Public Law 86-272’s Thin Veil of Income Tax Protection is Getting Thinner

  • Tax strategies
  • 9/14/2023
Colleagues talking at informal meeting.

Key insights

  • California is modifying how it applies Public Law 86-272 with a broad definition of nexus (including internet-based activities) - which might require businesses to file California income tax returns.
  • There are other states with similar changes in the works through statutory, regulatory, or administrative positions.
  • Examples in the new California technical advice memorandum explain when businesses may or may not be exceeding the protections of P.L. 86-272.
  • Refund claims may be available for certain California taxpayers that have used P.L. 86-272 as protection from filing in other states.

Need help analyzing your P.L. 86-272 protection claim?

Contact Us

UPDATE: This article was originally published on June 2, 2022. Since then, there has been traction in other states through additional guidance, retroactive application in state audits, and cases calling the application of the MTC updates into question.

Since Congress adopted Public Law (P.L.) 86-272 in 1959, the retail world has changed dramatically — and the ways a company obtains customers, approves orders, and ships goods have all changed along with it. After the Wayfair decision — which imposes sales tax nexus due to a significant economic presence — states took an aggressive approach to taxing out-of-state businesses, and may do the same in relation to potential changes in the application of P.L. 86-272.

P.L. 86-272 prohibits states from imposing a net income tax on income derived from interstate commerce if the only business activity within the state is the solicitation of orders of tangible personal property (TPP). The orders must be sent outside the state for approval or rejection. If accepted, the orders must be filled from a point of shipment outside the state. If any services are provided along with these transactions, then P.L. 86-272 protections do not apply.

However, P.L. 86-272 does not explicitly define what “solicitation of orders” means, and states have taken different positions over the years to interpret it. As retail sales have shifted to the internet, this definition has become even less clear.

On August 4, 2021, the Multistate Tax Commission (MTC) revised its Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272. The most notable revision is the inclusion of internet-based activities piercing the veil of P.L. 86-272 protection.

According to the MTC’s P.L. 86-272 Statement, when a business interacts remotely with a customer via the business’s website or app, the business should be considered to be engaging in a business activity within the customer’s state, as if the business was physically performing these activities in that state. If remote activities would pierce the P.L. 86-272 protection if performed physically in the state, they should likewise pierce the P.L. 86-272 protection if performed through the internet or app.

California was the first state to issue official guidance adopting the MTC’s P.L. 86-272 Statement, and other states have started to follow — which might require businesses to file additional state income tax returns.

Following is a summary of what is happening in some of the states that have considered adopting the MTC’s P.L. 86-272 Statement.

California may set the tone for more taxes

On February 14, 2022, the California Franchise Tax Board (FTB) issued Technical Advice Memorandum (TAM) 2022-01. The TAM provides numerous new fact patterns more common in today’s economy. These changes will require businesses with nexus previously claiming protection under P.L. 86-272 to file California income tax returns and pay income tax.

TAM 2022-01 provides several examples of internet-based activities that either exceed protections or retain them. The examples assume the business:

  • Makes sales to California customers
  • Is commercially domiciled outside of California
  • Has no activity in California other than those mentioned in the specific fact pattern

Consider the nuances of protection in these instances

Example 1: Answering customer questions electronically

  • Exceeds protection — A company regularly provides post-sale assistance to California customers via electronic chat or email initiated by clicking on an icon on the business’s website.
  • Retains protection — A company provides post-sale assistance to California customers by posting a list of static frequently asked questions with answers on the business’s website.

Example 2: Using internet cookies

  • Exceeds protection — A company places internet cookies on the computers or other electronic devices of California customers, and the cookies gather customer search information used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.
  • Retains protection — A company places internet cookies on the computers or other electronic devices of California customers, and the cookies gather customer information used only for purposes entirely ancillary to solicitation, such as remembering items in the customer’s shopping cart or reminding customers of previously viewed products.

Example 3: Selling products online

  • Exceeds protection — A company contracts with an online marketplace that facilitates the sale of a business’s products. The facilitator maintains inventory for the company at fulfillment centers in various states where the business’s customers are located.
  • Retains protection — A company offers for sale only items of TPP on its website, which enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options, and pay for items. The business does not engage in any other in-state business activities.

Additional examples address topics such as remote fixes or upgrades, extended warranty plans, video and music streaming, and employment and credit card applications. See the TAM for further detail on California’s position on internet-based activity nexus.

How in-state businesses could benefit

Although unprotected internet-based nexus activities will generate additional California tax revenue from out-of-state businesses, in-state businesses may benefit from the new P.L. 86-272 interpretation.

The state has indicated that although P.L. 86-272 affects the determination of whether a state into which TPP is delivered (the “destination state”) may tax the income of the seller, it also affects the determination of whether the state from which TPP is shipped (the “origin state”) may subject the related receipts to that state’s throwback rule.

California has indicated it intends to apply P.L. 86-272 uniformly, irrespective of whether the destination state determines it can tax the income of the seller, or whether the origin state determines the related receipts are subject to that state’s throwback rule. Therefore, businesses with unprotected internet-based activities that ship products from California may be entitled to refund claims for years open under the statute of limitations.

Other state developments


The Minnesota Department of Revenue circulated a draft revenue notice that closely follows the 2021 MTC updates. The Department circulated its proposal to the Minnesota State Bar Association and the Minnesota Society of Certified Public Accountants, asking for comments before taking steps to formalize its new interpretation of P.L. 86-272.

Interestingly, the Minnesota Tax Court recently rejected a company’s reliance on P.L. 86-272 and found that sales representatives collecting and reporting market data on the company’s competitors twice a month exceeded the protections of P.L. 86-272 (Uline, Inc. v. Comm’r of Revenue, Minn. T.C., No. 9435-R, 6/23/23). Although not directly related to the 2021 MTC updates, it is a good reminder of how narrow the state’s interpretation of P.L. 86-272 protection can be.

New Jersey

On September 5, 2023, New Jersey became the second state to have formally issued a position with respect to online activities. TB-108 provides an extensive listing of internet and web-based activities that, in New Jersey’s view, create and do not create nexus for an out-of-state entity. According to the TB, New Jersey will not apply its position retroactively, as the TB is effective for tax years ending on or after July 31, 2023 (i.e., July through December 31, 2023, tax year-ends and thereafter). TB-108 also, for the first time, introduces an economic nexus threshold as well as updates New Jersey’s long-standing nexus guidance.

New York

The New York State Department of Taxation recently issued proposed regulations indicating the state will generally conform with MTC guidance regarding internet-based income tax nexus-creating activities.

According to the proposed regulations, to be exempt by virtue of P.L. 86-272, the activities of employees or representatives in New York State, or activities engaged in via the internet, must be limited to the solicitation of orders for the sale of TPP. The proposed regulations then go on to provide 16 examples of protected and non-protected activities, including internet-based activities.


As anticipated, a state can make an internal administrative change without a rule change regarding the 2021 updated MTC recommendations. CLA is currently working on Ohio pass-through entity (PTE) income tax exams for prior periods beginning in 2014 where the state is retroactively applying the 2021 MTC internet-based nexus recommendations.

Ohio examiners received exam review instructions to retroactively apply the 2021 MTC model definition change, after which the taxpayer can challenge this in the Ohio Department of Taxation hearing process. Therefore, activities such as online chat, website cookies, online job applications, and online ordering exceed P.L. 86-272 income tax protection according to Ohio.

PTE income tax exams with these nexus implications will need to be challenged at the next level of state review and those taxpayers who are not currently under exam should consider potential tax exposure in Ohio.


When the 2021 MTC updates were released, the Oregon Department of Revenue indicated it was planning to issue guidance. The state has not issued any proposed rule changes, legislation, or guidance due in large part to taxpayer objections. Oregon is considering including public input before adopting the 2021 MTC updates and may be waiting to see what happens in other states.

What happens next

With the issuance of the MTC’s Revised P.L. 86-272 Statement, a business’s state nexus footprint must be reexamined.

Depending on how a state adopts the MTC’s P.L. 86-272 Statement with respect to internet-based activities, a state may apply its interpretation either retroactively or prospectively. State tax auditors will likely take aggressive positions in states that adopt the MTC’s P.L. 86-272 Statement either directly through statutory, regulatory, or administrative positions or indirectly through existing tax laws on the books. California and Ohio are on the forefront. However, an auditor’s determination is not the last word.

A state’s position on internet-based activities is ripe for litigation and judicial interpretation. The American Catalog Mailers Association (ACMA), the largest trade association representing the direct marketing/e-commerce/catalog industry, filed a complaint in the San Francisco Superior Court that California’s position wrongly and substantially expanded the reach of income taxes on out-of-state taxpayers with no physical presence in California. The trial is set to begin October 23, 2023.

From a state income tax nexus perspective, businesses and their tax advisors have not generally needed to examine the extent of the internet-based activities that touch their customers throughout the United States. With the issuance of the MTC’s Revised P.L. 86-272 Statement, a business’s state nexus review must now be expanded.

How we can help

CLA can help businesses with all aspects of nexus determinations, mitigating state tax exposures, and identifying state tax refund opportunities.

An analysis of P.L. 86-272 protection can determine whether a business’s activities create state income tax nexus — and whether those activities would be protected under P.L. 86-272. Also, refund claims may be available for taxpayers that have used P.L. 86-272 as protection from filing in other states and have been throwing back sales for sales factor purposes.

CLA’s state and local tax professionals understand the complex tax laws in each state and jurisdiction where your company does business and can evaluate your multistate sales to assess your tax reach, analyze your readiness, and evaluate your exposure.

Experience the CLA Promise