What’s Next for the Evolution of Public Law 86-272?

By Stefi George and David Blum on Posted in Digital Tax, E-Commerce, Income Tax

For over 65 years, Public Law 86-272 has dictated a state’s ability to assert income tax on an out-of-state business. While the 1959 federal law predated the emergence of e-commerce and digital services and could not have anticipated the way businesses would operate today, P.L. 86-272 has nonetheless remained the law of the land.

P.L. 86-272 was enacted to protect out-of-state businesses from state overreach. The law prevents states from imposing income tax on income derived within the state from interstate commerce if the only activity performed in the state is the solicitation of orders of tangible personal property. While this statute was relatively easy to apply to commercial transactions in the 20th century, the explosion of e-commerce and the internet has changed the calculus, making it difficult to navigate for businesses soliciting over the internet.

The 2021 MTC Statement

In 2021, the Multistate Tax Commission (MTC) acknowledged this problem and developed a model statement to provide guidance specifically for internet businesses interpreting P.L. 86-272. The statement asserts that, generally, “when a business interacts with a customer via the business’s website or app, the business engages in a business activity within the customer’s state.” The MTC statement provides examples of internet activities (such as certain cookies or chat and email assistance) that self-servingly are deemed unprotected activities under P.L. 86-272.

Several states have since adopted rules that are consistent with the MTC’s position, and almost instantly have been hit with legal challenges. For instance, a New York court recently issued a decision upholding a New York regulation adopting the MTC’s interpretation.[1] The court did strike down the retroactive application of the regulations, but held that P.L. 86-272 did not restrict the state from determining and regulating which internet activities exceed mere solicitation in the state. Which begs the question of whether such regulations can exceed the scope of a law, especially a federal law designed to limit a state’s overreach.

While the court upheld New York’s narrow interpretation of P.L. 86-272 with respect to internet activities, it remains unclear whether such a position will prevail in all states (or if the New York decision will be upheld if appealed). There is significant uncertainty whether and to what extent e-commerce businesses can avail themselves of P.L. 86-272 protections. 

Ultimately, a federal amendment may be necessary to clarify how to interpret the law in the internet age.

A Federal Proposal

Slipped into the reconciliation bill recently passed by the House is a proposal to do just that. The proposed language would amend P.L. 86-272 to expand the definition of “solicitation.” The House Judiciary Committee’s text would define the term to include “business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.” 

The federal amendment would appear to significantly broaden the protection afforded to businesses under P.L. 86-272, further curtailing the ability of states to tax out-of-state businesses. 

What Lies Ahead for P.L. 86-272?

At this time, it is not entirely clear from the language in the bill what would or would not be covered. The proposed revisions do not specifically address internet activities. Further, the bill is now before the Senate, where it may undergo further changes — or be stricken altogether — before the reconciliation process is complete. 

A federal amendment to P.L. 86-272 is long overdue, and bringing the statute into the 21st century would be a positive development for taxpayers and states alike. However, reconciliation may not be the best vehicle for such an amendment, especially since the amendment is revenue neutral from a federal perspective. Modernizing the law would be most effective after soliciting and incorporating comments from interest groups, and any revisions should also provide guidance for internet businesses. Thoughtful revisions to P.L. 86-272 would go a long way to providing clarity for businesses, and, if nothing else, the proposal in the reconciliation bill could bring renewed attention to an issue that has often been overlooked by Congress.

[1] Am. Catalog Mailers Ass’n v. Dept. of Taxation Finance, N.Y. Sup. Ct., No. 903320-24 (4/28/25).

A “Source” of Consternation? The Taxation of Telecommunications Companies in Florida

By Michael Bowen and Lorie Fale on Posted in Apportionment, Florida, Income Tax, Telecommunications

Like many states, Florida’s corporate income tax regime has special rules applicable to telecommunications companies. The tricky part about taxing the telecommunications industry is how to source receipts earned from providing interstate telecommunications services. Put differently, when is a state permitted to tax an interstate phone call?

For corporate income tax purposes, the only receipts sourced to Florida are those relating to a “Florida sale.” What comprises a “Florida sale” depends on the nature of the taxpayer’s business. Florida’s unique sourcing provision relating to telecommunication companies is found in Fla. Admin. Code r. 12C-1.1055(2)(g) (the “Telecom Rule”). With respect to interstate communications, the Telecom Rule defines a “Florida sale” to include all receipts where “the communication originates or terminates in Florida and the bill is charged to a Florida telecommunications number or device, Florida telephone number or telephone, or Florida customer.” Although the Telecom Rule raises several constitutional issues, the focus of this post relates to the test for “internal consistency” under the Commerce Clause.

The U.S. Supreme Court has long made clear that a state tax must be fairly apportioned in order to survive scrutiny under the Commerce Clause. What that means is that a state can only tax its fair share of the receipts earned by a multistate business. If a state’s tax law seeks to tax more than its fair share, the applicable tax is not fairly apportioned and will be struck down as violating the Commerce Clause. One test for determining whether a state tax is fairly apportioned is the test for internal consistency. 

As recently reiterated by the Court in Comptroller of Maryland v. Wynne, a state tax fails the internal consistency test if its application by every taxing jurisdiction would cause a taxpayer engaged in interstate commerce to pay more in taxes than a similarly situated taxpayer conducting business solely intrastate. In other words, does a taxpayer pay more in state tax solely because it conducts business across state lines? The Florida Telecom Rule raises serious questions under the test for internal consistency.

Consider a straightforward example. Maria, is a Florida resident but has cell phone with a Georgia telephone number. Maria places a call to her friend Jim, a Georgia resident. Jim’s cell phone has a Georgia area code assigned to it. If every state applied Florida’s Telecom Rule, both Florida and Georgia would source 100% of the receipts from the same call. Florida would claim that 100% of the receipts as a “Florida sale” because the call originated in Florida and the bill is charged to a Florida customer. Applying the same law in Georgia, Georgia would claim that 100% of the receipts as a “Georgia sale” because the call terminated in Georgia and the bill is charged to a Georgia telecommunications number. This simple example is hardly unique and outlines just one of the many ways that the Telecom Rule poses challenges under the test for internal consistency. Those familiar with the holding in Goldberg v. Sweet may question the vulnerability of the Telecom Rule to a constitutional challenge. Among other distinctions, however, what saved the Illinois law in Goldberg was the inclusion of a credit provision. Specifically, Illinois law permitted the taxpayer a credit against the Illinois tax for tax paid to any other state on the same telephone call. The Telecom Rule contains no such credit mechanism. Consternation indeed.

Taxing the Intangible: Applying Conventional Definitions to Modern Digital Products

By Joshua Hamlet and Stefi George on Posted in Colorado, Digital Tax

In an ongoing battle against Netflix Inc., the Colorado Department of Revenue has argued that the historical definition of “tangible personal property” is sufficiently broad as to encompass digital goods — including streaming subscriptions.[1] The case, currently in the Colorado Court of Appeals, raises fundamental questions about the application of outdated legal definitions to the modern digital economy.

At the heart of the dispute is a 1933 edition of Black’s Law Dictionary, which the State relies upon for its position that tangible property includes anything “perceptible by the senses.” Colorado argues that because streaming content is seen and heard, it falls within the scope of tangible personal property and is thus taxable under the state’s sales tax law. Netflix, on the other hand, contends that its streaming service merely grants access to content rather than transferring a physical product — a distinction that has long separated services from taxable goods for sales tax purposes. A district court ruled in Netflix’s favor last year, but the state is pursuing an appeal.

Colorado’s interpretation would expand the concept of “tangible” beyond its conventional meaning. Equating digital accessibility with physical ownership could blur the lines between services and goods in ways that ripple well beyond streaming subscriptions. Of course, when the definition was adopted in 1933, no one could have envisioned this application in today’s digital world. 

The Broader Implications for Businesses

Application of archaic definitions to today’s businesses is a significant challenge in sales tax. Colorado’s approach in the Netflix case highlights a concern that many digital businesses face as they try to determine how to interpret and comply with outdated statutes and definitions. 

The Netflix case is not just a dispute over semantics; it reflects a broader trend of states pushing the limits when it comes to digital services. Taxation should evolve with the economy, because when it does not, it becomes increasingly difficult for companies to properly determine their tax obligations. Forcing digital transactions into frameworks designed for a world of physical goods creates confusion and uncertainty for businesses.

Looking Ahead

States are constantly looking for new revenue streams, and digital goods can be a significant revenue source. The surge in remote work, online entertainment, and e-commerce has shifted economic activity away from traditional taxable goods. While many states have approached digital products by broadening the scope of services that are covered under their sales tax regimes, others have attempted to reinterpret and stretch the definition of tangible personal property to capture modern business operations.

Regardless of the ultimate result in the Netflix case, digital businesses should be prepared to address expansive interpretations of “tangible” property. With the evolving landscape of digital taxation, businesses must stay informed, as these interpretations can have unanticipated implications for their operations.

[1] Netflix Inc. v. the Department of Revenue for the State of Colorado, et al., Case Number 2024CA1019, Colorado Court of Appeals

It’s None of My Business! Arkansas Court Rules on Business v. Non-Business Income Distinction

By Michael Bowen on Posted in Apportionment

Income received by a multistate business is either “business income” or “non-business income.” Although this labeling appears innocuous, the distinction between these two categories of income matters greatly to taxpayers and state departments of revenue alike. While business income is apportionable to the various states in which the taxpayer conducts business, non-business income is allocable to the taxpayer’s state of domicile. Given the all-or-nothing result of a non-business income determination, many a state controversy stems from this definitional tug of war. 

In United States Beef Corporation v. Walther, the issue was whether the capital gain received by the taxpayer from the sale of its Arby’s and Taco Bueno franchises was business or non-business income under the laws of Arkansas. The facts of the case were that the taxpayer, domiciled in Oklahoma, received unsolicited offers to purchase the franchises. The franchises operated in several states, including Arkansas. Following the sale of the franchises, the taxpayer liquidated its business. The taxpayer argued that the capital gain was non-business income because it was in the business of acquiring and operating franchises, not disposing of them.

The result in the case turned on the definition of business and non-business income under Arkansas law. The definition of “business income” included “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” “Non-business” income was defined as income that is not “business income.” The court, applying prior precedent, made clear that whether income is business or non-business income is dependent on the application of the “transactional test” and “functional test.” The parties had stipulated that the transactional test was not an issue in the case. Thus, the court’s analysis was focused on the “functional test.”

The court explained that the income is “business income” under the functional test “if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” In the factual context of the case, the court framed the issue as whether the taxpayer was in the business of acquiring, managing, and disposing of the franchises. There was no question that the taxpayer had long been in the business of acquiring and managing franchises. However, the court held that the taxpayer was not in the business of disposing of franchises. As a result, the court determined that the capital gain was non-business income allocable to Oklahoma, the state of the taxpayer’s domicile. It is important to highlight that states differ on how they define the distinction between business and non-business income. Despite the fact that many share the same statutory language derived from the UDITPA, the analytical approaches vary widely. Some states rely solely on the transactional test while others, like Arkansas, employ both tests. Within each of these categories lies a spectrum of how broad or narrow the relevant test(s) is applied. Care must be taken to closely consider the laws of the several states in which a taxpayer does business. What is “business income” in one state may very well be “non-business” income in another.

Maryland’s High Court Hands the State a Big Win in its Digital Ad Tax Dispute, More Challenges to Follow

By David Blum and Stefi George on Posted in Digital Tax, E-Commerce, Maryland, Sales Tax

Last fall, when a Maryland County Circuit Court held that the Maryland Digital Ad Tax violated the dormant commerce clause, the supremacy clause, the Internet Tax Freedom Act, and the First Amendment of the U.S. Constitution, most of the tax world anticipated that the Maryland Comptroller would promptly appeal the ruling, which it did.  The State argued that the Circuit Court’s decision must be reversed because the plaintiffs had not properly exhausted their administrative resources prior to bringing the lawsuit, as required under state law. 

On May 9, 2023, the Maryland Supreme Court, in a per curiam opinion, handed the State of Maryland a major victory, only days after hearing oral arguments.  The Maryland Supreme Court held that the Circuit Court did not have jurisdiction in the first place because the plaintiffs did not exhaust their administrative remedies, and vacated the lower court’s October 2022 ruling.  In a somewhat unusual move, the Court rendered its decision in summary form and indicated that an opinion explaining its reasoning would be forthcoming, so there will be more to unpack in the future.  But in the short term, what does this procedural decision mean for the Digital Ad Tax and SALT law more broadly?    

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What’s Next For Maryland’s Digital Advertising Tax?

By Stefi George, David Blum and Chelsy Lutz on Posted in Digital Tax, Maryland, Sales Tax

Maryland’s controversial Digital Advertising Gross Revenues Tax (the “Digital Ad Tax”) recently shot back to the top of the headlines when Maryland Circuit Court Judge, Alison Asti, ruled from the bench that the tax is unconstitutional and violates the federal Internet Tax Freedom Act (“ITFA”). Judge Asti ruled in favor of Verizon and Comcast that the Digital Ad Tax violates the ITFA, the First Amendment and the Commerce Clause due to its selective taxation, and the fact that it is not content neutral.

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Illinois DOR Proposes to Change Income Tax Liability for Businesses that Make Sales to Foreign Countries

By Lauren Ferrante and David Blum on Posted in Illinois, Income Tax

The Illinois Department of Revenue (“IDOR” or “Department”) recently issued a Notice of Proposed Amendment to amend its Regulation (86 Ill. Admin. Code § 100.3200) governing the “throwback” and “throwout” apportionment provisions (the “Amendments”). 46 Ill. Reg. ___ (Apr. 15, 2022), at 5856. If adopted, the Amendments would change the Illinois income tax burden imposed on a business by altering the business’ apportionment with respect to sales made into certain foreign countries. Continue Reading

Sirius XM Prevails in Texas Supreme Court on Sourcing of Receipts from Satellite Signal

By Lauren Ferrante and David Blum on Posted in Texas

In a recently issued taxpayer-favorable opinion, the Texas Supreme Court overturned the court of appeals’ decision holding that the state’s performance-based sourcing statute for service receipts essentially looks to customer location.  The Court, relying on the statute’s plain language, then affirmed the taxpayer’s methodology, which sourced its receipts to the location where the taxpayer’s performance occurred.  Sirius XM Radio, Inc. v. Comptroller, no. 20-0462 (Tex. Mar. 25, 2022) (“Sirius Op.”). Continue Reading

Texas Supreme Court Rejects Texas Comptroller’s “Receipt-Producing, End-Product” Act Test for Sourcing Receipts from Services

By Montaye Sigmon and David Blum on Posted in Texas

On March 25, the Texas Supreme Court issued a highly-anticipated decision concerning the proper test to source receipts from services for purposes of Texas franchise tax. By statute, receipts from a “service performed in this state” must be sourced to Texas, as the first step in calculating the amount of franchise tax owed by a service provider. See Tex. Tax Code § 171.103(a)(2).

The primary issue before the Court was whether Sirius XM’s receipts from Texas subscribers were receipts from a “service performed in this state.” Sirius XM contended they were not; the Comptroller disagreed and took the position that all subscription receipts from subscribers in Texas must be sourced to Texas. Continue Reading

Louisiana Launches Unique State Transfer Pricing Initiative

By Stefi George on Posted in Indiana, Louisiana, North Carolina, Transfer Pricing

Joining Indiana and North Carolina, Louisiana last week became the third state to offer an alternative to the burdensome and expensive process of enduring a state transfer pricing audit.

The Louisiana Department of Revenue announced a short-term voluntary initiative (the “Louisiana Transfer Pricing Managed Audit Program”) for taxpayers to come forward to resolve intercompany state transfer pricing issues. The program is open from November 1, 2021 through April 30, 2022 and, according to the Department’s Revenue Information Bulletin announcing the program, is “aimed at proactively and efficiently resolving intercompany transfer pricing issues.” Continue Reading

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