PL 86-272 - The Past Present and Future

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2021 WithumSmith+Brown, PC
Public Law 86-272 – The
Past, Present, and Future
1 CPE Credit in Taxes | June 9, 2022

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Polling Question Instructions

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Meet Your Speakers
Jim Bartek, CPA,
SALT Partner - Market Leader
jbartek@withum.com
(973) 567 6515
Rebecca Stidham, CPA,
SALT Partner
rstidham@withum.com
(415) 796 6614
Jonathan Weinberg, J.D., LL.M.
Senior Manager, SALT – Income Tax
jweinberg@withum.com
(267) 332 5851
Jason Rosenberg, CPA, CGMA, EA,
MST,
jrosenberg@withum.com
(347) 215 0115

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This content is for general informational purposes only and should not be
used as a substitute for individualized tax advice with a qualified tax
advisor. This content represents the views of the authors only and does
not necessarily represent the views or professional advice of
WithumSmith + Brown, PC. All information is provided "as is", with no
guarantee of completeness, accuracy, timeliness or of the results
obtained from the use of this information.
Disclaimer

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P.L. 86-272 – The History
The Changing Economy: Shrinking 86-272’s Application
Historically Protected Activities
Historically Unprotected Activities
P.L. 86-272 and Finnigan
MTC’s Revised Statement on P.L. 86-272
Table of Contents

WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH
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BE IN A POSITION OF SM
P.L. 86-272 – The History

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 The Interstate Income Act of 1959, also known as Public Law 86-272
(codified at 15 U.S.C. §§381-384) was enacted in response to the
Supreme Court’s decision in Northwestern State Portland Cement Co. v.
Minnesota
 In Northwestern, the Supreme Court held that Minnesota could tax an Iowa corporation that
solicited sales from an office in Minnesota.
 As a Federal Law, 86-272 applies to every state – the same as every other Federal law.
P.L. 86-272 – The Origins

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 §381(a) Minimum standards. 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:
(1) 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
(2) 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 in paragraph (1).
Text of P.L. 86-272

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 §381(b) Domestic corporations; persons domiciled in or residents of a State. The provisions of
subsection (a) shall not apply to the imposition of a net income tax by any State, or political
subdivision thereof, with respect to—
(1) any corporation which is incorporated under the laws of such State; or
(2) any individual who, under the laws of such State, is domiciled in, or a resident of, such State.
Text of P.L. 86-272 - Continued

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 §381(c) Sales or solicitation of orders for sales by independent contractors. For purposes of
subsection (a), a person shall not be considered to have engaged in business activities within a State
during any taxable year merely by reason of sales in such State, or the solicitation of orders for sales
in such State, of tangible personal property on behalf of such person by one or more independent
contractors, or by reason of the maintenance, of an office in such State by one or more independent
contractors whose activities on behalf of such person in such State consist solely of making sales, or
soliciting orders for sales, or tangible personal property.

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 §381(d) Definitions. For purposes of this section—
(1) the term “independent contractor” means a commission agent, broker, or other independent contractor who is
engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and
who holds himself out as such in the regular course of his business activities; and
(2) the term “representative” does not include an independent contractor.

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 §382(a) Limitations. No State, or political subdivision thereof, shall have power to assess,
after September 14, 1959, any net income tax which was imposed by such State or political
subdivision, as the case may be, for any taxable year ending on or before such date, on the income
derived within such State by any person from interstate commerce, if the imposition of such tax for a
taxable year ending after such date is prohibited by section 381 of this title.
 §382(b)Collections. The provisions of subsection (a) shall not be construed—
(1) to invalidate the collection, on or before September 14, 1959, of any net income tax imposed for a taxable year
ending on or before such date, or
(2) to prohibit the collection, after September 14, 1959, of any net income tax which was assessed on or before such
date for a taxable year ending on or before such date.

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 §383: For purposes of this chapter, the term “net income tax” means any tax imposed on, or
measured by, net income.
 §384: If any provision of this chapter or the application of such provision to any person or
circumstance is held invalid, the remainder of this chapter or the application of such provision to
persons or circumstances other than those to which it is held invalid, shall not be affected thereby.

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P.L. 86-272 says that a State may not impose a tax based on net income
when a taxpayer’s sole connection to the state is the solicitation for sale
of tangible personal property and the order is accepted and fulfilled
outside of the state.
(1) The long and short is P.L. 86-272 is essentially the “insanity defense” to state income taxation.
(2) Taxpayers claiming P.L. 86-272 are conceding that they likely have sufficient connections to the state for the state to
assert they have nexus – but the taxpayer has a good excuse.
P.L. 86-272 – Summary of the Law

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 P.L. 86-272 only protects taxpayers from “net income based” taxes. P.L. 86-272
does not protect taxpayers from any other taxes, including (but not limited to):
 Minimum taxes (e.g., MA $456 minimum tax)
 Gross receipts-based taxes (e.g., TX margin tax, WA B&O Tax, NV Commerce Tax, OH and OR CAT)
 Sales taxes
 Franchise Taxes (e.g., CA $800 Franchise Fee, CA LLC Fee)
 Other taxes not based on “Net Income” (e.g., NH BET)
P.L. 86-272 – Historic Limitations – Taxes
Based on Net Income

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 The owners of pass-through entities are protected from net-income based taxes in
nonresident states if the entity qualifies for P.L. 86-272 protection
 Claiming P.L. 86-272 protection may prevent a taxpayer from making a PTET election in their resident state
 Claiming P.L. 86-272 protection may prevent a taxpayer from making a PTET election for the year in a
nonresident state in the event a P.L. 86-272 claim was ineffective.
P.L. 86-272 and Pass-Through Entities

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Polling Question #1

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The Changing Economy –
Shrinking P.L. 86-272’s
Application

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 There is no one on this webinar that remembers a time in their career when P.L. 86-
272 did not exist.
 When P.L. 86-272 was enacted, webinars did not exist
 In 1959, any reference to “the cloud” was clearly a discussion about the weather
• In short, the world looked very different when this law was enacted
P.L. 86-272 was enacted in 1959

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 In the 21st century, a single purchase often includes a bundle of tangible goods,
services, and intangibles
 Look at the evolution of John Deere
When P.L. 86-272 was enacted, purchasing
goods, services and intangibles were very
separate transactions

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John Deere – the Original from 1838

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 This is the tool that revolutionized agricultural production
 From our perspective, this is as simple as you can get
In 1838, horsepower meant horse power

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John Deere – the 1959 Model

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 The main improvement is that farm machinery is now powered by the internal
combustion engine at a price that farmers can afford
In 1959, you now have rolling iron

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 It’s clearly an improvement over the 1838 and 1959 models
 It probably has optional A/C and a CD Player
 However, this tractor is not “smart” – it’s just a machine
Even in 1990 – the John Deere was still
very much a simple machine

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 While it still looks like a tractor it is really a very sophisticated computer running
highly intelligent software that just happens to roll around in farmers’ fields.
 For example, current John Deere commercial tractors comes bundled with the ability to increase horsepower on demand.
The user pays an extra fee to John Deere and John Deere remotely increases the available horsepower via an on-
demand software update
 Repairs, maintenance, and upgrades can only be done by authorized service centers because doing so requires
proprietary software updates – some of which require payment of an additional fee
The 2021 Model John Deere is no longer a
just a machine

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Polling Question #2

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Historically Protected
Activities

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1. Soliciting orders of TPP via any sort of advertising
2. Soliciting orders via in-state resident employees or independent contractors – so
long as such individuals do not maintain or use any office in the state other than
an “in-home” office.
3. Providing samples and displays to individuals who solicit sales – provided that
customer orders are never fulfilled from samples/displays
4. Furnishing and setting up display racks and advising customers on how to best
display the Company’s products (so long as such advice is provided without
charge)
Historically Protected Activities

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5. Providing automobiles to salespeople to conduct their activities
6. Coordinating shipment and delivery of tangible goods – so long as such activities
are done without charge.
7. Checking customers inventory to ensure that they have sufficient stock on hand
and monitoring when re-orders are required (but not for any other purposes)
provided this service is done without charge
8. Recruiting, training, motivating, and/or evaluating sales personnel – including
having occasional meetings for sales personnel in the state.
Historically Protected Activities - Continued

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8. Sales personnel passing customer complaints on to the home office
9. Maintaining property in the state that is necessary for salespeople to engage in
protected activities, such as:
• Cell phones
• Laptops and software
• Fax machines
Historically Protected Activities - Continued

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Historically Unprotected
Activities

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1. Activities in the state by salespeople/employees/independent contractors that go
beyond solicitation:
a) Dealing with collections on delinquent accounts
b) Addressing customer complaints
c) Investigating customer creditworthiness
d) Repossessing property
e) Accepting orders on the spot
• Does not matter if any of the above prohibited activities are done by employee or
independent salespeople
f) Having remote employees who are not engaged in selling TPP working in the state
• As a result of a mobile workforce, many companies are losing their P.L. 86-272 protections
Employee Activities that Break P.L.
86-272 Protection

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g) Holding meetings in the state that are unrelated to selling TPP. For example:
• Company A brings all its salespeople together in State X for a meeting to educate them
about Widget 2.0, the new bonus structure, and get them pumped up to have a record
setting year. It is unlikely this meeting breaks P.L. 86-272 protection.
• Company A then has a corporate retreat for all its employees in State X. The company
retreat likely breaks P.L. 86-272 protection.
• Everyone had such a great time at the retreat, Company A then holds its board of directors
meeting in State X. This also likely breaks P.L. 86-272 protection.
Employee Activities that Break P.L. 86-272
Protection – Continued

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1. Clinical trials and product testing
2. Employing a contract manufacturer in the state
3. Owning raw materials or goods-in-process in the state
4. Consigned inventory located in the state
5. Inventory owned by the Company is brought into a state by a marketplace seller
a) For example – Amazon moves Company X’s marketplace inventory into State
Y to make Amazon’s distribution of X’s products more efficient. Amazon has
probably broken P.L. 86-272 protection for Company X in State Y.
Maintaining Property Unrelated to Sales in the
State Traditionally Breaks P.L. 86-272 Protection

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6. Making on-the-spot sales at tradeshows or other venues
7. Salespeople fulfilling orders from samples/displays
8. Returnable containers or pallets
9. Opening an office or pop-up store in the state
a) Using fractional or on-demand office space such as WeWork for non-sales
related functions likely breaks P.L. 86-272 protection.
Maintaining Property Unrelated to Sales in the
State Traditionally Breaks P.L. 86-272 Protection

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1. Providing on-site warranty repairs
2. Maintenance services
3. Installation services
4. Picking up returned merchandise
5. Performing stock checks not related to informing a customer of their need to re-
order (e.g., examining customers’ inventory for freshness, checking goods for
recalls)
Business Activities that go Beyond Mere Solicitation
which Traditionally Break P.L. 86-272 Protection

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6. Providing training/certifications (other than training for the sales force on the products they
are selling and/or how to be a better salesperson)
a) For example – Company B is a brake pad manufacturer. B provides training and
certifications to mechanics in all 50 states on how to install brake pads. Upon
successful completion of the course, B issues mechanics certificates indicating they
are qualified to do brake jobs which helps mechanics secure employment. The
reason B does this is that mechanics will then choose B’s brake pads over their
competitors’. This breaks P.L. 86-272 protection
• It does not matter if any of the above prohibited activities are performed by
employees or independent contractors
Business Activities that go Beyond Mere Solicitation which
Traditionally Break P.L. 86-272 Protection – Con’t

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1. Transactions that are not selling tangible personal property which break P.L. 86-272
protection include (but are not limited to):
a. Providing apps on mobile devices
b. Selling downloadable software, media, books, movies, and/or music;
c. SaaS – or any other transaction that ends in “as a Service”
d. Leasing, renting, or financing property
e. Participating in the “sharing” economy
f. Selling franchises in a state
g. Licensing intangibles in a state
h. Selling extended warranties
Engaging in Transactions that are not Selling TPP
Traditionally Breaks P.L. 86-272 Protection

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Polling Question #3

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Finnigan and P.L. 86-272

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1. In separate filing states, each entity stands on its own. As such, the unprotected activities
of one entity does not necessarily taint affiliates
2. In Joyce states, only entities with their own nexus in the state include their sales attributes
in the sales factor numerator. As such, only entities that exceed P.L. 86-272 in the state
get numerator representation. Entities that are protected under P.L. 86-272 generally do
not report having sales in Joyce states.
3. In Finnigan states, if one entity has nexus in the state – all affiliated entities are deemed to
have nexus in the state. As such if one member of a unitary/combined/consolidated group
exceeds P.L. 86-272 protections in a state, this taints all its affiliates and prevents them
from claiming P.L. 86-272 protection.
The Finnigan – P.L. 86-272 Mixer – A Recipe
for a Nexus Hangover

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1. Under the Finnigan rule, even intercompany transactions may break P.L. 86-272
protections
a) Company A purchases all of its inventory from affiliate B. A then sells its inventory at a
markup.
• In this situation, A and B are likely both protectible under P.L. 86-272.
2. Affiliates A and B change their arrangement. Now A receives a commission (i.e., a fee for
a service) for selling B’s inventory.
a) A is now providing B a service – not selling tangible personal property. As such, many
Finnigan states would take the position that neither A nor B are protected in the state
under P.L. 86-272.
The Finnigan – P.L. 86-272 Mixer – A Recipe for
a Nexus Hangover

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MTC’s Revised
Statement on P.L. 86-272

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 The Multistate Tax Commission (“MTC”) is an organization that represents state tax authorities.
 The MTC’s activities include:
 Recommending uniform state tax laws with respect to interstate commerce.
 Encouraging compliance and consistency in tax laws through its Joint Audit and National Nexus Programs.
 Training and education in complex multistate tax issues.
 Supporting states engaged in major tax litigation through amicus briefs and technical assistance.
 Advocacy of state interests in the field of multistate taxation to the federal government.
 The MTC does not have:
• Legal authority or
• Administrative Authority.
P.L. 86-272 and the Multistate Tax
Commission

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Timeline of MTC’s Statement on P.L. 86-272
In 1986,
original
adoption of
MTC
Statement on
P.L. 86-272.
In 1993, MTC
adopts
revised
version of
Statement on
P.L. 86-272.
In 1994, MTC
adopts
second
revised
version of
Statement on
P.L. 86-272.
In 2001, MTC
adopts third
revised
version of
Statement on
P.L. 86-272.
In 2021, MTC
adopts its
fourth
revised
version of
Statement on
P.L 86-272.

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 The world has changed substantially since 86-272 was enacted in 1959.
As such, the MTC issued its current restatement on P.L. 86-272
indicating how the law should apply in the internet age.
 Adopted on August 4, 2021, the purpose of the revision per the MTC was “to address changes
that have occurred during the past two decades in the economy and the way that business is
conducted”.
MTC’s Current Restatement on P.L. 86-272

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1. Selling only tangible personal property via a website that only allows
customers to:
 Search for products.
 Read product descriptions.
 Select items for purchase.
 Choose delivery options; and,
 Pay for the items.
2. Placing a static FAQ on a webpage; and,
Examples of Protected Activities Under the
MTC’s Current Restatement

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3. Placing “cookies” on the computer/devices of customers if the cookies’
purpose is strictly limited to:
 Reminding customers they have items in their online shopping carts.
 Storing customer information so they can avoid re-inputting it for each
transaction; and,
 Reminding customers what products they considered in prior browsing sessions.
Examples of Protected Activities Under the
MTC’s Current Restatement - Continued

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1. Providing post sale assistance to customers via electronic chat or email;
2. Soliciting and/or receiving on-line applications for branded credit cards;
3. The Company’s website invites individuals to apply for non-sales related job openings, fill
out an electronic application and upload a resume;
4. Placing “cookies” on the computers/devices of customers if the cookies are used to gather
information used to:
 Adjust production schedules;
 Manage inventories; and/or,
 Develop new products or offer new products for sale.
Examples of Unprotected Activities under
the MTC’s Current Restatement

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5. The business remotely fixes or upgrades products by transmitting code or other
electronic instructions to those products via the internet.
6. The business offers or sells extended warranty plans via its website.
7. The business contacts with in-state customers to stream video and music to
electronic devices for a charge.
Examples of Unprotected Activities under
the MTC’s Current Restatement

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 California: Technical Advice Memorandum 2022-01 (February 14, 2022)
 New York: Draft Regulations (April 29, 2022)
State Developments/Guidance

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Polling Question #4

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 Analyze impact of MTC revision statement.
 Monitor how states will adopt the new revised restatement.
 Taxpayers may challenge the MTC’s interpretation of protected and unprotected
activities under P.L. 86-272.
 Model impact and evaluate potential need for structure modifications.
 Apportionment implications.
 Consider impact in combined vs. separate reporting states.
Considerations of MTC’s Restatement

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Questions? Contact Us!
Jim Bartek, CPA,
SALT Partner - Market Leader
jbartek@withum.com
(973) 567 6515
Rebecca Stidham, CPA,
SALT Partner
rstidham@withum.com
(415) 796 6614
Jonathan Weinberg, J.D., LL.M.
jweinberg@withum.com
(267) 332 5851
Jason Rosenberg, CPA, CGMA, EA,
MST,
jrosenberg@withum.com
(347) 215 0115

PL 86-272 - The Past Present and Future

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