Interstate Income Tax Act of 1959

Key Findings

States have broad corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. authority, but Public Law 86-272—which affirms that businesses do not establish nexus in a state merely through the solicitation of sales—offers critical protections to businesses in states with which they have only limited contact.
As written, the law only protects businesses engaged in the sale of tangible property. However, the expansion of the service economy and the rise of digital commerce in the decades since passage of PL 86-272 argues for modernization.
As a result of the relatively ambiguous language of the statute and attempts by some to erode its core protections, PL 86-272 is facing growing obsolescence.
States should resist proposals to eviscerate the protections of PL 86-272 through legally dubious means, including so-called “cookie nexus” under which the use of internet cookies is sufficient to establish nexus in any state where the company’s website can be accessed.
Without legislative modernization, businesses will continue to face uncertainty, litigation, and rising compliance costs.

Introduction

The Interstate Income TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Act of 1959, commonly known as Public Law 86-272 (PL 86-272), represents a critical framework for protecting businesses engaged in interstate commerce from overreaching state income tax regimes. However, the evolving economy—marked by the rise of digital commerce and shifting judicial interpretations—has exposed significant ambiguities in the law, undermining its original intent. This analysis examines the history and importance of PL 86-272, the challenges posed by its ambiguities, recent state actions, and policy recommendations to modernize the law while adhering to the principles of sound tax policy: simplicity, transparency, neutrality, and stability.

As the economy has evolved, so too has the rise in service-based businesses, but PL 86-272 only contemplates businesses engaged in the sale of tangible property. The law has come under fire from those wishing to erode its existing protections, while at the same time, it has been subject to calls for modernization to apply its principles to today’s business environment. This paper argues against efforts in some states to undermine the intent and plain meaning of the existing law, while suggesting reforms to extend the law’s protections to other businesses with only limited contacts with a state in which they lack physical presence.

Nexus should not attach to businesses with no physical presence in a state simply due to virtual contacts or post-sale communication, and sellers of services (including digital products) should enjoy the same protections the law provides to sellers of tangible goods. Congress should articulate a de minimis standard to ensure that small and medium-sized businesses are not overly burdened by increased compliance requirements.   

History and Importance of PL 86-272

In the United States, the Supreme Court has affirmed the power of states to levy taxes on income.[1] However, this authority is not absolute. It is constrained by both Congress’s authority over interstate commerce and the guarantees of the Fourteenth Amendment.[2] Both constitutional provisions seek to ensure that taxpayers are not discriminated against when operating outside their home states.

Generally, Congress avoids interfering with state taxes, though it has done so in the past, famously in response to the Supreme Court. In the late 1950s, the Court heard argument in a pair of cases, joined for decision, Northwestern Cement Co. v. Minnesota and Williams v. Stockham Valves & Fittings, Inc. (together, the “Northwestern Cases”).[3]

In Northwestern Cement, the appellant, an Iowa business dedicated to the manufacture and sale of cement, challenged a Minnesota law subjecting it to the state’s income tax.[4] The taxpayer maintained a leased office in Minneapolis and limited its activity in the state to the solicitation of orders that were later fulfilled by the plant in Iowa.[5] From 1933 to 1948, the taxpayer did not file a Minnesota return, but was later assessed $102,000 with penalties and interest (over $1 million in current dollars).

In Stockham, the respondent was a Delaware corporation with a principal office in Birmingham, Alabama. The business sold valves and pipe fittings. Georgia assessed and collected $1,478.31 from the respondent for tax years 1952, 1954, and 1955, even though Stockham maintained no warehouse or storage facilities in the state. However, as in Northwestern Cement, the taxpayer in Stockham maintained a sales office in Atlanta with one salesperson and one secretary.

Per statute, Georgia would levy a tax on income of any corporation, foreign or domestic, owning property or doing business in the state.”[6] Georgia law defined “doing business in the state” as “any activities or transactions” conducted in the state for “profit or gain” irrespective of the connection, or lack thereof, with interstate commerce.[7]

In deciding the Northwestern Cases, the Court reaffirmed that the Commerce Clause granted Congress the sole power to regulate interstate commerce.[8] Moreover, even when Congress fails to act, interstate commerce must remain free from “direct restrictions or imposition by the States.”[9] However, citing Peck & Co. v. Lowe, the Court also found that taxing net income derived from interstate commerce does not “offend constitutional limitations upon state interference with such commerce.”[10] In upholding both the Minnesota and Georgia taxes, the Court found that they did not represent a constitutionally prohibited regulation or privilege tax. Rather, the Court concluded: “[N]et income from the interstate operations of a foreign corporation may be subjected to state taxation provided the levy is not discriminatory, and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same.”[11]

Following the ruling, Congress expressed concerns that the case created an uncertain environment for businesses trying to navigate the extent to which in-state activities might create nexus for “out-of-state seller’s income from interstate commerce.”[12]

In response to the Northwestern Cases, and other holdings, Congress enacted the Interstate Income Tax Act of 1959, better known as PL 86-272. It acted to preempt some state tax laws, like the ones at issue in the Northwestern Cases. The text of the statute reads:

No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or behalf of such person during such taxable year are either, or both, of the following: (1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and (2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).[13]

When enacted, the statute was intended to be temporary, and Congress assembled the Special Subcommittee on State Taxation of Interstate Commerce, tasking it with developing recommendations to amend and improve PL 86-272. But its replacement with a more robust statute is a task Congress never returned to, despite the subcommittee’s work.

The subcommittee issued its findings in two parts in 1964 and 1965. The report, which quickly became known as the Willis Commission Report after Representative Edwin Willis (D-LA), who chaired the subcommittee, made several recommendations across many major tax types, including corporate and individual income taxes, sales taxes, gross receipts taxes, and capital stock taxes.[14] The analysis contained herein is specifically focused on income taxes, and for that reason, we will restrict our discussion to nexus issues related to this tax alone.

The Willis Commission recognized that the income tax is a “self-assessing” tax requiring a high degree of voluntary compliance. This necessitates clear rules, and in the absence of bright-line standards, voluntary compliance is unlikely.[15] To demonstrate this, the authors specifically included the following language:

To suggest that the legal rules governing jurisdiction are largely characterized by vagueness and indefiniteness is not to suggest that there are not many cases in which companies are clearly liable for taxes in certain States. However, with respect to a rather wide range of commercial activities, the combined effect of State laws, Public Law 86-272, and the provisions of the Federal Constitution falls short of providing clear guidelines to liability.[16]

The Willis Commission recognized that the uncertainty and lack of clarity were not beneficial to either the taxpayer or the tax administrator.

Seeking to provide taxpayers with consistent and uniform nexus rules that do not unconstitutionally constrain interstate commerce, the Willis Commission recommended the enactment of legislation that provides rules governing several primary issues, including (1) the division of income, (2) the jurisdiction to tax, and (3) the definition of taxable income.[17]

On the division of income, it was recommended that rules be adopted requiring formula apportionment without specific allocation or separate accounting, with the formula consisting of two factors, property and payroll, and specifically excluding a sales factor. Similarly, it was recommended that a state have jurisdiction to tax an interstate business whenever a company has either real property or payroll in the state. Lastly, the report suggested using the federal definition of income as a starting point (without eliminating the state’s ability to make modifications) and minimizing local favoritism laws that preference single-state businesses over multistate enterprises.

While the Willis Commission’s recommendations have stagnated in the decades since they were issued, the Supreme Court has taken up the matter since ruling in the Northwestern Cases. In 1992, the William Wrigley Jr., Co. challenged a Wisconsin tax assessment, claiming it was not subject to taxation in Wisconsin per PL 86-272. The Court recognized that:

Wrigley did not own or lease real property in Wisconsin, did not operate any manufacturing, training, or warehouse facility, and did not have a telephone listing or bank account. All Wisconsin orders were sent to Chicago for acceptance, and were filled by shipment through common carrier from outside the State. Credit and collection activities were similarly handled by the Chicago office. Although Wrigley engaged in print, radio, and television advertising in Wisconsin, the purchase and placement of that advertising was managed by an independent advertising agency located in Chicago.[18]

Further, the Court acknowledged that a de minimis exemption would apply to those activities that fall outside the protection of PL 86-272, but defining de minimis would require an assessment that the activity “establish[ed] a nontrivial additional connection with the taxing state.”[19] If it did, presumably, the activity would fall outside the protection of the de minimis exemption and be subject to taxation.

Wrigley did employ a sales force (regional manager and field representatives) that was charged with facilitating orders for customers in Wisconsin. Importantly, all Wisconsin orders were sent to Chicago and then filled by shipment via common carrier outside Wisconsin. This activity was protected by PL 86-272. However, Justice Scalia, writing for the majority, found that other activities fell beyond the statute’s protections and any de minimis exemption. This included replacing stale gum stock without cost, using stocks to sell gum to retailers who agreed to the installation of displays, and the “storing of gum for these purposes at home or in rented space[s],” all of which fell outside PL 86-272 protections and were not de minimis activities.[20]

In 1993, the South Carolina Supreme Court decided Geoffrey, Inc. v. South Carolina Tax Commission.[21] Geoffrey, the taxpayer, was a wholly owned subsidiary of Toys R Us, Inc. Geoffrey, headquartered in Delaware, entered into an agreement with Toys R Us that covered several issues. One key provision of the agreement allowed Toys R Us to make use of Geoffrey’s expertise in marketing, promotion, and other areas, in exchange for royalty payments.[22] Geoffrey maintained no tangible property in South Carolina but received royalty payments stemming from Toys R Us’ activities in the state, for which the South Carolina Tax Commission found that Geoffrey should be subject to the state’s income tax (and corporate license fee). Under protest, Geoffrey paid the taxes and fees, and appealed the finding, asserting insufficient nexus for purposes of taxation, which was rejected by the trial court.[23]

The South Carolina Supreme Court considered Geoffrey’s appeal through the lens of both the US Constitutional guarantees of due process and Commerce Clause protections. The Court affirmed the trial court’s decision. Specifically, the Court did not find a violation of either provision, holding that Geoffrey had the ability to prevent nexus issues from arising by specifically removing Toys R Us’ ability to use its intangible property in South Carolina, and that physical presence was not necessary to generate nexus.[24] The United States Supreme Court did not grant certiorari, refusing to consider the matter further.

The Growing Obsolescence of PL 86-272 in a Modern Tax Landscape

Over six decades later, the law’s vague language, limited scope, and failure to evolve with modern commerce have rendered it increasingly ineffective, burdening businesses with heightened litigation and compliance challenges.

A central flaw in PL 86-272 is its lack of a clear definition for “solicitation of orders,” paired with the limitation of this protection to the sale of tangible goods. The law protects businesses from state income taxes if their activities within a state are confined to soliciting orders for tangible goods, approved and fulfilled from outside the state. However, the undefined term, “solicitation,” has led to inconsistent interpretations by state tax authorities and courts. States facing budget pressures have capitalized on this ambiguity, enacting regulations that narrow the scope of protected activities. Courts in revenue-hungry states often uphold these interpretations, eroding the law’s original intent to foster interstate commerce.

Additionally, the law does not cover corporations engaging in limited activities beyond solicitation, such as repair services, or leasing or maintaining in-state inventory, even though such activities close the customer service loop for sales and do not, on their own, indicate broader in-state business activity. Some could argue that these exclusions significantly limit the law’s utility; however, there needs to be a standard under which the protections of PL 86-272 no longer apply. If a company engages in activity that inherently transcends the protection of the law, income should not be sheltered from state taxation.  

Despite its temporary intent, PL 86-272 has seen no significant updates since 1959, leaving it ill-suited for today’s digital economy. The rise of e-commerce and remote transactions has outpaced the law’s framework, which was designed for a pre-internet era. In 2024, the Interstate Commerce Simplification Act proposed modernizing PL 86-272 by expanding the definition of “solicitation” to include activities that facilitate order-taking, even if they serve other purposes.[25] Unfortunately, the bill stalled in committee, leaving businesses without clear federal guidance in a rapidly evolving tax environment.

Wayfair, the Multistate Tax Commission, and State Cases

The 2018 Supreme Court decision in South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions., Inc. reshaped the state tax landscape by overturning the physical presence requirement for sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.  nexus affirmed in prior cases like National Bellas Hess v. Department of Revenue of Illintatois (1967) and Quill Corp. v. North Dakota (1992). By allowing states to impose sales taxes based on economic activity, Wayfair emboldened states to pursue broader income tax nexus assertions, particularly for digital activities. States now argue that internet-based functions—like using cookies, offering online customer support, or delivering digital updates—create a taxable presence, even without physical operations in the state, and even if the business’s activity would otherwise be afforded the protections of PL 86-272.

Without updated federal standards, states have adopted divergent interpretations of PL 86-272, especially after Wayfair, creating a fragmented tax landscape, undermining the law’s goal of uniform protection for interstate commerce, and complicating compliance for businesses operating across multiple jurisdictions. The ambiguities in PL 86-272 have fueled a surge in litigation, with businesses facing costly legal battles to defend their tax positions. Businesses must continually monitor their activities, particularly online, to assess potential tax exposure, often subjecting taxpayers to expensive compliance burdens. These legal expenses divert resources from growth and innovation, particularly for small and mid-sized enterprises.

The Multistate Tax Commission (MTC), created by the Multistate Tax Compact, is an intergovernmental state tax agency that seeks to uphold state taxing authority and protect the same from unconstitutional infringement. All 50 states have some association with the MTC, with 15 states and the District of Columbia serving as Compact Members, meaning that they have enacted the Compact into state law and also govern the MTC.[26]

The MTC first issued guidance regarding PL 86-272 in 1986 through a Statement of Information.[27] Since then, the Statement of Information has been amended several times. Throughout, the MTC has attempted to provide clarity to states regarding nexus issues, the lack of which has been both a feature and a flaw of the statute since its enactment. Sometimes, however, the MTC’s recommendations have been in tension with the statute’s protections.

Without congressional action since the passage of PL 86-272, the MTC stepped in to fill the void for states. In so doing, the MTC has recommended several policy considerations that would significantly erode the protections of PL 86-272 and overly burden interstate commerce. This has intensified in the wake of the Wayfair decision.

While that case involved sales tax nexus, and not income tax nexus, the Court’s dicta referenced the evolving economy and that virtual contacts could be sufficient to create nexus, without clarifying the extent that this should be expanded or limited.[28] Building on this, the lack of any development in PL 86-272 from Congress, and on the back of other relevant court precedent, the MTC has sought to expand which activities generate nexus. For example, in 2021, the MTC indicated that certain internet activities could create nexus, including placing internet “cookies” on the computers of in-state customers.[29]

In recent years, several states have adopted or attempted to implement the MTC’s expansive view of nexus, making the protections afforded by federal law a virtual nullity. In 2022, the California Franchise Tax Board (CFTB) sought to expand corporate nexus to include certain internet activities that had previously been exempt under PL 86-272. These included, but were not limited to, providing certain post-sale customer service, repairing or upgrading products online, and soliciting and selling warranty plans.[30] This attempt was ultimately challenged by taxpayers. A California court overruled the CFTB’s actions, not on the tax merits, but due to violations of the state’s Administrative Procedures Act, leaving the question open as to the legality of the CFTB’s desire to amend nexus protections currently enjoyed by taxpayers.[31] Similarly, through Technical Bulletin 108(R), New Jersey largely adopted the MTC’s nexus updates in 2023.[32]

Another case with implications for nexus is the ongoing dispute about New York’s Internet Activities Rule, which was adopted by the state’s Department of Taxation and Finance (DoTF) in response to the Wayfair decision. The DoTF’s interpretation of protected and nonprotected internet activities largely followed the MTC’s revised Statement of Information, which added a section on activities conducted over the internet.[33] The New York draft regulations stated that they were not final and “should not be relied upon.” The final regulations, which include the internet activities rules, were adopted by the DoTF on December 27, 2023.

The rule addresses e-commerce by specifying that protected activities include basic website functions like displaying product information or order forms, provided they involve tangible personal property and orders are approved outside New York. Unprotected activities, which create a tax nexus, include offering online customer support via chat or email, accepting job or company-branded credit card applications from the state through a website, using internet cookies to collect customer data, or providing post-sale services like warranties or returns. These rules align with the MTC’s 2021 Statement of Information. The regulations, initially proposed to apply retroactively from January 1, 2015, have sparked debate, with businesses arguing they dilute the federal protection based on a court decision that pertains to sales taxes and not income taxes (i.e., Wayfair).

The American Catalog Mailers Association (ACMA) filed a lawsuit against the DoTF seeking to overturn these regulations, asserting that they remove protections on activities that are ancillary to the solicitation of orders. On April 28, 2025, the New York Supreme Court in Albany County upheld the constitutionality of the rules, finding that they were not pre-empted by the federal protections. The court ruled that the regulations validly interpret which non-solicitation internet activities (e.g., interactive online services) establish state income tax jurisdiction, aligning with the MTC’s 2021 guidance.

The court rejected ACMA’s argument that these rules impermissibly expanded taxable activities, stating that ancillary internet activities beyond mere solicitation are not protected under PL 86-272. However, the court sided with ACMA on the issue of retroactivity, ruling that applying the regulations to tax years before their December 2023 publication violated due process under both the US and New York Constitutions.[34] The decision has been appealed to the New York Appellate Division Third Department, with the DoTF seeking to challenge the retroactivity ruling and the ACMA challenging the entire decision and all the enacted regulations. It remains to be seen which aspects of the parameters eventually apply.

A slightly older case that also narrowed the definition for activities ancillary to the solicitation of orders, further diluting protections under PL 86-272, was filed in Oregon. Santa Fe Natural Tobacco Co. (SFNTC), a subsidiary of R.J. Reynolds since 2002, sold branded tobacco products to Oregon wholesalers, who then sold to Oregon retailers. The Oregon Department of Revenue (DoR) argued that SFNTC’s activities exceeded PL 86-272’s protections and identified two primary activities that it claimed removed SFNTC from the law’s safe harbor.

First, SFNTC’s representatives visited Oregon retailers to secure “prebook orders,” which were formalized agreements signed by retailers and sent directly to wholesalers, triggering contractual obligations under SFNTC’s Distributor Incentive Program Agreements. These agreements incentivized wholesalers to prioritize SFNTC’s products, effectively facilitating sales within Oregon rather than merely soliciting orders for out-of-state approval. The DoR argued this process went beyond solicitation, as it resembled sales facilitation.

Further, SFNTC required Oregon wholesalers, via contracts, to accept returns of unsalable products from retailers under a “100% Product Guarantee.” SFNTC provided credits to wholesalers for these returns, which the Oregon DoR contended constituted in-state business activity “on behalf of” SFNTC, defeating PL 86-272 immunity protections, and making it liable for Oregon’s tax for the years 2010-2013. The Tax Court ruled in favor of the DoR, asserting that these two activities were not merely ancillary to solicitation of orders, but rather constituted separate business actions that would create tax nexus to the state.

Upon appeal, the Supreme Court of the State of Oregon affirmed the judgment of the Tax Court. The court concluded that Santa Fe’s pursuit of prebook orders in Oregon, invoking incentive agreement contractual provisions used by Santa Fe to ensure that wholesalers treated each one of those orders favorably, exceeded the scope of permitted “solicitation of orders” under PL 86-272. The court further agreed that Santa Fe’s activities were not de minimis. Accordingly, SFNTC was subject to Oregon income tax. The US Supreme Court declined to review these findings.

In the decades since the enactment of PL 86-272, the economy has evolved significantly in terms of scope and scale, all while efforts to update nexus standards have been woefully inadequate. During this period, the MTC has attempted to fill this void with an expansive policy objective, all within the context of a state’s constitutional ability to tax. This, however, has resulted in a patchwork of action, with some states fully implementing the MTC’s recommendations, while others have not. This has led to courts being tasked with determining the limits of PL 86-272, something that is better left to Congress. The MTC’s actions are not just legally dubious; in many instances, they act to directly undermine the intention of PL 86-272. For these reasons, it should not be presumed that these actions will survive future judicial scrutiny, and states should avoid adopting proposals that eviscerate the protections of PL 86-272 even if Congress fails to act.

Of course, Congress can and should clarify and update the law to avoid ambiguities and afford protections appropriate to today’s economy. In doing so, Congress may well be guided by some of the animating principles of the Willis Commission but need not be constrained by them. While the Willis Commission’s recommendations may have been appropriate in the 1960s, their relevance today should, rightfully, be open to debate.

Here, we will offer concrete and practical policy recommendations for updating PL 86-272 that accord with the principles of sound tax policy to provide the consistency and uniformity Congress sought decades ago. States can tax, but their tax policies cannot run afoul of constitutional constraints. Moreover, the power to tax should not infringe on the continued growth and development of the economy, both at the state and national levels.

Modernizing PL 86-272 and Sound Policy Considerations

Over the years, Congress has considered updates to PL 86-272, but thus far those efforts have failed to yield results. The Business Activity Tax Simplification Act (BATSA) has been introduced several times and would have extended PL 86-272 protections to digital products and limited a state’s ability to tax only those businesses with a physical presence in a state.[35] Similarly, the Interstate Commerce Simplification Act of 2024 sought to broaden the definition of “solicitation of orders” to include those activities that  also serve an “independently valuable business function apart from solicitation.”[36] This same bill was revived during discussion of the 2025 One Big Beautiful Bill Act, but was later omitted from the Senate version of the bill.[37] Taken together, these efforts would have countered the MTC actions that continue to threaten the protections of PL 86-272, and with additional states considering adopting the MTC’s approach, time is of the essence to ensure that taxpayers are provided with stability and uniformity when engaged in business in multiple states.

Critics of overhauling the definition of “solicitation of orders” fear dramatic expansion of the protections contained in PL 86-272 that could categorize virtually any business action as a “solicitation of orders,” and inappropriately preempt state taxing authority.[38] However, updating the current law to match economic realities ensures that the intent of the law is preserved, particularly given the temporary nature of PL 86-272. Moreover, failing to do so would allow states to collect revenue that would otherwise remain exempt from taxation.

Sound tax policy requires that laws and regulations comport with four principles: simplicity, transparency, stability, and neutrality. The MTC’s attempt to expand corporate income tax nexus falls short of these principles, leaving taxpayers facing a patchwork of potential nexus liabilities throughout the country, depending on how many of MTC’s recommendations are adopted. For these reasons, states should resist efforts to undercut the protections of PL 86-272, and Congress should act to clarify and expand the protections of PL 86-272 to match the realities of the present economy.

Fortunately, updating PL 86-272 is not complicated, as reflected by the relative brevity of the statutes that Congress has introduced previously. At a minimum, Congress needs to concretely identify what activities trigger nexus, decide how to treat digital products, and choose whether to include a de minimis exemption to ensure that smaller taxpayers do not face an outsized burden. However, as the economy continues to evolve, lawmakers would do well to continue to revisit PL 86-272 protections, to ensure the spirit of the law is preserved despite shifts and changes to the economic landscape.

What Activities Should Generate Nexus?

Congressional efforts to preserve and extend PL 86-272 protections represent a good attempt at enacting sound tax policy. However, lawmakers should consider clearly articulating a standard through which virtual contacts alone should not trigger nexus, subject to the limited enumerated circumstances. Generally, the nexus standard should be limited to physical presence in the state, as provided for under BATSA. Post-sale virtual interactions with customers to ensure a positive product experience (e.g., customer service, minor repairs, or replacement items/parts) should be protected by PL 86-272, even if such efforts have other business value. Lawmakers may also wish to establish that solely maintaining a sales office is insufficient to trigger nexus.

On the other hand, manufacturing operations or maintaining financial offices would trigger nexus, as these activities are beyond a passive, virtual presence in a state. Compared to the example of a sales office, these activities go beyond solicitation of orders, which is currently protected. These activities entangle a business with a state’s economy in a way that more passive engagement does not.

The court in Geoffrey was right to consider the extent to which know-how and intellectual property could trigger nexus. While the standard for nexus should favor a bright-line, physical presence standard, there may be instances where it would be appropriate for nexus to be triggered by intangible property, subject to the de minimis limitations below. Marketing operations, in contrast with mere marketing activities, are beyond a passive presence. They represent a clear entry into a state’s economy, and should be taxed as such. This activity more closely approximates that of a corporate office than it does mere solicitation.

De Minimis Exemptions

Even in those cases where economic presence triggers nexus, states should consider enacting a de minimis exemption below which a taxpayer would not be subject to corporate income tax liability. There is precedent for this approach, both with existing factor presence standards for economic nexus under corporate income taxes and under the sales tax. Following Wayfair, states rushed to enact marketplace facilitator and remote seller sales tax collection and remittance obligations. However, in so doing, states created thresholds below which these liabilities would not come due. Providing for a de minimis exemption helps small and medium-sized businesses from being disproportionately impacted by a higher compliance burden.

Some states also use factor presence to determine when a business without a physical presence in the state has nexus. This concept has merit, but a certain volume of sales should not establish nexus even if the business’s contacts with the state are otherwise too incidental to trigger nexus. Instead, these factors should function as a de minimis exemption from the broader nexus standard.

States may choose the level of de minimis exemption that best correlates to their economies. For example, larger economies like Texas and California may opt for larger de minimis exemptions, compared to smaller economies like Vermont. Regardless of the amount, the exemption should attempt to avoid imposing greater compliance burdens on small and medium-sized enterprises.

The Treatment of Digital Products and Services

Digital products and the provision of services should not trigger corporate income tax nexus, unless the business otherwise maintains a physical presence or conducts other activities not protected by PL 86-272. Both digital products and services sold into a state from without may be rightly subject to sales tax collection and remittance obligations. But subjecting out-of-state businesses to in-state corporate income tax because of these sales is a step too far and could unconstitutionally impede interstate commerce.

The economy has evolved, and digital products and services are more common now than ever. Including these items in the protections of PL 86-272 will help corporate income from being taxed at the wrong rates in the wrong states. There is no reason why a business that merely sells digital products into a state should have nexus with that state when a company selling a tangible product into that state, and operating identically in all other particulars, would not have nexus.

Conclusion

PL 86-272, while still important, is increasingly outdated in today’s complex tax environment, and is under assault by increasingly aggressive state statutes and regulations. Its vague definition of “solicitation,” limited scope, and failure to address services (and particularly digital commerce) leave businesses vulnerable to aggressive state tax policies.

Without legislative modernization, such as the stalled H.R. 8021, businesses will continue to face uncertainty, litigation, and rising compliance costs. Congress should act to update PL 86-272, providing clear, modern protections to ensure a fair and predictable tax framework for interstate commerce. And state lawmakers should remain cognizant of the reasons for such protections and resist legally dubious efforts to undermine the protections that currently exist.

References

[1] New York ex rel. Cohn v. Graves et al., 300  US 308 (1937).

[2]  US Const. Art I, §8; US Const. amend. XIV.

[3] 358 US 450, 457 (1959).

[4]  Id.

[5]  Id. at 458.

[6]  Id., 456-457.

[7]  Id., 457, citing Ga. Stats. § 92-3101-3103.

[8]  Id., 458.

[9]  Id.

[10]  Id., 459; see also Peck & Co. v. Lowe, 247  US 165 (1918).

[11]  Id., 450, 452, 461-462, 464.

[12] “The Evolution of PL 86-272’s State Income Tax Immunity for Income Derived from Interstate Commerce, United States Congress,” Feb. 21, 2025, https://www.congress.gov/crs-product/IF12919PL.

[13] The Interstate Income Tax Act of 1959, PL 86-272.

[14] “Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee of the Judiciary,” US House of Representatives, 89th Congress, 1st Session (1964-1964).

[15]  Id., 152.

[16]  Id., 147.

[17]  Id., 1143-1164.

[18] Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 505  US 214, 219 (1992).

[19]  Id., 221-232.

[20]  Id., 235.

[21] Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E. (2d) 13 (1993).

[22] Id., 17.

[23] Id.

[24] Id., 18-24.

[25] The Interstate Commerce Simplification Act of 2024, H.R. 8021 (2024).

[26] “Member States,” Multistate Tax Commission, https://www.mtc.gov/the-commission/about-us/.

[27] “Submission of Proposed Revisions to the MTC Model Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272,” Multistate Tax Commission, https://www.mtc.gov/wp-content/uploads/2023/02/Submission-to-Hearng-Officer-w-attachments.pdf, Jun. 17, 2020.

[28] South Dakota v. Wayfair, 585 U.S. 162 (2018).

[29] Multistate Tax Commission, “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272, fourth revision adopted by the Multistate Tax Commission (August 4, 2021).”

[30] California Franchise Tax Board, “Technical Advice Memorandum 2022-01 (2022)”; California Franchise Tax Board, “Publication 1050,” https://wcginc.com/wp-content/documents/FTB1050-Rev2017.pdf.

[31] American Catalog Mailers Association v. Franchise Tax Board, Superior Court of California, San Francisco County. Case No. CGC-22-601363 (2023); see also The California Administrative Procedure Act, California Government Code § 11340 et. seq.

[32] New Jersey Division of Taxation, “Technical Bulletin 108(R), Nexus for Corporation Business Tax for Privilege Periods Ending on and after July 31, 2023,” revised Jan. 18, 2024, https://www.nj.gov/treasury/taxation/pdf/pubs/tb/tb108.pdf.

[33] The New York State Department of Taxation and Finance, “Tax Alert 2022-0734,” 2022.

[34] The court applied a three-pronged test to assess retroactive tax measures: (1) whether taxpayers were forewarned of legislative changes and could reasonably rely on prior law, (2) the length of the retroactive period, and (3) the public purpose for retroactivity. In a split decision, it found that the April 2022 draft regulations explicitly stated they were not to be relied upon, providing insufficient notice, and the nearly nine-year retroactive period (back to 2015) was excessive. Thus, while the regulations were upheld for prospective application from December 2023 onward, their retroactive application was struck down, protecting taxpayers from unexpected tax liabilities for prior periods.

[35] Business Activity Simplification Act of 2019, H.R. 3063 (2019); see also “The Evolution of PL 86-272’s State Income Tax Immunity for Income Derived from Interstate Commerce,” Congressional Research Service, Feb. 21, 2025, https://www.congress.gov/crs-product/IF12919.PLstate.

[36] Interstate Commerce Simplification Act of 2024, H.R. 8021 (2024); see also “The Evolution of PL 86-272’s State Income Tax Immunity for Income Derived from Interstate Commerce,” Congressional Research Service Feb. 21, 2025, https://www.congress.gov/crs-product/IF12919PL.

[37] One Beautiful Bill Act, H.R. 1 (2025); Interstate Commerce Simplification Act of 2025, H.R. 427 (2025); see also Amy Hamilton, “Senate Strips PL 86-272 Language From One Big Beautiful Bill,” Tax Notes, Jul. 7, 2025, https://www.taxnotes.com/tax-notes-today-state/corporate-taxation/senate-strips-p.l-86-272-language-one-big-beautiful-bill/2025/07/01/7sn0l.

[38] Richard L. Cram, “H.R. 8021: More Preemption of State Taxing Authority,” Tax Notes, Nov. 11, 2024, https://www.taxnotes.com/tax-notes-state/legislation-and-lawmaking/h.r-8021-more-preemption-state-taxing-authority/2024/11/11/7mscn. 

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