Should a company protected by P.L. 86-272 still file state returns?
Edvin Givargis Published 10 minute read
The short answer
There is no single right answer, and that is the point of the analysis. A multistate seller that concludes it is protected from a state's net income tax under Public Law 86-272, or that it has no nexus there at all, faces a genuine choice between filing a return that discloses the protected position and reports no tax due, and simply staying out of the state. Filing starts a statute of limitations that otherwise never begins to run, cheap insurance against a later, broader reading of the statute reaching back across every open year. Filing can also read as a step toward submission to a state's taxing authority, can trigger minimum taxes or fees P.L. 86-272 does nothing to prevent, and adds a compliance obligation in every state where it becomes blanket practice. The choice belongs at the state level and should be documented and revisited, not defaulted into.
What a protective return is, and what it is not
A protective return, in this context, is a return filed in a state where the company has concluded that it owes no tax, either because its activities are protected by P.L. 86-272's solicitation shield or because it lacks nexus under the Due Process and Commerce Clause standards more generally. The return discloses the position rather than concealing it: it identifies the company, describes or attaches enough information about the in-state activity to show why the company believes it is not taxable, and reports zero tax due or, where the state imposes one, the flat minimum tax or fee that attaches independent of net income. The return is not a concession that tax is owed. It is a statement, made to the state and dated, of the position taken and the facts it rests on as of the year filed.
That is a different instrument from a protective refund claim, and the two are easy to conflate because both use the word protective for preserving a right rather than exercising one. A protective refund claim is filed by a taxpayer that has already paid tax, typically because an unsettled legal question, a pending case, or a contested apportionment methodology might later show that less tax was owed than was paid, and the claim asks the state to hold the refund right open pending resolution. A protective return runs the opposite direction: the taxpayer has not paid and is not filing to get money back, but to establish a record and start a clock in a state where it believes no filing obligation exists at all. The refund claim assumes taxability and challenges the amount; the protective return denies taxability and files anyway.
The case for filing
The strongest argument for a protective return is procedural, not substantive, and it turns on how state statutes of limitations work. In most states, the period during which the revenue department can examine a return and assess additional tax runs for a fixed number of years, but only from the date a return for that year was filed. A taxpayer that never files for a given year generally has no return to start that clock, and many states' assessment provisions say so directly: without a filed return, the limitations period simply does not begin. A state that later concludes, years afterward, that a company had nexus all along is not limited to the last three or four years; it can reach back to the first year nexus existed, because no year ever closed. A filed return, even one reporting zero tax due on a disclosed protected position, starts the clock in the states whose statutes tie the assessment period to the filing date, and once that period lapses, the earliest years are closed regardless of what the state later decides about the underlying position.
That protection has become more valuable as the interpretation of P.L. 86-272 itself has moved. The statute's text, protecting solicitation of orders for tangible personal property that are approved and filled from outside the state, has not changed since enactment, but its application to activity conducted over the internet has been actively contested. The Multistate Tax Commission revised its interpretive statement on the statute in 2021 to describe website-based interactions, including post-sale customer support and the collection of information for purposes beyond soliciting a sale, as falling outside protected solicitation, and the states have not moved in unison in response, with some adopting versions of that reading through their own guidance and at least one instance of such guidance later being challenged in court. A company whose activities were unquestionably protected under the narrower, pre-internet reading, and that filed a protective return during those years, has already fixed the years the state cannot reach no matter how far a later reinterpretation travels. A company that never filed remains exposed for every open year, under whatever reading eventually prevails.
Two further considerations reinforce the case for filing in particular circumstances. Some large multistate sellers file protective returns reporting no tax due in every income-tax state, as standing practice, independent of a fresh state-by-state exposure calculation each season; the marginal cost of a zero return is small next to an indefinitely open assessment period, particularly where the company's footprint shifts year to year in ways easier to track through a continuous filing history than to reconstruct later. Disclosure can also matter for penalties: many states relieve or reduce penalties for a position adequately disclosed on a filed return, reserving harsher, negligence-adjacent penalties for positions never disclosed, so a protective return can change the penalty exposure attached to a later, unfavorable determination even where it does not change the tax result.
The case against
The case against filing starts with what filing signals. Registering with a state's taxing authority and appearing in its system, even to report zero tax due, has been treated in at least one non-precedential state administrative proceeding as evidence of the kind of ongoing relationship with a state that supports a nexus finding, particularly where the same company had already registered and filed for a different tax, such as sales tax, there. The decision is not binding beyond its own facts, but the argument it reflects, that a company's own registration and filing history can be used against it as evidence of submission to the state's authority, now exists and is available to an auditor looking for support. A company that has concluded in good faith that it lacks nexus may reasonably decide that filing manufactures the very evidentiary record a state would otherwise have to build on its own.
Cost is the second argument, and it runs in two directions. Where a state imposes a minimum tax, a flat annual fee, or a franchise tax measured by something other than net income, filing a return can trigger that charge even though P.L. 86-272 protects the company completely from the state's net income tax, because the statute restrains only taxes measured by net income and was never positioned to reach a flat-dollar or capital-based levy; the companion article on P.L. 86-272 and minimum franchise taxes develops why that gap survives a fully protected income tax position regardless of whether a return is filed. Separately, filing protectively in every income-tax state, without regard to each state's specific facts, carries its own compliance calendars, return preparation, and registration records a competitor or unrelated state agency can later find, cost that accumulates across dozens of states whether or not any of them ever assesses tax.
Finally, the procedural benefit of filing is not guaranteed everywhere. Some states condition the start of the assessment period on a return that discloses the position with enough specificity that the state could have identified and challenged it at the time; a bare return reporting zero tax due, without a statement of the P.L. 86-272 position and the facts supporting it, risks doing less work than a company filing it may assume. Whether a particular state treats an undisclosed zero return as sufficient to start its limitations period is a state-by-state question this article does not resolve, and it belongs in the same state-by-state decision as whether to file at all.
The middle positions
Most multistate sellers land somewhere between filing everywhere and filing nowhere, and the factors that separate the two are consistent even though the recommendation is not. The states worth filing in first are the ones where the underlying evidence file is weakest, where the company's own documentation of what its people and property do in the state is thin, ambiguous, or contested internally, because those are the states where an adverse nexus determination is most likely and where the open-ended assessment period does the most damage. They are also the states that have moved furthest to narrow P.L. 86-272's protection for internet-based activity, since a position comfortably protected under an older reading may not stay protected under a newer one, and the years closed by an early protective filing are years a state cannot later reclaim under whatever standard it eventually adopts.
A third category deserves separate mention because filing there is not purely defensive. For a company headquartered in a state that applies throwback to sales otherwise untaxed at the destination, establishing that a market state can tax the company, even at zero net liability under a protected solicitation position, can pull those sales out of the home state's throwback numerator, because throwback generally applies only where the seller is not taxable at the destination. California's regulation implementing the uniform apportionment framework treats actual payment of tax in another state as prima facie evidence the taxpayer is taxable there for these purposes, which means a protective return filed and acted upon in the market state can do double duty: it starts that state's limitations period and it supports the taxpayer's own throwback relief claim at home. The companion article on throwback relief and internet activities develops that affirmative use of destination-state filing; here it is enough to note that the file-or-not decision is not always a defensive one.
Practice notes
The discipline that makes any of these approaches defensible is the same regardless of which one a given state calls for. The decision is made state by state, against that state's own limitations rule, its minimum tax structure, and its current posture on P.L. 86-272, not adopted once as a company-wide policy and left alone. It is documented when made, with the facts supporting the protected position written down rather than left to memory, because that documentation supports the position if a state later challenges it and distinguishes a considered decision not to file from simple noncompliance. And it is revisited on a real cadence, at minimum whenever the company's activities in a state change, whenever that state issues new guidance narrowing or broadening the statute's reach, and whenever a prior year closes under the limitations period and a new one opens, because a filing decision made three years ago on facts and law that have since moved is not a decision anymore; it is an inherited setting nobody rechecked. This article does not tell a reader which states to file in; that determination depends on facts specific to each company and each state and is the product of state-by-state analysis, not a rule applied uniformly across a portfolio of states. Making those determinations, and documenting them so they hold up years later, is part of the state tax nexus consulting G&G State Tax Group provides.
This article states the law as of September 18, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.