Could Congress Modernize State Income Tax Rules for the Digital Economy? 

Businesses that sell across state lines rely on Public Law 86-272 to figure out whether a state can tax their income. But that law is old. It was written in 1959, long before cloud computing, SaaS, digital products, or e-commerce existed. 

A new federal bill wants to fix that gap. It’s called the Business Activity Tax Simplification Act, or BATSA, and Rep. Harrigan introduced it in the current Congress. The bill would expand PL 86-272 and set one clear physical presence standard for state business activity taxes. It hasn’t passed yet. But if it does, it could reshape how multistate businesses think about state income tax altogether. 

Why Now? 

Public Law 86-272 protects businesses in a narrow way. A state can’t tax an out-of-state company if that company’s only in-state activity is soliciting orders for tangible goods. Those orders must be approved and shipped from outside the state. 

That rule made sense in 1959. It doesn’t fit today’s economy, where companies make money from digital products, cloud services, and remote software access that the old law never saw coming. 

States have noticed the gap too, and some have gotten aggressive about it. They argue that things like website cookies or customer portals go beyond what PL 86-272 protects. That creates nexus where none existed before. BATSA tries to draw clearer lines around all of this. 

What the Bill Would Actually Do 

It covers digital business, not just physical goods. Right now, PL 86-272 only protects tangible personal property. BATSA would expand that to digital goods, digital services, software delivered electronically, cloud computing, and data processing. For SaaS companies, this is the huge change and would give them much clearer footing of where they owe income tax. 

It sets one physical presence standard for every state. Under the bill, a state generally can’t tax a company’s income unless that company is physically present there. The bill spells out what counts: 

There’s also a short-stay exception. Spend fewer than 15 days in a state during the tax year, and it generally won’t count as presence. 

Why This Matters for Multistate Businesses 

BATSA is still just a proposal. But it shows Congress is paying attention. If the bill passes, here’s what businesses should follow:

One thing to keep in mind: this bill only touches income tax and similar business activity taxes. It leaves sales and use tax alone. The economic nexus rules that came out of the Wayfair decision would stay exactly as they are.

What Should Businesses Do in the Meantime? 

Nothing has changed yet. Keeping following current nexus rules and existing PL 86-272 guidance would be the best idea. 

If your company sells digital products or services across state lines, take a fresh look at your income tax position now and watch how this bill moves. Federal legislation can crawl along for years or die quietly.  

Final Thoughts 

BATSA is the latest attempt to update a tax law from 1959. Earlier versions of this bill have stalled before. But it’s a good reminder that multistate digital taxation is still an unsettled area of law. 

At Leyton, our State and Local Tax (SALT) team helps businesses sort through exactly this kind of complexity. We evaluate nexus exposure, assess multistate income tax risk, and track legislative changes like this one. Staying informed now means less risk later.