California Rules That Delivery of Goods in Taxpayer’s Trucks Satisfies P.L. 86-272 Nexus Protection

February 4, 2019

A federal law limiting income tax nexus allows companies to engage in certain solicitation activities in a state without having to pay income tax, but only if the representatives engaging in such activities understand what activities are and are not permitted.

By Jeff Glickman, SALT Partner

As a general rule, states take an expansive view when it comes to activities that establish income ax nexus.  Generally, delivering goods into a state using a private, company-owned truck (i.e., other than via common or contract carriers) would create income tax nexus in the state.  However, there is a federal law, commonly referred to as P.L. 86-272, that limits state taxing authority.

P.L. 86-272 was enacted by Congress in 1959 in response to the growing level of multi-state solicitation activity by businesses (think back to the door-to-door encyclopedia salesperson).  Prior to P.L. 86-272, this type of activity likely would have subjected a taxpayer to an income tax filing obligation in each state in which such solicitation activities occurred.  P.L. 86-272, therefore, prohibits a state from imposing a net-income based tax on a taxpayer whose only activity in the state consists of the solicitation of orders for tangible personal property, provided: (i) orders are sent outside the state for rejection or approval and (ii) if approved, the property is shipped or delivered from a point outside the state.

There are some basic exceptions to P.L. 86-272: (1) the law does not apply in the taxpayer’s state of legal formation; (2) taxes other than those based on net income are not covered, such as net worth, minimum, gross receipts and sales/use taxes – this includes the Texas Franchise (Margin) Tax. Ohio’s Commercial Activity Tax (CAT), Washington Business & Occupation Tax (B&O) and California’s minimum $800 franchise tax; and (3) the taxpayer loses protection if it sells anything other than tangible personal property.

Most of the analysis under the law centers around what activity constitutes “solicitation of sales.”  In 1992, the United States Supreme Court decided the case of Wisconsin v. Wrigley,[1] in which the Court addressed the meaning of “solicitation of sales.”  Wrigley (the gum manufacturer), argued that solicitation should be interpreted broadly to cover all activities performed by salespeople.  The state argued that the term should be narrowly defined to “just asking a customer to buy the product,” and may include certain activities leading up to the sale, but not activities performed after the sale.  The Court, as is often the case, declined to accept either side’s argument and adopted an “entirely ancillary” standard, stating:

“[S]olicitation of orders” covers more than what is strictly essential to making requests for purchases, the next (and perhaps the only other) clear line is the one between those activities that are entirely ancillary to requests for purchases – those that serve no independent business function apart from their connection to the soliciting of orders – and those activities that the company would have reason to engage in anyway but chooses to allocate to its in-state sales force.

Since that decision, states have been left with determining whether or not a taxpayer’s activity in the state is “entirely ancillary” to solicitation.  In addition, the Multistate Tax Commission published a statement on its website explaining P.L. 86-272 and providing a list of activities that it considers to fall within the protection of the law as well as those that fall outside such protection.  Many states have adopted this or a substantially identical statement.

On Dec. 4, 2018, California published Technical Advice Memorandum 2018-03, in which the state ruled that taxpayer’s delivery of goods to California customers in taxpayer-owned trucks (i.e., not via common carrier) did not violate P.L. 86-272 (i.e., such activity falls within the “solicitation of orders”), noting that the statute does not specify that delivery must be limited to common carrier transactions.

The ruling goes on to note that any other use of the trucks, such as backhauling, would likely go beyond permitted solicitation activities.  In addition, backhauling in the form of the pickup and delivery of goods on behalf of another business represents a separate and distinct revenue stream from that of the product being sold.  As such, this constitutes a service activity which is unprotected by P.L. 86-272 because the law only applies to tangible personal property.[2]

It is important to remember that since P.L. 86-272 does not apply to sales/use taxes, this activity would likely cause the taxpayer to have nexus for sales/use tax purposes under general physical presence nexus principles.  In addition, the taxpayer in this case may also be subject to California’s minimum $800 franchise tax.  Thus, it is possible that in states where a taxpayer is protected by P.L. 86-272, it may still need to file an income tax return to report and pay any non-income-based tax.

P.L. 86-272 can be a powerful tool for companies to be able to expand their marketing efforts through the use of travelling salespeople without creating a state income tax obligation.  However, it is very easy to overstep the protections of the law if the business’ representatives in the state don’t understand fully what they are and are not allowed to do.  Aprio’s SALT team has experience advising companies on the permitted and non-permitted activities under P.L. 86-272, and we can assist to make sure that your business is engaged in only those activities that fall within the rule’s protection to avoid state income tax nexus.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the January 2019 SALT Newsletter.

[1] Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

[2] California has its own, substantially similar, version of the Multistate Tax Commission’s statement regarding P.L. 86-272, FTB Publication 1050.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.