The 50th Anniversary of Public Law 86-272

What's the protocol for honoring the anniversary of a temporary law? Challenges of multistate taxation revealed.

March 27, 2008
by Annette Nellen, CPA/Esq.

Public Law 86-272, addressing circumstances under which a multistate business may owe state income taxes, was enacted as a stopgap measure on September 14, 1959. For the past several years, efforts to reform this law have raised issues similar to those of 1959. This article provides a brief history and the issues surrounding PL 86-272 and poses the question — when the 50th anniversary milestone is reached, will PL 86-272 be in its historic form or a new form (and what might that be)?

1959 Supreme Court Decision

In February 1959, the U.S. Supreme Court issued its opinion in Northwestern Cement v. Minn., 358 US 450 (1959). The Court upheld a state's power to tax income generated from interstate activities. Such a tax is valid if it does not discriminate against interstate commerce and is properly apportioned to activities within the state that create nexus. The Court ruled that such a tax was within the Due Process clause of the U.S. Constitution because fair apportionment led to only taxing income arising in the taxing state.

The Court referred to its earlier decision, Wisconsin v. J.C. Penney Co., 311 US 435, 444 (1940). The "'controlling question is whether the state has given anything for which it can ask return.' Since by 'the practical operation of [the] tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred.' it 'is free to pursue its own fiscal policies, unembarrassed by the Constitution.'"


The decision raised many concerns for businesses and Congress. Most troubling was what the Senate described as the Court's "broad language" (Senate Rpt. No. 658 (8/11/59) to S. 2524).

Key concerns for businesses included:

  1. Determining the quantity and nature of activities in a state that could cause a business to have sufficient nexus to be subject to income tax there.

  2. How income of a multistate business should be fairly apportioned among states in which it has nexus.

  3. The possibility that non-uniform rules among the states could cause a sale to be attributed to more than one state.

  4. Dealing with the compliance burden and costs of computing taxable income under the differing rules of each state in which a business is subject to tax and applying the different apportionment rules of each state. Some businesses noted that the costs to comply might exceed the tax owed in some cases.

Some members of Congress observed that nexus uncertainty and compliance burdens could lead some businesses to limit their interstate activities. They noted that the situation was worse for small businesses for which the compliance costs were more problematic. Concerns were also expressed over the possibility that states would use the 1959 Court decision to assess taxes for past years.

PL 86–272

PL 86–272 was enacted within seven months of the Court's decision. Its aim was a more certain rule for when a multistate business is subject to income tax in any particular state. The Senate Report (Senate Rpt. No. 658 (8/11/59)) noted that the legislation "is not a permanent solution to the problem." Instead it was intended to "serve as an effective stopgap or temporary solution while further studies are made of the problem."
Senator Byrd of Virginia expressed the Senate's rationale for the rush in passing a law prior to further study of the issues. "Unless immediate action is taken at this time, it is feared that the States will amend their laws to further encroach upon interstate commerce." (Cong. Rec. 8/19/59, p. 16354).

Basically, PL 86–272 prohibits a state from imposing a net income tax if a company's only state activities are solicitation of orders for sales of tangible personal property which are sent outside the state for approval or rejection and are filled from outside the state. It also called for a study and report on state taxation by a congressional subcommittee.

Note: The author has created a Web site on PL 86-272 and its reform with links to proposals and analysis.

Current Issues

The "current" issue since 1959 is when temporary PL 86–272 will be replaced with permanent legislation. Prior to enactment, Senator Gore, who preferred further study before changing the law, noted that the legislation was permanent because no termination date was provided (Cong. Rec. 8/19/69, p. 16357).

While time has, in effect, made PL 86–272 permanent, in the past few years, there have been several proposals and hearings about its reform (for example, S. 1726 (110th Cong.), Senate Finance Committee hearing 7/25/06 and the Multistate Tax Commission's factor presence proposal (PDF)). These changes call for updating the law to cover more than net income taxes and tangible personal property.

Much of today's debate on PL 86–272 reform echoes the pro and con positions expressed in 1959 and the matters addressed in the post-1959 congressional study (often referred to as the "Willis report" (6/30/65) for the Congressman who headed up the project). These positions dealt with the tension between protecting businesses from uncertainty and multiple taxation and preserving state tax authority and revenues.

Today, many businesses sell services and intangibles, rather than tangible personal property. Also, some states have business taxes that are not income taxes, such as gross receipts taxes. When a business is not covered by the "protection" of PL 86–272, due process and commerce clause guidance governs whether a state may tax the income of a multistate business. Most states have provided nexus guidance either legislatively or administratively, but as was the situation decades ago, such guidance is not uniform among the states and rarely provides certainty to taxpayers.

When PL 86–272 does not apply, many businesses have relied on the physical presence nexus standard laid out by the Supreme Court in Quill (504 U.S. 298 (1992)). This case involved a state imposing sales tax collection responsibilities on a remote vendor. The Court held that the Commerce Clause required a physical presence for substantial nexus.

However, several court decisions have ruled that physical presence is only relevant for sales and use tax nexus (for example, Tax Comm'r. of the State of West Virginia v. MBNA, 640 SE2d 226 (2006), cert. denied, U.S. S.Ct., Dkt. No. 06–1228, 06/18/2007). Some of these cases have held that "economic presence" (such as customers and intangibles) can create nexus. The current state of affairs involving nexus determinations is reminiscent of 1959.

PL 86–272 Reform Considerations

Ways of doing business have changed dramatically since 1959. Businesses can operate with fewer physical locations, borders are not always important and many products and services are digitized. Congress, state governments and businesses must evaluate what nexus standards are appropriate today that also provide certainty and fairness to taxpayers and state governments. PL 86–272 focused on nexus rather than also apportionment. Reform efforts should consider how much guidance Congress should provide under its commerce clause authority to regulate interstate commerce. Congress must find the balance between the exercise of its authority and states' authority to define their tax systems.

As evidenced by a temporary law approaching its 50th anniversary, reform efforts will not be easy, but are clearly needed. The discussions are likely to continue right through PL 86–272's 50th anniversary.

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Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University and an Irvine Fellow at the New America Foundation. Nellen is an active member of the tax sections of the ABA and AICPA. She has several reports on federal and state tax reform and a blog.