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“Is It Gonna Be Forever, Or Is It Gonna Go Down in Flames?”

November 1, 2023

Jennifer Karpchuk and Masha Yevzelman’s article, “Is It Gonna Be Forever, Or Is It Gonna Go Down in Flames?” in Tax Notes State

Tax Notes State

In an article published in Tax Notes State on October 30, 2023, Philadelphia-based Shareholder and S.A.L.T. Practice Co-Chair Jennifer Karpchuk and Masha Yevzelman, shareholder in the Minneapolis office of Frederickson & Byron PA, examine Public Law 86-272 and states’ increasing attacks on it in recent years. 

The first three paragraphs of the article are included below with permission from the publication. To read the full article, subscribers may click here.

For more than 60 years, taxpayers have relied on Public Law 86-272, a federal law that protects companies from income tax liability in states where the taxpayers’ in-state activities are limited to soliciting sales of tangible personal property, with the orders being approved and shipped from out of state. In enacting P.L. 86-272, Congress exercised its affirmative commerce clause power and, in such limited circumstances, sought to protect taxpayers by reducing the tax compliance burden on companies operating across many states throughout the country. Since 1959, the text of P.L. 86-272 has remained unchanged, yet the attacks by states upon the law have increased—most notably in recent years.

The states’ attacks are understandable because P.L. 86-272 offers an enormous benefit to those taxpayers able to fall within its protections: no income tax in that state. Thus, there are competing interests related to P.L. 86-272. Taxpayers want to interpret it as broadly as possible to fall within its scope, while state tax authorities want to interpret it as narrowly as possible to limit the pool of taxpayers able to claim its protection.

Unfortunately, there is limited federal administrative guidance about the meaning and scope of P.L. 86-272. Because it was enacted by Congress, there are no interpreting regulations or private letter rulings; the federal law is not part of the Internal Revenue Code and does not otherwise delegate authority to any federal agency. Thus, no federal agency and no state has the ability or authority to modify or clarify P.L. 86-272. Because it is a federal law, it preempts state law under the supremacy clause. Any guidance issued by states therefore has limited value. The only way for taxpayers or states to conclusively ascertain the law’s meaning is through litigation.