What Is P.L. 86-272 and How Can It Be Beneficial for State Compliance?

State nexus is the connection between a business and a state that gives the state authority to impose tax obligations, including income tax filing requirements. In some states, nexus is easy to identify because the law uses a bright-line test, such as a specific sales threshold; if a business exceeds that threshold, nexus generally exists. Although, many states do not provide that kind of clear rule.

When there is no bright-line test, nexus becomes a facts-and-circumstances question. Instead of asking whether the business crossed a single numerical threshold, the state looks at the nature and regularity of the company’s in-state activities; this can include employee visits, inventory, representatives, service activity, or other purposeful contacts with the state. The result is uncertainty: a business may not know whether it has nexus until it compares its facts to state statutes, regulations, and court decisions.

This uncertainty is one reason Public Law 86-272 remains so important. P.L. 86-272 is a federal law that limits a state’s ability to impose a net income tax on an out-of-state business, but the protection is narrow. It applies only when the business sells tangible personal property, its only in-state activity is soliciting orders, the orders are approved outside the state, and the goods are shipped from outside the state via common carrier.

What Is Covered Under P.L. 86-272 and What Is Not?

The key concept is “solicitation.” Under the Supreme Court’s decision in WI Dept. of Rev v. William Wrigley, JR., solicitation includes not only directly asking customers to buy products, but also activities that are entirely ancillary to requesting orders. In other words, the activity must exist solely to support the sales request and must not serve an independent business function.

Generally protected solicitation activities include:

• Direct sales calls
• Promotional discussions that encourage purchases
• Carrying free samples or promotional materials
• Furnishing display racks or helping arrange product displays without charge
• Missionary sales activity
  • Encouraging retailers to buy the seller’s products from wholesalers
  • Forwarding orders or customer inquiries to the home office
  • Coordinating shipment information
  • Checking inventory for reorder purposes
  • Training or supervising sales personnel when those activities are tied to solicitation
• Mediating customer complaints may be protected if it is done only to maintain goodwill and encourage future orders. However, this can be a fine line, and some states may consider it to exceed the protections of P.L. 86-272.

Generally nonprotected activities include:

• Repairs / Maintenance
• Installation
• Technical Support
• Collections
• Credit investigations
• Replacing damaged or stale goods as a regular practice
• Maintaining inventory for non-solicitation purposes or operating an office in the state
• Delivering goods via company owned transportation

Note: Even if the above nonprotected activities help generate sales, they are not considered solicitation because they serve operational or service functions separate from requesting orders.

The common thread is that these activities are part of asking for sales, not part of performing the broader business of selling and servicing products. That distinction matters because P.L. 86-272 protection is lost when in-state activities go beyond solicitation and begin serving an independent business purpose.

This narrow definition of solicitation also affects filing strategy. Some businesses choose to file a return in a state while claiming P.L. 86-272 protection. Since many states are narrowing their view of protected activities under P.L. 86-272, this can be a good idea to shield against unexpected liability in a state.

Should a Business File a Return in a State While Claiming Protection Under P.L. 86-272?

The Benefits of Filing

1. Filing may start the statute of limitations. In many states, if no return is filed, the state may argue that it can assess tax indefinitely. Filing a return that clearly claims P.L. 86-272 can help limit how long the state has to challenge the position, generally limiting the lookback period to 3 years.
2. Filing creates a formal record that the business is not ignoring the state. Instead, it is affirmatively taking the position that federal law prevents the state from imposing income tax. This can be helpful if the state later audits the company.
3. Filing may help the business maintain a more organized compliance posture. Some taxpayers prefer to disclose their position rather than remain silent, especially when nexus is uncertain.

 The Disadvantages of Filing

1. Filing can attract attention. A return claiming P.L. 86-272 may invite the state to examine whether the company’s activities were truly limited to protected solicitation. However, in this case, most business owners would prefer to uncover the liability, so they can be compliant going forward, rather than discovering a larger liability later on.
2. There is also an all-or-nothing risk. If the company engaged in even a small amount of unprotected activity during the year, the protection may be lost for the entire year; that makes the position vulnerable if the company’s salespeople, service team, or online operations crossed the line.
3. L. 86-272 does not shield the business from every state tax. A company may still face other tax obligations, even if it is protected from net income tax. Examples may include sales, franchise, net worth, and gross receipts taxes. Filing may also create administrative cost, especially for businesses operating in many states.

Final Thoughts

State nexus rules determine whether a state can tax a business, and the analysis becomes much harder when there is no bright-line rule. P.L. 86-272 offers a limited federal shield, but only for sellers of tangible personal property whose in-state activities are confined to solicitation and conduct entirely ancillary to solicitation. For businesses operating across state lines, understanding exactly what counts as solicitation is critical to preserving that protection.

For more information, or if you have thoughts and/or questions about the information outlined above, please do not hesitate to contact us; our seasoned and experienced tax professionals are always here to help. You can also learn more by visiting our Tax service page.

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