It is no secret that States abhor the protections afforded companies by P.L. 86‑272—the federal provision that prevents States from imposing an income tax in certain circumstances. While many States have interpreted P.L. 86-272 as narrowly as possible, some have used other methods to attempt to sidestep the federal protections. One such method is the use of Finnegan rules for sourcing receipts for apportionment purposes in combined reporting States. Generally, under Finnegan, if one member of the combined group is taxable, then the sales of all members, even tax-exempt members, are included in the apportionment formula. However, the Massachusetts Appellate Tax Board (the “Board”) put the kibosh on that.
The recent decision in Smithfield Packaged Meats Corporation and Combined Affiliates v. Commissioner of Revenue involves the Commissioner’s “Reallocation Rule,” which uses a Finnegan approach to sourcing. Dkt. No. C344811 (Mass. App. Tax Bd. July 22, 2026). Under the Reallocation Rule, if one member of a unitary group is taxable in Massachusetts, but another member is not, the sales of the nontaxable member may be assigned to the taxable group members. In Smithfield, one of the unitary group members was protected from taxation by P.L. 86‑272. On audit, the Commissioner reassigned the Massachusetts sales of the nontaxable member to two taxable members.
On review, the Board analyzed whether the Reallocation Rule violated the Supremacy Clause of the U.S. Constitution. The Board determined that the Rule has the effect of taxing income proportionate to the amount of Massachusetts income earned by the nontaxable member. To determine if P.L. 86‑272 prevented such taxation, the Board examined two questions. First, whether P.L. 86‑272 only prevented a state from directly taxing the out-of-state entity. Second, whether the federal provision afforded its protections separately to each member of a unitary group.
With respect to the first issue, the Board determined that P.L. 86-272 exempts income earned by a protected entity from taxation. Here, by assigning the sales of the nontaxable member to other members, more income was taxable in Massachusetts. The Board found that the increase in taxable income was prohibited by the federal law.
For the second issue, the Board held that because a unitary group is not soliciting orders, a requirement to obtain P.L. 86‑272 protection, but instead, the individual members are conducting the solicitation, the protections extend to each individual group member. Therefore, even if one member of the group is not protected by P.L. 86‑272, other members may still be tax exempt.
While the Commissioner cited to many cases wherein the Finnegan approach to sourcing was upheld, the Board stated that those courts take positions that are not consistent with the federal law or incorrectly frame the issue. In the end, the Board did not permit the Commissioner to do indirectly what federal law prohibited it from doing directly—i.e., subject the income of the nontaxable member to tax in Massachusetts. In an onslaught of attempts to narrow P.L. 86‑272, the case stands as a beacon that the federal provision’s protections are holding steady.
This update is one in a series of updates written for the August 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.