Interstate Income Tax Discrimination & Public Law 86-272
Public Law 86-272, codified at 15 U.S.C. §§ 381-384, is one of the most important federal limits on state business-income taxation. It is one of Congress's earliest exercises of Commerce Clause authority to police state taxes that burden interstate trade, and it works in tandem with the judicial Dormant Commerce Clause doctrine. It says a state generally cannot impose a net income tax on an out-of-state seller of tangible personal property when the seller's in-state activity is limited to the solicitation of orders that are approved and filled from outside the state. This rule does not eliminate state tax nexus broadly, and it does not protect service businesses the same way. But for interstate sellers of goods, it remains a central federal shield against certain state income-tax claims.
Current Law (2026)
| Parameter | Value |
|---|---|
| Core statute | 15 U.S.C. §§ 381-384 |
| Common name | Public Law 86-272 |
| Main protection | States generally may not impose a net income tax when in-state activity is limited to protected solicitation of orders for tangible personal property |
| Protected goods | Tangible personal property only |
| Main limitation | Protection does not broadly cover services, digital products, or in-state activities beyond protected solicitation |
| Tax type covered | Net income taxes, meaning taxes imposed on or measured by net income |
Legal Authority
- 15 U.S.C. § 381 — Limits state power to impose a net income tax on certain interstate sellers whose in-state activity is limited to protected solicitation
- 15 U.S.C. § 382 — Restricts assessment of certain older taxes where the modern imposition would be prohibited
- 15 U.S.C. § 383 — Defines "net income tax"
- 15 U.S.C. § 384 — Separability clause
How It Works
Public Law 86-272 is a narrow federal safe harbor for sellers of tangible personal property — it doesn't say such sellers owe no state taxes, but that states cannot impose a net income tax when the only in-state activity is "solicitation of orders" for tangible personal property sent outside the state for approval and shipment. Solicitation is the operative concept: if the seller's in-state conduct stays within pure order-taking, the shield holds; if it crosses into post-sale service, maintaining inventory, training customers, or other non-solicitation activities, the protection can be lost. The statute was enacted in 1959 for a world of traveling salesmen placing paper orders, but it still governs 2026 e-commerce — a tension that has made the coverage analysis increasingly difficult as modern sales involve dynamic websites, live chat, remote employees, cookies, and digital service delivery.
The MTC's 2021 revised guidance is the current flashpoint: the Multistate Tax Commission concluded that several common internet-era activities exceed protected solicitation — including using cookies to serve targeted advertising, post-sale customer assistance via chat or email, interactive web pages for warranty claims, and allowing customers to apply for store credit cards online. States following the MTC guidance assert these activities strip federal protection, exposing sellers to income tax; taxpayers dispute the interpretation, and the guidance has no force of law — but states have begun auditing positions consistent with it, creating real compliance exposure for e-commerce businesses. Critically, Public Law 86-272 covers only state net income taxes — it doesn't protect against sales tax collection obligations (which are governed by Wayfair economic nexus rules), franchise taxes, gross-receipts taxes, or registration requirements, so a seller protected from income tax may still have significant state tax obligations.
How It Affects You
<!-- pria:personalize type="impact" -->If you sell physical products into many states without a large physical footprint: Public Law 86-272 may be one of your best defenses against certain state income tax assessments, but only if your in-state activities stay within protected solicitation. For a product company with independent sales reps and no in-state warehousing, offices, or support staff, the protection is strong. For a company whose website also features live customer service chat, post-sale warranty processing, or a rewards program — activities that states following the MTC guidance say go beyond solicitation — the protection may be thinner than it appears.
If your business provides services, SaaS, or digital products: This statute provides little protection. Its classic protection is built around tangible personal property delivered from outside the state. A SaaS subscription, a software download, or a professional service engagement is not "tangible personal property," and most states will assert nexus based on economic presence alone. See Remote Work Tax Nexus if your employees are in multiple states.
If you have remote employees or in-state support activity: Public Law 86-272 protection can disappear quickly once employees do more than solicit orders. A single employee in a state who handles customer service calls, installs products, or resolves billing issues may constitute activity beyond protected solicitation. This is a significant compliance risk for companies that expanded their remote workforces post-COVID without updating their state income tax nexus analysis.
If you're auditing multistate income tax risk: Public Law 86-272 is still table stakes for any multistate tax risk analysis for product sellers. Even when it does not fully protect the business, it shapes how states frame assessment theories and how taxpayers defend them. For 2026, the key audit questions are: (1) Does your website or e-commerce platform include interactive features that the MTC guidance classifies as beyond solicitation? (2) Do you have any remote workers in-state, and what do they do? (3) Are your in-state activities truly limited to order-taking, or do they include post-sale activity?
<!-- /pria:personalize -->State Variations
State variation is a huge part of the real-world picture — Public Law 86-272's protection is only as strong as the state you're being assessed by:
States that have adopted MTC 2021 internet-activity guidance: California (Franchise Tax Board Technical Advice Memorandum, 2022), New York, Illinois, and several other states have formally adopted or indicated they apply the MTC's position that common internet-era activities — using cookies for targeted advertising, live chat for post-sale support, online warranty submissions, interactive account management features — exceed protected solicitation under Public Law 86-272. In these states, an e-commerce business with any of these website features faces a realistic risk that its PL 86-272 shield is gone, exposing it to corporate income tax assessment based on economic presence.
California specifically — FTB enforcement posture: California's FTB has been the most aggressive in applying the MTC guidance. California uses market-based sourcing (revenue is sourced to where the customer is located) for its income tax apportionment formula, so a company with significant California customers but no physical presence could face a large California income tax assessment if PL 86-272 protection is stripped. California has a high corporate tax rate (8.84%) and a significant potential revenue base from remote sellers, creating strong incentive to audit aggressively.
States maintaining traditional, narrower view: Texas, Florida, Nevada (no corporate income tax — PL 86-272 is irrelevant for income tax purposes), and several other states either have no income tax or have not adopted the MTC guidance, offering a more traditional interpretation of "solicitation" that remains favorable to interstate sellers.
Key states in the middle: Ohio, Washington (which uses gross receipts tax, not net income tax — outside PL 86-272's scope), Indiana, and others have not taken a clear position on the MTC guidance as of 2026, creating audit uncertainty for sellers with significant customer concentrations in those states.
Practical exposure map: For a direct-to-consumer e-commerce company with no physical stores or offices, the highest-risk states for income tax assessment stripped of PL 86-272 protection are: California, New York, and Illinois (have adopted MTC guidance); Massachusetts and New Jersey (aggressive enforcement posture even without explicit MTC adoption). The lowest-risk states are those with no income tax (TX, FL, NV, WA, WY) or states that have explicitly maintained a traditional PL 86-272 reading. For a company with $50M in annual U.S. revenue, the difference between being assessed in California (with apportioned income and the FTB's MTC position) vs. being protected under PL 86-272 could be hundreds of thousands of dollars in annual state income tax exposure.
Implementing Guidance
Public Law 86-272 is statutory federal law interpreted largely through state tax administration, MTC model guidance, and litigation rather than a dedicated federal regulatory code. The MTC's revised 2021 guidance (updated after public comment) and state-specific technical advice memoranda are the most practically important documents for 2026 compliance analysis.
Pending Legislation (119th Congress)
No major standalone 119th Congress legislation was prominent as of April 2026 to replace or broadly modernize Public Law 86-272. Congress has periodically been urged to update the statute for the digital economy — given that the original statute predates the internet by decades — but no bill has advanced.
Recent Developments
- MTC 2021 guidance remains the primary battleground in 2026: The Multistate Tax Commission's 2021 revised guidance on the application of Public Law 86-272 to internet activities has prompted significant litigation and advisory activity. The MTC's position that interactive website features (live chat, cookie tracking, online warranty submissions) exceed protected solicitation is disputed by taxpayers and has not been definitively resolved in court. Sellers with active e-commerce operations should have a current PL 86-272 analysis in place.
- California's FTB application of MTC guidance: California adopted the MTC's updated guidance, taking the position that common e-commerce activities can strip federal protection. The FTB's position is the subject of ongoing litigation and taxpayer advocacy, making California a high-risk state for product sellers to assume PL 86-272 applies without analysis.
- Post-Wayfair nexus complexity: Since South Dakota v. Wayfair (2018) eliminated the physical-presence requirement for sales tax purposes, the practical compliance burden for remote sellers has grown on multiple fronts simultaneously — economic nexus for sales tax, potential PL 86-272 erosion for income tax, and state-by-state payroll/registration requirements from remote workers. These issues often arise together and require coordinated multistate tax planning.
- Congressional inaction: As of April 2026, Congress has not acted to update Public Law 86-272 for the digital economy, leaving taxpayers and states to fight over the 1959 statute's application to 21st-century business models.