The Minnesota Tax Court held a catalog and internet-based distribution company exceeded the protections of Public Law 86-272 (PL 86-272) by providing non-sales personnel with information about competitors’ products and sales terms obtained from Minnesota customers by the company’s salespeople.
PL 86-272 is a federal law enacted in 1959 that prohibits states from imposing a net income tax on income derived within the state by an interstate business if the business’s in-state business activities (other than merely de minimis activities) are limited to the solicitation of orders for sales of tangible personal property and/or activities ancillary to such solicitation.[1] Since 2018, when the U.S. Supreme Court overruled longstanding precedent in South Dakota v. Wayfair (Wayfair)[2] that an interstate business can have taxable nexus without physical presence, PL 86-272 has been aggressively under attack by states as one of the only remaining state tax imposition protections for such interstate businesses.
Here, the company’s salespeople gathered information from customers about competitors’ product prices, lead time, payment terms, rebates, and discounts. This information was made available to the company’s non-sales personnel. At court, the company argued obtaining this information was entirely ancillary to solicitation of sales of tangible personal property as protected under PL 86-272, because the collection of this information helped salespeople negotiate and make “on the spot” sales. The court disagreed, instead ruling the activities did not serve only a singular purpose of negotiating “on the spot” sales, but other business purposes as well, such as product development and determination of competitive prices resulting from the company making this information available to non-sales personnel. The court also concluded this activity was not de minimis due to it being a company-wide policy.
The court also analyzed other company activities and held they did not exceed the protections of PL 86-272. For instance, the court deemed the salespeople’s retrieval of samples of defective merchandise from customers to send to corporate headquarters as ancillary to solicitation when it was conducted during the process of reporting customer complaints. The court reasoned the reporting of complaints ingratiated the sales representative with the customer, thus facilitating continued sales, and that obtaining a defective sample was an inextricable component of reporting those complaints. In contrast, the court deemed a salesperson’s personal retrieval of product returns as unprotected activity because product return was a separate function from sales solicitation. However, the court found the level of personal retrieval conducted by the company’s salespeople to have been de minimis.
As another example, the court also held that although one of the owners of the company was provided a company iPad and iPhone to check company messages and conduct non-sales work at his Minnesota residence, his activity was protected by PL 86-272 because no one related to the distribution business other than one manager could contact the owner at his home and the home was not held out as a business location.
Uline, Inc. v. Comm’r of Revenue, No. 9435-R (Minn. T.C. June 23, 2023).
[1] 15 USC 318; see also https://www.govinfo.gov/content/pkg/STATUTE-73/pdf/STATUTE-73-Pg555.pdf.
[2] South Dakota v. Wayfair, Inc. (2018) 138 S.Ct. 2080.