Operating a business across multiple states means navigating a complex web of tax obligations—sales tax in states where you have customers, income tax where you maintain operations, and employment tax wherever your team works. But state taxation authority isn't unlimited. The U.S. Constitution's Commerce Clause establishes federal limits on when and how states can tax interstate business activities.
Understanding these constitutional protections helps businesses distinguish between legitimate tax obligations and state overreach. The framework matters because crossing a state's valid nexus threshold creates immediate compliance obligations, while improper tax assertions can be challenged.
The Supreme Court's 1977 decision in Complete Auto Transit, Inc. v. Brady established the four-prong test that every state tax must satisfy to comply with the Commerce Clause. All four requirements must be met—failing any single prong makes the tax unconstitutional.
Substantial nexus requires a meaningful connection between your business and the taxing state. Before 2018, this meant physical presence—offices, inventory, or employees. The Wayfair decision changed everything by allowing states to assert nexus based purely on economic activity like sales revenue.
Fair apportionment ensures states only tax the portion of your income or activities fairly attributable to their jurisdiction. When your business operates in ten states, each state can only tax its proportionate share. Without proper apportionment, you'd face double or triple taxation on the same income.
Non-discrimination prohibits states from imposing higher taxes on out-of-state businesses or providing exemptions exclusively to in-state companies. The Commerce Clause demands equal treatment regardless of where your business is headquartered.
Fair relation to services requires that taxes bear a reasonable relationship to the benefits the state provides — court access, infrastructure, police protection, educated workforce. Courts give states substantial deference on this prong, and it's rarely violated in practice.
Public Law 86-272, enacted by Congress in 1959, provides protection beyond what the Commerce Clause requires. This federal statute prohibits states from imposing net income taxes on businesses whose only in-state activity is soliciting orders for tangible personal property.
The statute's three conditions must all be satisfied for protection:
Meeting these criteria prevents state income taxation even when a substantial nexus exists under Commerce Clause standards.
Critical limitations undermine P.L. 86-272's applicability to modern businesses. The law protects only tangible personal property sales — not services, digital products, software, or most contemporary business models. Activities beyond pure solicitation — such as providing customer training, performing repairs, installing equipment, or maintaining inventory — eliminate protection. Administrative or management activities conducted in-state also remove P.L. 86-272 coverage.
States interpret P.L. 86-272 narrowly to maximize their taxation authority. The Multistate Tax Commission provides guidance aimed at clarifying protected versus unprotected activities; however, significant ambiguity remains. Businesses can't rely on P.L. 86-272 protection without carefully analyzing whether their activities fall within its narrow scope.
Discern helps businesses manage multi-state compliance by providing comprehensive registered agent services, automated compliance tracking, and expert guidance across all 51 jurisdictions. Our platform ensures you maintain proper registration where constitutionally required while providing visibility into compliance obligations as they arise.
Ready to streamline your multi-state compliance? Book a demo with Discern today.
.png){kind=small}