Congress enacted P.L. 86-272 in direct response to the US Supreme Court’s decision in Northwestern States Portland Cement Co. v. Minnesota, 358 US 450 (1959). Since its enactment in 1959, the retail world has changed drastically. After the Wayfair decision (which imposed sales tax due to a significant economic presence), states like New York are beginning to take an aggressive approach to taxing out-of-state businesses, challenging the federal regulation. The information below outlines the background of P.L. 86-272, why it’s significant, and what to look out for in the future regarding this public law.
What is P.L. 86-272?
P.L. 86-272 prohibits a state from imposing a net income tax on any person’s income derived from interstate commerce if the only business activity performed in the state is the solicitation of orders of tangible personal property. The orders must be sent outside the state for approval or rejection. If accepted, the orders must be filled from the point of shipment outside the state. If any services are provided along these transactions, P.L. 86-272 protections do not apply.
New York’s revised regulations restrict P.L. 86-272 protection to companies whose online activities solely involve soliciting orders. Activities like providing customer service chat or accepting online credit card applications could disqualify a business from the exemption without considering if the business has physical nexus in the state.
In April 2024, the American Catalog Mailers Association (ACMA) challenged New York’s regulations in court, arguing that the regulation improperly expands the Department’s authority to impose income tax on out-of-state merchants even if they meet the requirements under P.L. 86-272. ACMA represents companies that sell through catalogs, phone, and online. ACMA is concerned about the risk of retroactive tax assessments under the new interpretation.
What’s Next?
Similar challenges are happening in other states. California also issued guidance based on the MTC statement, but a court recently struck it down due to procedural issues. The New York case could be a landmark decision. A ruling in favor of ACMA would limit states’ ability to restrict P.L. 86-272 protections. However, the case could take years to resolve.
What Should You Do Now?
The legal landscape for out-of-state businesses selling online is changing, and companies should stay informed to navigate these complexities. If your firm relies on P.L. 86-272 protection, consult with one of our state and local tax professionals to ensure its online activities comply with the evolving interpretations of this law.
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