Business Activity Tax Simplification Act of 2026
- Sponsor
- Rep. Harrigan, Pat [R-NC-10]
- Committees
- Judiciary Committee (primary)
- Last action
- Jun 10, 2026
Bottom line
This bill seeks to restrict state and local taxation of businesses engaged in interstate commerce by codifying a physical presence requirement and extending existing federal protections to digital transactions and a broader range of state business activity taxes.
What it actually does
This bill expands and modernizes Public Law 86-272 to limit states' ability to tax interstate commerce, particularly for digital goods and services, by establishing a physical presence standard for net income and other business activity taxes. It aims to prevent states from imposing taxes on businesses without a tangible connection to the state, and sets rules for combined reporting.
Proponents argue
Proponents argue the bill provides much-needed clarity and uniformity for businesses operating across state lines, especially those in the digital economy, reducing compliance burdens and fostering economic growth by preventing states from overreaching their taxing authority. They contend it prevents multiple taxation and ensures fair competition by establishing a clear, administrable standard.
Opponents contend
Opponents would likely argue that this bill significantly curtails states' sovereign authority to tax economic activity within their borders, potentially leading to substantial revenue losses for states and local governments. They might contend it creates loopholes for businesses to avoid contributing to the public services they benefit from, and that a physical presence standard is outdated in the digital age.
The bill is relatively short, but its technical nature and reliance on existing law mean a casual read might miss significant implications for state tax policy.
Section 2(a)
Expansion of Protected Activities under PL 86-272
This section updates existing federal law (Public Law 86-272) which currently limits state net income taxes on businesses whose only activity in a state is soliciting orders for tangible personal property. The bill expands these protections to include solicitation for 'all other forms of property, services, and other transactions' fulfilled from outside the state, as well as the furnishing of information to customers/affiliates, gathering information, and sales/transactions of digital goods or services.
Supporters argue
Supporters contend this modernization is crucial for the digital economy, providing legal certainty and preventing states from imposing burdensome tax obligations on businesses that lack a traditional physical footprint. They argue it aligns tax law with modern business practices and reduces compliance costs.
Critics contend
Critics might argue this provision creates a significant loophole for digital businesses to avoid state taxes, shifting the tax burden to other entities or reducing state revenues needed for public services. They may assert that economic nexus, not physical presence, is the appropriate standard for the digital age.
Tradeoffs
Balances the desire to foster interstate commerce and reduce compliance costs for businesses against states' rights to tax economic activity within their borders and maintain revenue streams.
Section 2(b)
Extension of Protections to 'Other Business Activity Taxes'
This section extends the protections of Public Law 86-272 (which originally applied only to 'net income taxes') to 'each other business activity tax.' This includes any tax 'in the nature of a net income tax or tax measured by the amount of, or economic results of, business or related activity conducted in the State,' but explicitly excludes sales, use, or similar transaction taxes.
Section 3(a), (b)
Codification of Physical Presence Standard
This section establishes a clear federal minimum jurisdictional standard, stating that a state cannot impose a net income tax or other business activity tax unless the person has a 'physical presence' in the state during the taxable period. Physical presence is defined as having an individual or employee physically in the state, using an exclusive agent to establish a market, or leasing/owning tangible or real property (excluding computer software). It also includes a de minimis exception for presence less than 15 days or for limited/transient activity.
Section 3(e)
Exceptions for Domiciled Entities, Residents, and Anti-Abuse Rules
This section outlines exceptions to the physical presence requirement. It clarifies that the standard does not apply to businesses incorporated or domiciled in the taxing state, or to individuals who are residents of that state. It also preserves states' authority to tax owners/beneficiaries of pass-through entities (like partnerships or S corporations) if the entity itself has a physical presence. Importantly, it explicitly preserves state authority to pursue enforcement actions against illegal activities, sham transactions, or actual abuses, and to require combined reporting.
Section 4
Rules for Combined or Consolidated Group Returns
This section mandates that if a state taxes a combined or consolidated group of affiliated persons, the portion of their income subject to state tax must be computed using generally applicable methodology. Crucially, if an apportionment formula is used, the denominator must include the aggregate factors of all persons in the combined group, but the numerator (attributable to the state) must only include factors of those persons who are themselves subject to taxation by that state under the provisions of this Act (i.e., have a physical presence).
Defines 'digital good' as software or other electronically delivered goods (sounds, images, data) where the good itself is the true object, with permanent or specified use rights. Defines 'digital service' as electronically provided services like audio, data processing, cloud computing, or remote access to digital goods.
Section 2(b), adding Section 106 to 15 U.S.C. 381 et seq.
Why it matters:Standard legislative practice to place definitions in a dedicated section, but their specific wording is crucial for the scope of the bill's protections.
Case for: Proponents argue these definitions provide much-needed clarity for the application of physical presence rules to the digital economy, ensuring that modern business models are explicitly covered by the federal protections.
Case against: Critics might argue that the specific definitions could be too narrow or too broad, potentially creating unintended carve-outs or loopholes as technology evolves. The 'true object of the transaction' clause could be a point of contention.
Estimated impact: Significant, as these definitions determine which digital transactions are protected from state taxation under the new physical presence standard.
Clarifies that for the purpose of establishing 'physical presence' via leasing or owning tangible personal property (Section 3(b)(1)(C)), the leasing or licensing of computer software does not count as tangible personal property.
Section 5(a)(5)
Why it matters:This is a technical clarification that significantly impacts the scope of 'physical presence' for software companies. Its placement in definitions is standard but makes it less visible.
Case for: Proponents argue this prevents states from asserting physical presence nexus over software companies merely because their software is licensed or used within the state, aligning with the intent to protect digital businesses without a traditional physical footprint.
Case against: Opponents might argue this creates a significant loophole, allowing software companies to avoid state taxes even if their products are extensively used and generate substantial revenue within a state, simply because the 'property' is intangible.
Estimated impact: Substantial, as it directly impacts the tax nexus of the entire software industry.