The Minnesota Tax Court has held that the in-state activities of merchandisers employed by an out-of-state distributor created corporate income tax nexus for the distributor.1 Specifically, the merchandisers' activities exceeded the mere "solicitation of orders" which would be afforded immunity from a state's income tax under Public Law 86-272 (P.L. 86-272).2 The merchandisers' training sessions provided to retail store employees, and their preparation of store reports, photos, and floor maps, were not ancillary to the "solicitation of orders" or the "requesting" of orders. Instead, the training sessions and the prepared materials served independent business purposes. In addition, when taken together, the merchandisers' non-immune activities were not de minimis and, as a result, the out-of-state distributor was subject to Minnesota's corporate income tax.
Background
Skagen Designs, Ltd. was headquartered in Nevada and distributed watches and jewelry to retail department stores, including stores located in Minnesota. Skagen employed Minnesota merchandisers, on a part-time basis, who visited retailers' stores in Minnesota.3 During these visits, the merchandisers inspected, re-arranged, and re-filled watch cases or towers to be displayed in accordance with a plan developed by Skagen. They also maintained detailed floor maps of the stores that carried their products, keeping track of changes in the positions of the products of each competitor. In addition, the merchandisers provided training on Skagen products to the retailers' employees, assisted with in-store sales events by being present on the sales floors to answer questions from customers, reviewed price adjustments and markdowns of Skagen products, and periodically submitted store photos and reports to the regional merchandising manager. These merchandisers were not responsible for selling any Skagen products, did not accept any sales orders and did not interact with Skagen's actual sales representatives.
The Minnesota Commissioner of Revenue determined that Skagen was required to file and apportion its income to Minnesota because the merchandisers' in-state activities exceeded the protection provided by P.L. 86-272. Skagen protested this finding and the Commissioner denied the protest and reaffirmed the original finding that the income tax, as applied to Skagen, was proper. Skagen filed an appeal to the Tax Court and the parties subsequently filed cross motions for summary judgment.
Merchandisers' Activities Not Protected by P.L. 86-272
The issue before the Tax Court was whether the activities of Skagen's merchandisers in Minnesota were the "solicitation of orders" as provided under P.L. 86-272 and, therefore, Skagen was protected from Minnesota's corporate income tax.
Public Law 86-272 and Wrigley
P.L. 86-272 prohibits a state from imposing an income tax on out-of-state corporations when their in-state activities are limited to the "solicitation of orders" where the orders are sent outside the state for approval and filled by shipment from a point outside the state. In Wisconsin Department of Revenue v. William Wrigley, Jr., Co.,4 the U.S. Supreme Court held that an out-of-state manufacturer's in-state activities, such as the replacement of stale chewing gum at no cost to retailers and the completion of "agency stock checks,"5 were not merely ancillary to the solicitations of orders within the state. The Supreme Court determined that these activities served a business purpose independent of a sales force because the company would have conducted these activities regardless of the presence of a sales force in the state. The Supreme Court also determined that when taken together, the activities were not de minimis. Therefore, the activities exceeded "solicitation" protected under P.L. 86-272 and the state was permitted to tax the out-of-state manufacturer.
Merchandisers' Activities Exceeded Solicitation of Orders
The Tax Court separately considered the merchandisers' in-state activities to determine whether they disqualified Skagen from the protection of P.L. 86-272. First, the Court addressed the merchandisers' store reports and photos that were submitted to the regional merchandising manager. The Court maintained that these reports and photos had no connection to making requests for sales from Skagen's customers. Rather, they were submitted for inventory management or quality control purposes. The reports and photos contained important market data as well as information enabling Skagen to forecast its sales as well as the sales of competitors. Skagen would have wanted the content of the reports and photos regardless of whether there was a sales force within Minnesota. Furthermore, the fact that the reports and photos could ultimately "facilitate" sales in Minnesota was irrelevant to the issue. Activities that facilitate sales are different from activities that are ancillary to the request for sales. In order for an activity to be ancillary to the request for sales, the Court found that the activity must facilitate the actual "requesting" process.
Second, the Court considered the retailer floor maps prepared by the merchandisers. The Court determined that these floor maps served a competitive purpose. The maps were meant to track competitors' displays regardless of any change in floor position with respect to Skagen's displays. In other words, the maps gave Skagen invaluable information about its competitors. As with the store reports and pictures, the maps were not ancillary to "requesting purchases" and as such, they exceeded the mere "solicitation of orders." Next, the Court analysed the training provided by the merchandisers to the retailers' sales associates. The training sessions educated the retailers' staffs on the various features of Skagen watches and new products. The training was conducted to "increase general sales." The training did not facilitate requests for orders. Moreover, the training sessions also served a business purpose independent of the request for orders because they eradicated the need for Skagen to produce lengthy and detailed product manuals for the retailers. Therefore, the training did not qualify as an activity that receives immunity under P.L. 86-272.
However, unlike the preparation of store reports, photos, and floor maps, and the provision of training to the retailers' sales associates, the Court held that the merchandisers' conduct of inspecting, re-arranging, and re-filling the display cases in Minnesota retail stores constituted "solicitation." The Court conceded that the displays were essential to enticing indirect purchasers (retail customers) and thus, qualified for the protections afforded by P.L. 86-272.
Merchandisers' Unprotected Activities Not De Minimis
After finding that Skagen's merchandisers conducted a number of non-immune activities, the Court determined that, when all of these activities were taken together, they were not de minimis. The Court emphasized the amount of time and energy that was involved with the preparation of reports, photos and floor maps as well as the training presentations.6 Thus, the activities amounted to sufficient nexus with Minnesota to justify the imposition of Minnesota's corporate income tax upon Skagen. As a result, the Court granted summary judgment in favor of the Commissioner of Revenue.
Commentary
P.L. 86-272's protections only apply to a state tax on net income, and they do not apply to a true franchise tax imposed on the privilege of conducting business within a state. Minnesota's "corporate franchise tax," while imposed on the "exercise of the corporate franchise to engage in contacts with" Minnesota, is measured by the corporation's taxable income.7 Minnesota's corporate franchise tax is an income tax which is labelled as a franchise tax so that Minnesota may include in the tax base, interest income that a corporation receives from debt instruments that are issued by the U.S. government. Therefore, an out-of-state corporation potentially may shield itself against Minnesota corporate franchise tax liability by limiting its in-state activities to the solicitation of orders. But as the Court's ruling shows, the corporation needs to be careful to restrict the types of activities performed in the state. Unless the activity constitutes pure solicitation of an order of tangible personal property (or an ancillary activity) through the facilitation of requesting sales, a corporation's limited reach into Minnesota could cause it to be subject to the state's corporate tax. Corporations that desire to receive the protection provided by P.L. 86-272 need to be aware of what activities their employees, agents or independent contractors may be doing in a state so that they can determine whether such activities could be enough to trip the wire of taxability.
The Court's ruling does not come as a surprise given Minnesota's adherence to the "Statement of Information Concerning Practices of [the] Multistate Tax Commission and Signatory States Under Public Law 86-272." This document, originally adopted by the Multistate Tax Commission (MTC) in 1986, has been relied upon for guidance by many states with respect to interpretations of P.L. 86-272 since its publication and is noteworthy for its listing of examples of "unprotected activities" as well as "protected activities." Among those activities that are deemed "unprotected" is an activity that Skagen's merchandisers performed: "conducting training courses... for personnel other than personnel involved only in solicitation." As for the specific activities involving the generation of reports, pictures, and maps, the lists are silent.
It is important to note that the Court essentially granted the possibility that an out-of-state corporation's activities that go beyond "solicitation" could still be de minimis. While the Court did not espouse a rule for what constitutes de minimis activities (and few states have considered a bright-line test in this area), an out-of-state corporation with minimal presence in Minnesota conducting perhaps just one of the same activities as Skagen's merchandisers, may be more successful in arguing that such activity is de minimis and protected under P.L. 86-272.
Footnotes
1 Skagen Designs, Ltd. v. Commissioner of Revenue, Minnesota Tax Court, No. 8168-R, April 23, 2012.
2 P.L. 86-272, codified at 15 U.S.C. §§ 381-384, is a federal law that prohibits a state from imposing an income tax if the only in-state activity of the out-of-state person is the solicitation of orders for sales of tangible personal property where the orders are sent outside the state for approval or rejection and are filled by shipment or delivery from a point outside the state.
3 Note that Skagen also employed Minnesota sales representatives who solicited orders from retailers with stores in Minnesota. These sales representatives submitted orders to Skagen's headquarters for fulfillment, and the orders were then shipped into Minnesota from other states. However, the actions of these sales representatives were not at issue in this case.
4 505 U.S. 214 (1992).
5 Sales representatives performed "agency stock checks" by helping retailers display the gum and by refilling retailers' gum inventory.
6 Specifically, merchandisers generated and submitted reports on a weekly basis or 52 times per year and they also submitted photos on a monthly basis or 12 times per year. In addition, merchandisers spent time preparing the floor maps and the training presentations.
7 See MINN. STAT. § 290.02.
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