Tax Law

Turf Battle: P.L. 86-272 Changes Opposed on States Rights Grounds

On September 14, 1959, the federal government responded to the need for a uniform standard of income tax imposition by the states by enacting Public Law 86-272 as part of the United States Code. The law, which prohibits states from imposing net income taxes unless a taxpayer has substantial nexus with that state, has set a bright line standard for tax imposition for nearly half a century. 
 
In that past 49 years, though, the economy has changed a great deal. And in response to economic changes (and sometimes falling revenue streams), the states have enacted different types of taxes, which have imposed greater tax burdens on many businesses with fewer and less substantial connections to the taxing state. With the advent of certain types of business activity taxes, which may or may not fall within the purview of 86-272, some businesses have found themselves with nexus to states where they have barely any economic presence at all.
 
Currently, proposed legislation (the “Business Tax Simplification Act of 2008”) makes changes to P.L. 86-272 (15 U.S.C. 381, et seq.) that would expand the law to include business activity taxes, i.e., any taxes “in the nature of a net income tax or tax measured by the amount of, or economic results of, business or related activity conducted in the State.” Similar legislation, which had been proposed in recent years, fell victim to both inertia and opposition from several sources, not the least of which has been the states, many of which believe that they will be unjustly deprived of revenues that are rightfully theirs. The National Governor’s Association states in its policy positions that the Association opposes “any further legislative restrictions on the ability of states to determine their own policy on business activity or corporate profits taxes. This is an issue of state sovereignty. The U.S. Constitution adequately protects the interests of both states and business.”
 
Although it seems unlikely that we’ll have any legislation passed to address this issue in the near future, perhaps the issue of standardization of nexus for purposes of business activity taxes will be resolved before the half-century mark for 86-272.
  • Recently, our firm has noticed several clients have been receiving notices from various states. These notices request the client to complete a nexus questionnaire. We have noticed that clients are being blindsided by a few rogue states that have decided to pass laws to circumvent Public Law 86-272. Clients who thought their activities in a state were protected by federal law are finding that states can circumvent the law as passed by our Congress to impose taxes upon them, when their activities in that state are trivial.

    Public Law 86-272, enacted in 1959, was intended to protect companies from unfair taxation. In 1959, Senator Harry F. Byrd of Virginia expressed the Senate''s rationale for the rush in passing a law prior to further study of the issues:

    Unless immediate action is taken at this time, it is feared that the States will amend their laws to further encroach upon interstate commerce. - Cong. Rec., August 19, 1959.

    It appears to me that Senator Byrd''s fears have come true.

    It is my understanding that for the last two to three years a business acitivity simplification act has been introduced in the House of Representatives. It is also my understanding that bills introduced in 2007 and in 2008 have gone nowhere.

    In your opinion, do you see any legislative help from Congress related to a bright line test or a simplification of state tax regime to be passed in the near future?

    Do you know if there is any pending or current legislation against rogue states that have decided to circumvent the law as passed by Congress?

  • Actually, with the start of the 2009 legislative session, once again the Business Activity Tax Simplification Act (BATSA) has been reintroduced (Feb. 13, 2009). The reintroduced legislation provides that the protections that apply to multistate taxpayers under P.L. 86-272 with respect to taxes on net income would be expanded to include business activity taxes.  The law would prohibit states from imposing business activity taxes on taxpayers unless those taxpayers had physical presence in the state for at least 15 days during the tax year.  Protected activities would continue to include solicitations and those activities that are incidental to solicitation activities. Protected activities would also be expanded to include additional activities such as furnishing information or gathering information in a state that is disseminated outside the state. Although the BATSA has not seen much success in past years, the newly introduced legislation leaves the door open.  Stay tuned!

  • Hi Susan, I am interested in knowing why the BATSA failed in prior years and what changes have been made for this session. Could you suggest a good article or where I can find the legislative history or comments surrounding the Act?