Federal law may protect remote sellers from state net income taxes
Public Law 86-272
Known today as Public Law 86-272, Congress enacted the Interstate Income Act in 1959 in response to two U.S. Supreme Court cases allowing states to impose net income taxes on businesses with limited in-state activity.1 P.L. 86-272, in relevant part, provides the following:
No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).
Fast forward 70 years and there is far different business landscape and legal environment for business than there was in 1959. The South Dakota v. Wayfair case in 2018 now allows states to levy sales and use taxes on remote sellers regardless of whether they have an in-state physical presence. So long as remote sellers have a threshold number of in-state transactions or amount of revenue generated from in-state consumers, they could trigger use tax collection duties.
Know Your Rights
The Stanislaus case demonstrates that state taxing authorities including the New Jersey Department of Revenue can take aggressive positions when levying taxes, particularly with the wind at their backs following the 2018 Wayfair decision. Businesses that may be subject to sales and use tax obligations under economic nexus standards following pre-or-post-Wayfair state tax legislation should nonetheless consider their rights and protections from net income taxes under P.L. 86-272.
1 See, Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959); Brown-Forman Distillers Corp. v. Collector of Revenue, 234 La. 651, appeal dismissed, 359 U.S. 28 (1959).