Definition
Public Law 86-272, codified at 15 U.S.C. 381, prevents a state from imposing a net income tax on income from interstate commerce when the only business activity in the state is solicitation of orders for sales of tangible personal property. The orders must be sent outside the state for approval or rejection, and, if approved, filled by shipment or delivery from outside the state. Independent contractors may solicit and maintain an in-state office without defeating protection. It covers net income taxes only, not sales tax or gross receipts taxes, and it does not cover services.
Why it matters in an audit or review
Management may take the position that no state income tax return is required in states where the company only sells goods. Auditors evaluate whether activity went beyond solicitation, such as installation or repair, and whether an uncertain tax position is needed.
Example
Illustrative: a manufacturer's sales representatives visit customers in State B and send orders to headquarters, which approves them and ships from another state. The protection can apply. If the same representatives also repair equipment on site, the activity goes beyond solicitation and the protection may be lost.
Common mistakes
- Assuming protection applies to a company that sells services or software.
- Treating the law as protection from sales tax.
Sources
- 15 U.S.C. 381: https://www.law.cornell.edu/uscode/text/15/381
- Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error