A Pinch of Salt, July 2010- Applying P.L. 86-272 In a Modern Economy


In 1959 a gallon of gas was 25 cents; Mattel introduced the first Barbie doll; the commercial copier and mainframe computer were introduced; Alaska and Hawaii became the 49th and 50th states, respectively; and the Boeing 707 jetliner came into service. In a developing and traditional manufacturing economy in which many of the luxuries of modern technology we know today did not exist, Congress enacted 15 U.S.C. section 381, et seq., commonly known as Public Law 86-272, to protect traditional businesses. The federal statute allows interstate businesses to solicit sales of tangible personal property in states without triggering an income tax return filing requirement. In today’s economic environment in which iPods, e-readers, and cellphones are staples, the application of P.L. 86-272 is just as relevant.

We will first provide an overview of P.L. 86-272 and then discuss applying P.L. 86-272 in a modern economy in which digital and intangible property and service-based businesses are prevalent. Finally, we will discuss how evolving income tax regimes (for example, combined reporting and gross-receiptsbased taxes) have created additional challenges in applying P.L. 86-272.


In 1959, just seven months after the U.S. Supreme Court handed down its decision in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959), Congress enacted P.L. 86-272, setting forth the minimum standard for imposition of a state net income tax in certain situations. P.L. 86-272 states:

no State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:

• the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and

• the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described [above].1

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