Oregon Rules that Taxpayer’s Activity Exceeded Protection of Public Law 86-272

September 28, 2022

By Jess Johannesen, SALT Senior Manager

At a glance

  • The main takeaway: An Oregon Tax Court case addresses certain activities that create income tax nexus because they fall outside the scope of “sales solicitation” under Public Law 86-272.
  • Assess the impact: Each state may interpret Public Law 86-272 differently, which illustrates the complexity for businesses to appropriately determine their income tax obligations.
  • Take the next step: Aprio’s State and Local Tax (SALT) team can help your business comply with income tax obligations by addressing your income tax nexus issues. 

Schedule a free consultation today to learn more!

The full story:

On August 23, 2022, the Oregon Tax Court ruled that an out-of-state cigarette manufacturer was subject to Oregon’s excise (income) tax because two types of activities conducted in Oregon exceeded the protection under Public Law (P.L.) 86-272.[1]  

P.L. 86-272 is a federal law that generally prohibits states from imposing a net income-based tax on a business if that business’ only activities in a state are limited to “solicitation of orders” for sales of tangible personal property. To preserve federal protection, the approval of such orders must occur outside of the state in question and the shipment or delivery must originate outside of the state in question as well. For additional information regarding P.L. 86-272 and how the interpretation of the law has been recently revised to account for activities conducted via the internet, please refer to our September 2021 SALT Newsletter article.

Take a closer look at the case

The taxpayer in the case was a manufacturer, marketer and distributor of cigarettes and related tobacco products. The taxpayer had no offices in Oregon and had none of its own inventory in Oregon for sale or return. In Oregon, the taxpayer sold its products to Oregon wholesalers, and those wholesalers sold the products to Oregon retailers. The Oregon retailers ultimately sold to consumers. 

While the taxpayer’s sales were primarily to Oregon wholesalers, the taxpayer encouraged sales to the retailers in two activities that the Court analyzed. 

  • First, agreements with wholesalers required the wholesalers to accept product returns from the retailers (referred to as a “100% Product Guarantee”). 
  • Second, the taxpayer’s employees visited and solicited Oregon retailers to carry and sell taxpayer’s products. While the employees did not carry inventory for sale, the employees took “Pre-Book Orders” which were orders authorized by an Oregon retailer that the employee completed and forwarded to an Oregon wholesaler. Pursuant to the taxpayer’s agreement with its wholesalers, the wholesalers were required to fulfill these Pre-Book Orders with the wholesalers’ inventory.

The ruling explained

While P.L. 86-272 itself does not identify specific activities that constitute protected solicitation, the US Supreme Court stated that the:

“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.”[2]

In short, the Oregon Tax Court concluded that each activity independently exceeded the protections of P.L. 86-272. With respect to the Oregon wholesalers’ acceptance of Oregon retailers’ returns, the Court noted that there was no dispute that there was a business reason, independent of soliciting orders, for accepting such returns. As such, the Court did not view such activities to be “entirely ancillary” to soliciting orders, and the activities exceeded the protections of P.L. 86-272.

With respect to the Pre-Book Orders, the Court record showed that Oregon retailers sometimes failed to follow through on their verbal intentions to buy the taxpayer products. This led to the taxpayer training its employees to use Pre-Book Orders to combat a “potentially meaningless oral ‘yes’” by converting the verbal commitment to an actual order forwarded to the Oregon wholesaler. The Court held that the taxpayer “allocated” this activity to its in-state representatives. Since this activity served an independent business purpose to ensure the completion of sales, the Court held that this activity also exceeded the protection of P.L. 86-272.

The bottom line

Each state may interpret P.L. 86-272 in different ways, and this Oregon Tax Court case helps to illustrate two activities in Oregon that exceeded the protections of the federal law. Other states may consider these decisions persuasive when analyzing similar issues.

Aprio’s SALT team has experience addressing income tax nexus and issues related to P.L. 86-272, particularly given the recent MTC changes noted above. Our team can assist your business to make sure that it complies with its income tax obligations and does not pay income tax to states where it is entitled to protection under P.L. 86-272. 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 Jess Johannesen, SALT Senior Manager, at Jess.Johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the September 2022 SALT newsletter.

[1] Santa Fe Natural Tobacco Co. v. Dep’t of Revenue, TC 5372 (Or. Tax Court, Reg. Div.), 08/23/2022.

[2] Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). Separately, the Multistate Tax Commission promulgated a “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272,” which specifies certain types of activities that are likely protected by the federal law as well as activities that likely exceed such federal protection. States generally look to the MTC’s Statement for guidance, but states ultimately interpret P.L. 86-272 on a state-by-state basis.


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.

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About the Author

Jess Johannesen

Jess Johannesen, Senior Tax Manager at Aprio, is a state and local tax advisor with expertise in sales/use tax and state income tax matters, state tax credits and incentives, and state and local tax M&A due diligence. Known for quick response times and technical expertise, Jess helps business leaders and decision makers in an array of industries maximize state tax benefits, and minimize risks and exposures while keeping in compliance. Defined by kindness and passion for Georgia sports, Jess is a thoughtful, curious and detail-oriented advisor.