Minnesota Tax Court Rules Distributor is Not Protected by Public Law 86-272

August 30, 2023

By: Michael Colavito, SALT Director

At a glance

  • The main takeaway: A Minnesota Tax Court decision addresses whether certain activities of a taxpayer in the state do not create nexus because they are protected under Public Law 86-272.
  • Assess the impact: A business that sells tangible personal property and has sales representatives in multiple states should examine the activities of those representatives to determine if they give rise to an income tax filing requirement for the business. 
  • Take the next step: Aprio’s State and Local Tax (SALT) team can assist your company with determining its state income tax filing obligations.  

Schedule a free consultation today to learn more!

The full story:

The Minnesota Tax Court, in a lengthy but well thought-out decision, recently held in Uline, Inc. v. Comm’r of Revenue1 that an out-of-state distributor of industrial and packaging products was subject to income tax and not protected by Public Law 86-272 (P.L. 8-272).2 Generally, a business that has employees performing sales-related activity in a state will have generated a sufficient connection (i.e., nexus) with that state and be subject to that state’s income tax. However, when that business is a seller of tangible personal property, it can avoid being subject to a state’s income tax if its in-state activities are limited to those protected by P.L 86-272, as explained belowIn Uline, the Minnesota Tax Court concluded that while most of the taxpayer’s in-state activities were protected, one activity that involved regularly obtaining information about competitors while on sales calls was not protected. 

A closer look at Public Law 86-272

P.L. 86-272 is a federal law, enacted in 1959, that generally prohibits states from imposing a net income-based tax on a business if the business’s only activities in a state are limited to “solicitation of orders” for sales of tangible personal property, provided that the approval of orders occurs outside the state and the shipment or delivery originated outside the state. The law does not specifically identify what activities constitute protected solicitation, though the U.S. Supreme Court has held that such activities include more than just a verbal request for orders and that activities that are “entirely ancillary to requests for purchases” will be protected.3 If a taxpayer engages in an activity deemed to be unprotected and such activity is not de minimis, the taxpayer will be subject to the state’s income tax.

The Uline ruling explained

In determining whether the taxpayer in Uline was protected by P.L. 86-272, the Minnesota Tax Court reviewed the following five activities of the taxpayer:

  1. Non-sales representatives participating in job fairs for non-sales positions; 
  2. A vice president performing non-sales related work from his Minnesota home;
  3. Sales personnel picking up defective merchandise from Minnesota customers and returning it to an out-of-state office location; 
  4. Sales personnel collecting and reporting to an out-of-state office information about customer complaints; and 
  5. Sales personnel collecting and reporting to an out-of-state office information about competitors’ practices. 

The Court concluded that the first two activities did not result in the taxpayer being subject to Minnesota income tax. With respect to the participation in job fairs, the court reasoned that due to the activities being limited to providing prospective non-sales employees information in the form of written materials and performing informal, non-hiring interviews, this activity did not rise to the level of “conducting a trade or business” in the state. The court found it notable that the taxpayer’s personnel did not receive applications from candidates or make any hiring decisions in the state and that the non- sales positions were for jobs outside of Minnesota. Therefore, the Court concluded that this activity did not create nexus, and determining whether the taxpayer was protected under P.L. 86-272 was not necessary.  

The Court’s reasoning with respect to the vice president’s use of his Minnesota home to perform certain work functions was somewhat similar. Here, the company’s vice president used a company-issued tablet and personal mobile phone to check business-related messages from his home. His home was not identified by the taxpayer’s employees as a company office, and the company did not hold the vice president’s home out to the public as a company office location. Thus, the location was considered a “home office” used for non-sales related activities.  

The other three activities examined by the Court were all performed by sales personnel. The Court first concluded that picking up defective merchandise and returning it to an out-of-state office location was not protected by P.L. 86-272 because product return is a business activity that exists independently from sales activity. However, in this case, the court concluded that this activity was de minimis in nature because the sales representatives only performed this activity on 10 occasions during the two years at issue and it was not company policy for sales representative to perform this specific activity. 

The sales representatives’ activity of collecting and reporting customer complaints was limited to communicating customer concerns to other departments of the taxpayer that were located outside of Minnesota. The court concluded that this activity was protected because it served a mediation function that is ancillary to the solicitation of orders in that it ingratiated the customer and facilitated continued purchase requests. 

In the end, the collecting of information about the taxpayer’s competitors was the only activity that the Court concluded exceeded the protections of P.L. 86-272. Here, the Court reasoned that this activity may be a sound and necessary practice that will increase sales in general. However, an activity is not considered protected merely because it may increase sales. Rather, to be protected, the activity must facilitate the “requesting of sales.” The facts in this case indicated that the collection of information about competitors, such as product information, product pricing and payment terms, served other purposes. This was largely due to the collected information being shared through a company database with non-sales personnel. The Court concluded that this information could be used for purposes separate from the solicitation of sales, such as product development and pricing determinations.  Further, due to the taxpayer’s sales representatives being required to prepare notes that may contain information about competitors at least twice a week, the Court viewed this non-sales activity as not being de minimis.

The bottom line

Sellers of tangible personal property that have sales representatives in multiple states should closely examine the activities performed by those individuals. Implementing a policy that outlines the activities that sales representatives can and cannot perform can potentially help reduce a taxpayer’s state income tax liability.4 

Aprio’s SALT team has experience in advising taxpayers on these types of state income tax issues and can assist your business with potentially limiting its state income tax filing obligations. 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.

1 File No. 9435-R, Minn. Tax Court, 6/23/2023. 

2 15 U.S.C. §§ 381-384

3 See Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

4 For additional resources, the Multistate Tax Commission publishes a “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting State Under Public Law 86-272.” This statement, originally adopted in 1986 and revised several times since (the last being in 2021), serves as a guide for the application of P.L. 86-272, specifically the types of activities that may or may not provide protection from state income tax nexus.  Many states, either formally or informally, adopt the statement as their own guidance and interpretation of state income tax nexus. 

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About the Author

Michael Colavito

Michael assists clients with a broad range of state and local tax issues. His expertise extends to many areas of multistate taxation, including income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy—from audit through appellate litigation as well as advising clients on restructurings and state tax refund and planning opportunities.