CPA Now Blog

Flexing State Tax Muscle: The Evisceration of Public Law 86-272

U.S. Public Law 86-272 provides enormous protection from state income tax in instances where a company has limited activities within a state. If a taxpayer falls within the scope of the federal law, it will not be subject to a particular state’s income tax. However, there has been an uptick in states challenging taxpayers’ protection claims under Public Law 86-272 , so much so that some see an attempt to eviscerate it.

Jun 6, 2023, 21:02 PM

Jennifer KarpchukBy Jennifer W. Karpchuk, JD

U.S. Public Law 86-272 provides protection from income tax in a state where a company limits its activities within the state to solicitation of tangible personal property, where orders are sent outside of the state for approval and shipped from outside of the state. Public Law 86-272’s protection can be enormous, because a taxpayer that falls within the scope of the federal law cannot be subject to that particular state’s income tax. Because of this immense protection, taxpayers and taxing authorities have different motives in interpreting Public Law 86-272: taxpayers want to interpret it as broadly as possible, while taxing authorities want to interpret it as narrowly as possible.

Illustration: Large hand emerging to take giant $100 bill from business personThere has been an uptick in states challenging taxpayers’ claims under Public Law 86-272 protections on audit. This may be attributable to the Multistate Tax Commission’s (MTC) revised guidance related to the federal law and what some see as an attempt to eviscerate it. The MTC is an organization that was formed by state tax administrators in 1967 – in part as a response to Public Law 86-272. The MTC has been issuing “guidance” regarding the federal law’s meaning since 1986, when it issued its first “Statement of Information.” This was subsequently revised in 1993, 1994, 2001, and 2021. With each revision, the MTC has tried to further limit the applicability and scope of the law’s protections. This is consistent with the motives at play. The MTC is essentially an avatar of state taxing authorities, thus, its inherent motive is to interpret Public Law 86-272 as narrowly as possible.  

For most, MTC’s Statement of Information is just guidance, although some states have incorporated it into their laws. The guidance provides a list of “unprotected activities.” During November 2018, shortly after the U.S. Supreme Court’s South Dakota v. Wayfair decision (and spurred in part by some of the language in Wayfair), the MTC decided that the changing technological landscape required substantial revisions to its Statement of Information. This has culminated in its latest revisions in 2021.  

These revisions are severe to internet businesses, finding that essentially any interaction with a customer on a website eviscerates Public Law 86-272 protections. The guidance provides that when a business “interacts” with a customer via a business’s website or app, the business engages in activity within the customer’s state. This is despite the fact that many of these interactions are no different than those that may be achieved via telephone or mail, so they should be viewed as protected. However, according to MTC’s revised statement, the presence of static text or photos on a company’s website does not constitute business activity in a given state.  

California was the first state to adopt the MTC’s revised statement via a technical memorandum in February 2022.1 California’s attempt to adopt the revised statement was immediately met with litigation. The American Catalog Mailers Association (ACMA) filed an action for declaratory relief. It claimed California’s recently issued administrative guidance violates Public Law 86-272 and the Franchise Tax Board did not properly follow the California Administrative Procedure Act. The case is pending.  

Additionally, during April 2022, the New York Department of Taxation issued a draft rule that adopts select portions of MTC’s revised statement. The draft rule does not have an effective date, nor has it been finalized. In May 2023, Minnesota became the latest state to consider adopting the MTC’s revised statement.

While California, New York, and Minnesota are openly discussing the issue and opining on the revised statement in terms of adopting or attempting to adopt it into law, other states are quietly challenging the federal law. On audit, an increasing number of states are challenging taxpayers’ claims of Public Law 86-272 protection. Taxpayers should consider their options when approached by departments of revenue. The MTC’s position is guidance; it is not binding law. The only binding law in existence is Public Law 86-272, and it has not changed since its enactment over 60 years ago. The MTC’s revised statement clearly reflects the interests of the states in trying to limit the application of Public Law 86-272. This is an effort taxpayers should not accept without a challenge.

1 California Franchise Tax Board Technical Advice Memorandum (TAM) 2022-01.

Jennifer W. Karpchuk, JD, is co-chair of the state and local tax (SALT) controversy and planning practice at Chamberlain Hrdlicka. She can be reached at

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.

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