A 1959 Tax Law May Cause Compliance Headaches in 2021

In 2018, corporate tax departments were shocked by the U.S. Supreme Court’s Wayfair decision, which reversed a longstanding physical presence ruling that had been in effect since the “Be Like Mike” era. In 2021, state departments of revenue emboldened by the Wayfair ruling are moving forward with corporate income tax liability changes that would reverse a federal law that has been on the books since the “Be Like Ike” era.

Finalized in 1959, Public Law 86-272 limits a state from imposing a net income tax on revenue derived within its borders from interstate commerce, based on several conditions. For example, the law restricts states from imposing net income tax (and franchise tax) when a company’s activities in that state are limited to soliciting orders for goods. Drafted well before the internet was conceived, the law has not been amended in 60-plus years to reflect the advent of e-commerce, which now underpins the business model of most organizations that currently conduct interstate commerce.

More states have become aware of this gap, as has the Multistate Tax Commission (MTC), which has issued guidance on PL 86-272 for decades. The Wayfair decision’s upending of decades-old nexus precedent intensified awareness of PL 86-272 and gave state revenue agencies the idea that decades-old limits to corporate income tax imposition also might be updated, either by new federal legislation or jurisprudence. 

The MTC’s Uniformity Committee foresaw this state-level response when it issued a proposed revision to its 1986 guidance statement on PL 86-272 (adopted by several states and reflected in their income tax laws) a few months after the Supreme Court issued its Wayfair ruling in 2018.

Last year, the Uniformity Committee continued to reshape its current guidance on PL 86-272, including its applicability to e-commerce transactions, through its formal review and revision process. (You can find all of the MTC’s work and reports on the law here.) 

Keep in mind that the MTC does not possess any regulatory authority. While many state income tax laws and rules reflect MTC guidance, they are not required to do so – which makes this issue important to monitor, especially for tax teams within companies that sell goods in multiple states. Those organizations may be facing higher income taxes and related compliance costs.

On that score, it’s notable that states like Hawaii are moving to establish a new corporate income tax economic nexus threshold that counters longstanding PL 86-272 protections. (It’s also a bit ironic or fitting; I can’t figure out which: President Eisenhower signed the bill that made Hawaii a U.S. state in – you guessed it – 1959.)