At a Glance
Selling tangible goods across state lines is more complex than ever. While P.L. 86-272 still offers protection for certain in-state activity, that protection is rapidly narrowing, leaving businesses that rely on outdated interpretations increasingly exposed.
In 1959, Congress enacted Public Law 86-272 in response to state efforts to tax out-of-state businesses based on minimal connections. The law established a critical safe harbor: states cannot impose net income taxes on businesses whose only in-state activities involve soliciting orders for tangible personal property, provided those orders are approved and filled from outside the state.
For decades, this protection has served as a cornerstone of multistate tax planning. It enabled companies to expand into new markets, whether through traveling sales reps, direct shipments, or basic customer support, without triggering income tax obligations in every state where they had customers. Whether operating in manufacturing, distribution, e-commerce, or consumer products, businesses relied on P.L. 86-272 to scale efficiently while keeping compliance manageable.
Courts and tax authorities traditionally interpreted the law’s scope to include auxiliary activities such as providing samples, checking inventory, and offering limited post-sale support. That flexibility let companies deepen customer relationships without continually reevaluating filing obligations.
As business practices modernize and digital engagement becomes the default customer interaction channel, states are reevaluating what qualifies as “mere solicitation.” Many now exclude interactive websites, account access, or real-time order tracking from the safe harbor.
The shifting landscape still offers planning opportunities. Companies that understand where P.L. 86-272 still applies and how to structure operations accordingly can preserve protection and reduce risk. And in cases where states overstep, taxpayers are increasingly finding success in court. The key is proactive evaluation: assess your digital presence, fulfillment model, and affiliate structures before risk turns into liability.
While P.L. 86-272 once provided a reliable shield for tangible goods sellers operating across state lines, its protections have steadily eroded as states pursue new revenue sources.
For decades, the physical-presence standard, reinforced by Supreme Court cases Bellas Hess (1967) and Quill (1992), limited states’ ability to tax out-of-state businesses, supporting a narrow interpretation of nexus that aligned with P.L. 86-272. But states gradually developed new theories, including economic and factor-based nexus, to tax companies with significant in-state sales but no physical footprint.
The Supreme Court’s 2018 Wayfair decision marked a turning point. While addressing sales tax collection obligations, the Court overturned Quill‘s physical presence requirement, holding that economic and virtual contacts could create substantial nexus. That same rationale now underpins many state income- and franchise-tax nexus statutes. The Court emphasized that physical presence is not necessary when a business “avails itself of the substantial privilege of carrying on business” in a state.
Although Wayfair directly addressed only sales tax, its reasoning has emboldened states to assert broader nexus theories for income tax purposes. States argue that despite the administrative burden of multistate compliance, if economic presence suffices for sales tax nexus, it should similarly support income tax nexus.
Post-Wayfair, states have accelerated adoption of economic nexus standards for income tax. Many states now assert income tax nexus once annual receipts exceed $350,000 to $1 million.
For companies with national customer bases, these thresholds can trigger filing obligations in dozens of states, even without any physical presence or activities beyond those traditionally protected by P.L. 86-272.
Recent 2025 court decisions confirm that the scope of P.L. 86-272 is still evolving, making proactive monitoring essential. The most aggressive challenge to P.L. 86-272 protections comes from state interpretations of digital activities. As business operations increasingly rely on internet-based customer interactions, states have seized on these activities to assert nexus beyond the law’s traditional boundaries.
In 2021, the Multistate Tax Commission (MTC) issued controversial guidance suggesting that various internet activities exceed “mere solicitation” and therefore fall outside P.L. 86-272 protection. While the MTC’s guidance is not binding law and represents only an interpretation, several states have adopted its approach, though courts have shown skepticism.
According to the MTC, activities that create nexus include placing cookies on in-state customers’ computers, providing post-sale customer assistance through electronic chat or email, offering electronic shopping carts, and maintaining password-protected portals.
That view would erase the safe harbor for ordinary e-commerce features. Under the MTC’s view, features standard on many businesses’ websites could strip away P.L. 86-272 protection entirely. For business leaders, this forces a trade-off between meeting customer expectations and managing multi-state tax risk.
Several states have aggressively adopted these interpretations. California has formally adopted the MTC’s position that interactive website features, such as checking order status, accessing technical specifications, or obtaining warranty information, exceed “mere solicitation” and create nexus. Massachusetts has taken a similar stance, asserting that any functionality beyond the passive display of information may jeopardize P.L. 86-272 protection. New York expressed comparable views, focusing on out-of-state merchants whose websites provide technical support or detailed product documentation to in-state customers.
These interpretations seem to conflict with business reality. Modern companies cannot compete effectively without providing these types of digital experiences. Yet states argue these standard features exceed protected solicitation and create taxable nexus.
Courts have shown skepticism toward the most aggressive state positions. Some decisions have rejected attempts to create nexus based solely on website functionality, recognizing that P.L. 86-272’s protections cannot be eliminated simply because solicitation occurs through modern channels. For example, several court decisions have upheld taxpayer positions that standard e-commerce features remain protected when they merely facilitate order placement. However, litigation remains ongoing, and outcomes vary by jurisdiction. This uncertainty forces companies to choose between risking assessment or conceding nexus in states where they may have valid defenses.
The intersection of digital engagement and fulfillment logistics presents growing risks for businesses. States may argue that features like online ordering, real-time inventory visibility, and electronic shipping updates go beyond protected solicitation under P.L. 86-272. When combined with economic nexus thresholds, these interpretations can expose a company’s entire nationwide sales footprint to state income tax obligations, even without physical presence.
Practical Application: Midwest Equipment Maker
A Midwest-based manufacturer of industrial equipment ($50 million annual revenue) operates with a lean, modern model: sales reps in five states, drop shipments nationwide, and a customer-friendly website. Historically, its activities fell within the protections of P.L. 86-272, limiting income tax obligations to its home state and the five where reps are present.
But its digital footprint complicates matters. The company’s website allows customers to create accounts, track orders, access technical documentation, and chat with support. It also uses analytics tools to monitor user behavior and marketing performance.
States like California, Massachusetts, and New York now assert that these online features exceed protected solicitation. If additional jurisdictions follow suit, the company’s online configurator and live chat support could trigger income tax nexus in more than twenty states, adding an estimated $2–3 million in annual tax and compliance costs. Until that happens, its exposure is limited to early-adopter states (California, Massachusetts, and New York), making continuous monitoring, rather than across-the-board registration, the prudent next step.
Even when a company enjoys P.L. 86-272 protection in a destination state, exposure may persist. Many states, including California, Oregon, and others, apply throwback rules that can significantly distort apportionment.
Under throwback rules, if a sale of tangible personal property is not taxable in the destination state, the state of origin (often where the goods are shipped from) may “throw back” the sale and treat it as in-state revenue. These rules exist to prevent “nowhere income,” sales that would otherwise escape state taxation entirely. For example, a company that uses a California warehouse to fulfill drop shipments may find that sales delivered into states where it is not taxable get sourced back to California.
In addition, unitary group rules pose challenges for businesses with multiple related entities. Even if one entity limits its activity to protected solicitation, another entity in the same unitary group may have in-state employees, inventory, or other nexus-creating activity. In some states, this can override P.L. 86-272 protection for the entire group, particularly when the entities are tightly integrated. States apply different approaches: Joyce states consider only the specific entity’s factors, while Finnigan states can attribute any unitary member’s activities to the entire group. Companies that separate sales, fulfillment, and support across affiliated entities should carefully evaluate how state unitary rules affect their exposure.
The erosion of P.L. 86-272 protections represents a critical challenge for companies operating across multiple states. What began as a clear federal protection for interstate commerce has become a complex maze of evolving standards, aggressive state interpretations, and digital-age uncertainties.
The combination of economic nexus adoption, post-Wayfair enforcement enthusiasm, expansive digital activity interpretations, and throwback or unitary considerations creates unprecedented state tax exposure. Leaders must carefully evaluate their business’s multistate footprint, considering not just traditional activities but every digital touchpoint, warehousing decision, and affiliated entity.
While federal legislation may eventually provide relief, companies cannot afford to wait. With states actively auditing digital activities and asserting nexus retroactively, delays could result in significant back taxes, penalties, and interest.
Immediate steps include:
Companies can develop defensible positions, especially when they proactively assess risk and structure operations accordingly.
The landscape will continue to evolve. Businesses that act now to assess their exposure and implement strategic solutions will be best positioned to manage these challenges while maintaining competitive digital capabilities.
Sapowith Tax Advisory helps businesses assess multistate tax exposure, develop defensible positions regarding digital activities, and implement practical compliance strategies. Schedule a brief Exposure Review with us to see how evolving P.L. 86-272 and economic-nexus rules could affect your 2025 state-tax posture.
This article is for general information only; it is not tax, legal, or accounting advice. Reading it does not create a client relationship with Sapowith Tax Advisory. Consult your own qualified advisers before acting on any information contained here. Sapowith Tax Advisory disclaims all liability for actions taken, or not taken, based on this content.