court declined to hear the appeal in Santa Fe, leaving these state court decisions as binding precedents.⁷

Congressional response: H.R. 427

Recognizing the growing friction between state enforcement and federal protection, lawmakers introduced the Interstate Commerce Simplification Act of 2025 (H.R. 427). The bill would modernize P.L. 86–272 by:

• Protecting digital activities that facilitate solicitation, even if they provide independent business value;
• Overriding state interpretations that treat common e-commerce functionality as taxable presence; and
• Reasserting federal authority to regulate interstate commerce and prevent a fragmented tax landscape.

The Congressional Research Service detailed this development in the Feb. 21, 2025, In Focus report, “The Evolution of P.L. 86–272’s State Income Tax Immunity for Income Derived From Interstate Commerce,” emphasizing the legal and policy implications of H.R. 427.

Practical implications for CPAs

Until or unless H.R. 427 is enacted, CPAs must help clients assess their exposure under a rapidly shifting patchwork of state interpretations. Key considerations include:

• Review digital activity: Audit client websites, customer portals, cookies, and chat functions for potentially unprotected activities.
• Analyze in-state representation: Evaluate whether non-sales activities performed by representatives exceed protected solicitation.
• Assess economic nexus separately: P.L. 86-272 applies only after nexus is established; clients may still have filing obligations under economic nexus rules.
• Consider voluntary disclosure: In uncertain jurisdictions, proactive disclosure may limit penalties and resolve ambiguity.
• Monitor litigation and state guidance: Stay current with MTC updates, state court decisions, and federal legislative developments.

Vigilance, precision, and planning

As e–commerce and digital platforms dominate trade, the protections once afforded by P.L. 86–272 are no longer as clear–cut. The combination of aggressive state enforcement, evolving judicial interpretation, and proposed federal reform leaves businesses in a precarious position. CPAs advising multistate clients must proactively assess nexus, structure digital engagement thoughtfully, and prepare for audit scrutiny.

While the fate of H.R. 427 remains uncertain, its introduction signals that Congress may once again act to clarify the boundaries of state taxation. In the meantime, navigating the evolving definition of nexus demands vigilance, technical precision, and careful planning.

Footnotes

¹South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), which upheld economic nexus based on the amount of in-state receipts or number of transactions by out-of-state retailers.

²Article I, Section 8: “The Congress shall have Power … To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

³Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

⁴See Jones, “States’ Reactions to MTC’s Application of P.L. 86-272 to Internet Sales,” 53 The Tax Adviser 44 (December 2022).

⁵Santa Fe Natural Tobacco Co. v. Oregon Dept. of Revenue, 372 Or. 509 (2024).

⁶Uline, Inc. v. Commissioner of Revenue, 10 N.W.3d 170 (Minn. 2024).

⁷Santa Fe Natural Tobacco Co. v. Oregon Dep’t of Revenue, No. 24-551 (U.S. 12/16/24) (cert. denied).

Contributors

Karen Lake, CPA, is a director, and Carl Richie, CPA, is a senior manager, both of the state and local tax practice at Berkowitz Pollack Brant Advisors + CPAs. Lake is also a member of AICPA Council and the AICPA State and Local Taxation Technical Resource Panel (SALT TRP), chair-elect of the Florida Institute of CPAs (FICPA), and a Forbes Top CPA in Florida (2025). Brian Myers, CPA, is a partner at Crowe LLP in Indianapolis and chair of the SALT TRP. For more information about this column, contact thetaxadviser@aicpa.org.