Reconciliation Markup Aims to Limit State Tax Reach

Committees in the U.S. House of Representatives recently began marking up sections of the “one big beautiful bill” that Congress currently is working on under reconciliation procedures. The goal is to cut spending, increase funding for defense and immigration enforcement, raise the debt limit, and extend tax cuts made by the Tax Cuts and Jobs Act of 2017 during President Donald Trump’s first term. One provision added to the House Judiciary Committee’s portion of the bill would expand P.L. 86-272 state income tax protections for out-of-state businesses.

Background

P.L. 86-272 is a federal law that generally prohibits states from imposing a net income tax on out-of-state businesses whose only in-state activities are the solicitation of orders for sales of tangible personal property.

The Multistate Tax Commission (MTC) released guidance in 2021 that certain internet activities exceed P.L. 86-272 protection and, therefore, expose out-of-state businesses to state tax on in-state activities, including placing internet cookies on customer devices, providing post-sale assistance via electronic chat, soliciting and receiving online applications for branded credit cards or employment, remotely fixing or upgrading products previously purchased by in-state customers, and offering and selling extended warranty plans via a website. Several states including California, Massachusetts, New York, and New Jersey have since adopted or proposed adoption of all or part of the MTC’s internet activity guidance, expanding their reach for income tax purposes to out-of-state digital businesses.

The 1992 U.S. Supreme Court decision in Wisconsin Department of Revenue v. Wrigley generally provided that “solicitation of orders” includes activities that are entirely ancillary to requests for purchases and serve no independent business function. However, activities that a company would have reason to engage in anyway but chooses to allocate to its in-state sales force are not protected.

Crowe observation

The scope and meaning of protected “solicitation” activities have been subject to considerable debate as states attempt to narrow protected activities. The spotlight on unprotected activities has grown with the MTC’s release of internet activity guidance.

Reconciliation bill draft language

Bills have been introduced recently to provide greater protection to out-of-state businesses and essentially overrule Wrigley. For example, in 2024, Rep. Scott Fitzgerald of Wisconsin introduced the Interstate Commerce Simplification Act of 2024 to expand the Supreme Court’s definition of “solicitation of orders” to include any activity that facilitates solicitation even if that activity also serves an independently valuable business function apart from solicitation. Rep. Fitzgerald introduced the same bill, now titled the Interstate Commerce Simplification Act of 2025, when the new congressional session began in January 2025.

On April 27, the House Judiciary Committee included in the markup of its portion of the reconciliation bill language from the Interstate Commerce Simplification Act of 2025.

Looking ahead

More in-state activity would be protected from state tax if the language added to the House Judiciary markup is enacted. The proposal broadens protection for out-of-state businesses by effectively overruling the Wrigley standard, which denies state tax protection for independent business functions.

However, even though proposed language is offered as a simplification of P.L. 86-272, significant disputes still could arise regarding the meaning of “facilitating” solicitation. Additionally, unprotected activities under the MTC’s internet guidance could be drawn into question should Congress enact the recommended P.L. 86-272 changes.

Regardless of what happens with the reconciliation bill, state challenges to restrict protection for out-of-state taxpayers appear to be gaining momentum. Taxpayers should contact their tax advisers to discuss current operations and the extent of their liability for out-of-state taxes and begin discussions of how to take advantage of any expanded protection from state tax.