Back in 2013, Uline Inc., a Wisconsin-based shipping products business, closed its branch in Minnesota. As Uline no longer had any physical office, warehouse, or distribution center in Minnesota, nor did it lease any physical property in the state, the company concluded it no longer had reason to pay corporate income tax to Minnesota.
Uline was justified in believing this. Federal law, the Interstate Income Act of 1959 (also known as P.L. 86-272), prohibits states from assessing income tax obligations on remote businesses whose only activity within the state is the “solicitation of orders” when those orders are subsequently fulfilled from a point outside the state. This law was intended to protect all businesses from facing state income tax obligations all around the country merely because they sell products into other states.
Unfortunately, over the years, state tax administrators have reinterpreted the phrase “solicitation of orders” to be so narrow and limited as to make the underlying law almost meaningless. While a reasonable person would understand the law to cover all activities involved in solicitation of orders as the act of solicitation itself, many states have taken it upon themselves to assume that any activity in a state that does not involve actively attempting to get a customer to purchase products is unprotected by P.L. 86-272.
Uline found that out the hard way when in 2017 Minnesota claimed that Uline owed back taxes for taxes it had not paid since the company left the state in 2013. Minnesota’s Department of Revenue threw the book at Uline, claiming that everything from a company co-owner’s Minnesota residence to the presence of Uline representatives at Minnesota-based job fairs forfeited P.L. 86-272 protections for Uline. In 2023, the Minnesota Tax Court disagreed with the Department of Revenue on nearly every single basis that the state tried to use to claim that Uline had nexus in the state — all except one.
The one activity the Minnesota Tax Court decided was not protected by P.L. 86-272 was the practice of Uline sales representatives collecting information about competitors’ practices and reporting on them to corporate headquarters in the form of written “Market News Notes.” It is difficult to imagine a situation in which sales representatives did not pick up information about competitors in the course of their sales activities, but Minnesota’s Tax Court nevertheless decided that this exceeded the scope of “solicitation of orders.”
And Minnesota isn’t the only state pushing the envelope on what is already becoming close to a dead letter. The Multistate Tax Commission (MTC), an intergovernmental agency that aims to promote uniformity among state tax departments, came out in 2022 with a statement listing activities it believes to be outside the scope of P.L. 86-272 — a list that collectively would place nearly every business outside the law’s protections. Activities the MTC argued were unprotected include:
Offering post-sale customer service through electronic means, such as email or online chat
Offering automatic software updates
Selling digital goods, such as software or streaming services
Posting job openings and receiving resumes and applications through the business’s website
Using “digital cookies” to streamline customers’ browsing experience
While states have been using creative interpretations of P.L. 86-272 like Minnesota’s to impose business income tax obligations on remote businesses for years, the MTC’s effort would effectively represent the final nail in the coffin. But as states have been seeking to further undermine P.L. 86-272, the expansion of the digital marketplace has only made the law more important.
Fortunately, Rep. Scott Fitzgerald (R-WI) has stepped forward to address the problem with H.R. 8021: a short bill, but one that would have a significant impact for small businesses being bombarded with letters claiming that their remote sales are taxable in states around the country. H.R. 8021 would simply clarify the phrase “solicitation of orders” to note that it includes businesses activities that facilitate the solicitation of orders as well.
Rep. Fitzgerald’s bill would go a long way towards forcing states to operate within P.L. 86-272’s spirit, and not just the narrowest possible protection of taxpayers in the original text. Congress has for too long allowed states to distort this important protection for interstate commerce that allows small businesses to function without armies of accountants, but H.R. 8021 would represent a crucial first step towards reversing that trend.