The House Judiciary Committee, as part of the overall budget reconciliation process, has added a provision to their bill that would make modifications to Public Law 86-272, which would serve to broaden the definition of solicitation of sales and thus limit a state’s ability to impose an income tax on an out of state entity, it was reported by Amy Hamilton in Tax Notes Today Federal.[^1] The 1959 law has never been amended by Congress since it was originally enacted.

If the Interstate Commerce Simplification Act of 2025 (H.R. 427) is enacted into law as written, it would change the states’ ability to impose a net income tax on out-of-state entities primarily by expanding the definition of "solicitation of orders" under Public Law 86-272.

Here’s a breakdown of the changes and their potential impact:

Current Law (P.L. 86-272): P.L. 86-272 limits the power of states to impose a net income tax on income derived from within the state from interstate commerce if the only business activity within the state is the solicitation of orders for the sale of tangible personal property. This is provided that the orders are approved (or rejected) and filled by shipment or delivery from outside of the state. The Supreme Court’s interpretation in Wisconsin Department of Revenue v. William Wrigley, Jr., Co. defined "solicitation of orders" to include activities "strictly essential" to making requests for purchases and "entirely ancillary" activities. The Court specifically explained that "entirely ancillary" activities are those that serve no independent business function apart from their connection to the soliciting of orders. This interpretation has been the subject of growing disagreement regarding its application to modern business activities, including internet interactions.
Proposed Change by H.R. 427: H.R. 427 specifically proposes to amend Section 101(d) of Public Law 86–272. The bill would add a new paragraph (3) to define "solicitation of orders". Under H.R. 427 as introduced, the term "solicitation of orders" would mean any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.
Impact on State Taxation Authority: This expanded definition directly contrasts with the Wrigley interpretation that excluded activities serving an "independent business function" from being considered "entirely ancillary" to solicitation. By broadening the definition of "solicitation of orders" to include activities that facilitate solicitation even if they have an independent value, the bill would bring a wider range of in-state business activities under the protection of P.L. 86-272 tax immunity. Consequently, an out-of-state seller could perform more types of activities within a state without losing the immunity from the state’s net income tax, thus limiting a state’s authority to impose such a tax based on those activities.

In summary, H.R. 427, introduced on January 15, 2025, and referred to the House Committee on the Judiciary, aims to simplify interstate commerce taxation by codifying a broader definition of "solicitation of orders", thereby potentially reducing the circumstances under which states can impose a net income tax on out-of-state businesses involved in interstate commerce.

The provision is not law at this point, but advisers with businesses that solicit sales in multiple states should keep a close watch on the progress of this proposal in the reconciliation process.

Prepared with assistance from NotebookLM.

[^1]: Amy Hamilton, “P.L. 86-272 Expansion Added to Federal Reconciliation Component,” Tax Notes Today Federal, May 1, 2025, https://www.taxnotes.com/tax-notes-today-federal/jurisdiction-tax/p.l-86-272-expansion-added-federal-reconciliation-component/2025/05/01/7s4b7 (retrieved May 1, 2025, subscription required)