As part of the budget reconciliation plan[1], the House of Representatives are proposing a significant expansion[2] of Public Law 86-272[3], a statute that has provided crucial tax protections for out-of-state businesses since its enactment in 1959. This proposed expansion aims to modernize the law to better align with the realities of today's digital economy and the evolving nature of interstate commerce. The revised language would include “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.’’ If passed, this provision could reshape how state income tax laws apply to businesses selling goods nationwide.

This proposed amendment aims to further restrict the authority of states to impose taxes on business enterprises by expanding the range of activities that are protected under the law. By broadening the definition of what constitutes protected activities, the amendment seeks to provide greater tax protection for businesses operating across state lines.

What is Public Law 86-272?

Public Law 86-272, enacted under the Interstate Income Act of 1959, was originally designed to shield out-of-state businesses from state income tax obligations if their in-state activities were limited to the solicitation of orders for tangible personal property. These orders had to be sent outside the state for approval and fulfillment. The law was a response to the complexities and burdens of complying with a patchwork of state tax laws, particularly for small and medium-sized enterprises engaged in interstate commerce.

Implications for State Income Taxation

The proposal seeks to provide clearer guidelines on what constitutes protected activities under the law. Historically, states, both individually and through the Multistate Tax Commission (MTC), have interpreted this protection narrowly, confining it to activities solely focused on order solicitation. If enacted, this provision could override various nexus-related provisions in states like California, New Jersey, and New York. Under these states’ guidance, certain online activities, such as using cookies to track user behavior or gather marketing data, are generally not protected by Public Law 86-272. 

If enacted, the updated law would provide greater certainty and protection for businesses engaged in interstate commerce. It would help prevent states from imposing income tax obligations on businesses with only minimal or digital presence, thereby fostering a more business-friendly environment.

Implication for Other Taxes

As Public Law 86-272 applies only to restrict state taxes measured by net income, the protection is not afforded to sales and use, gross receipts, franchise, or other business activity taxes such as Texas Franchise Tax and Tennessee’s Business Tax.  These taxes are subject to substantial nexus standards or economic nexus requirements. If the amendments to Public Law 86-272 are adopted and the manufacturing industry is revitalized in the United States, states may be affected by these jurisdictional restrictions on imposing income taxes, potentially leading to budget shortfalls. 

Consequently, in an effort to compensate for potential revenue shortfalls due to the limitations on imposing income taxes, these states might explore additional avenues for taxation. This could include the imposition of gross receipts taxes and/or franchise taxes, supplementing their existing corporate tax regimes. By doing so, states would aim to maintain their revenue streams and ensure the continued funding of public services and infrastructure.

A&M Tax Says

As this federal provision evolves, it is crucial for businesses to remain up-to-date on any potential changes and to anticipate how these changes might affect their operations. While the expansion of Public Law 86-272 could offer substantial advantages to certain taxpayers, it is important to thoroughly examine its implications. This is because it could also have negative consequences due to other state regulations concerning throw-back rules, drop-shipment, and dock sales. 

How Can We Help?

Alvarez and Marsal (A&M) can conduct nexus analyses to determine taxable presence and provide strategic tax planning services to optimize operations and minimize tax liabilities. As the business landscape evolves, we offer ongoing support to ensure clients remain compliant with the latest regulations and leverage new opportunities. A&M can also help businesses set up necessary compliance and documentation systems to meet new reporting requirements and maintain detailed records.

[1] U.S. House of Representatives. (2025). 119th Congress proposed bill.
[2] U.S. Congress. (2025). H.R. 427. 119th Congress.
[3] Public Law No. 86-272, 73 Stat. 555 (1959)