Should a company protected by P.L. 86-272 still file state returns?

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 does not begin. California measures its four-year assessment period from the date the return was filed and permits a proposed assessment at any time when a taxpayer fails to file (Rev. and Tax. Code sections 19057(a) and 19087(a)). New York's corporate franchise taxes follow the same pattern, with a three-year period running from the filing date and assessment at any time if no return is filed (Tax Law section 1083(a) and (c)(1)(A)), as does Illinois for its income tax (35 ILCS 5/905(a) and (c)). 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. California's guidance was invalidated in December 2023 on procedural grounds as an underground regulation, while New York's regulation was upheld against a facial preemption challenge and affirmed by the Appellate Division, Third Department on May 7, 2026. A company whose activities were 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, creates a record an auditor can cite as evidence of an ongoing relationship with the state, particularly where the company already registers and files there for another tax such as sales tax. A company that has concluded in good faith that it lacks nexus may reasonably decide that filing manufactures the 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. A bare return reporting zero tax due, without a statement of the P.L. 86-272 position and the facts supporting it, may not start the assessment period in every state, and 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 consideration runs alongside the other two and is worth stating carefully, because it is commonly stated backwards. For a company shipping from a state that throws back sales otherwise untaxed at the destination, what keeps those receipts out of the home state's throwback numerator is being taxable in the market state. A protected solicitation position is the opposite of that claim: it asserts that the destination state lacks jurisdiction to impose a net income tax on the company, which is the condition that causes throwback at home. Escaping throwback therefore requires activities in the market state that go beyond protected solicitation, or taxability there by reason of a tax that counts under the applicable taxable-in-another-state test, and not a return filed voluntarily from a position that denies taxability. The companion article on P.L. 86-272 and sales representative activities develops the first route, where documented unprotected activity makes the company taxable in the market state and drops the home state's factor; the companion article on throwback relief and internet activities develops the second.

California's regulation implementing the uniform apportionment framework makes the same point from the other direction, and it is frequently quoted only halfway. Cal. Code Regs., tit. 18, section 25122(b) treats a taxpayer as subject to another state's tax if it carries on business activity there and the state imposes the tax, and the regulation's examples treat actual payment as prima facie evidence of that status. The same subdivision provides that a taxpayer that voluntarily files and pays when not required to by that state's laws, or pays only a minimal fee for qualification or the privilege of doing business, is not subject to the tax if it does not engage in business activity there, or engages in some activity not sufficient for nexus where the minimum tax bears no relation to that activity. A protective return filed from a protected position falls within that rule. Read whole, the regulation is authority against treating a protective return as throwback relief rather than for it, and the procedural case for filing in the first two categories above has to stand on its own.

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 the same watch applies to Congress, where reintroduced legislation would broaden solicitation of orders itself; it passed the House in the 2025 reconciliation bill before being removed in the Senate, and its enactment would rewrite this calculus), 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.