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Public Law 86-272

Public Law 86-272. Sanjay Gupta Russell Palmer Endowed Professor of Accounting Eli Broad College of Business Michigan State University Prepared for Vienna University of Economics and Business Administration May 2012. Objectives. Understand the scope of P.L. 86-272

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Public Law 86-272

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  1. Public Law 86-272 Sanjay Gupta Russell Palmer Endowed Professor of Accounting Eli Broad College of Business Michigan State University Prepared for Vienna University of Economics and Business Administration May 2012

  2. Objectives • Understand the scope of P.L. 86-272 • Understand the distinction between “protected” and “taxable” activities • The Willis Committee • The MTC guidelines • Arizona’s ruling (CTR 99-5) Gupta: Wirtschaftsuniversitaet

  3. Background • Recall the Due Process and Commerce Clause requirements for nexus (jurisdiction to tax) • Due Process Clause • Minimum contacts • Fairly related to services • Commerce Clause • Substantial Nexus • Fairly Apportioned • Non Discriminatory • Fairly Related to Services Gupta: Wirtschaftsuniversitaet

  4. Public Law 86-272: Overview • Congress’ first legislative response to limit states’ power to tax interstate business • Enacted in 1959 as a response to Northwestern States Portland Cement case • Northwestern sustained states’ power to impose a nondiscriminatory, fairly apportioned direct net income tax on an exclusively interstate business • The decision provoked widespread alarm among businesses and intense lobbying to seek protective federal legislation • Two Senate Committees held hearings (the Senate Comm. on Finance and the Senate Select Comm. on Small Business) • PL 86-272 enacted within seven months of the decision • Public Law 86-272 has been codified at 15 U.S.C. sections 381-84; but popularly still referred to as “P.L. 86-272” Gupta: Wirtschaftsuniversitaet

  5. P.L. 86-272 (Sec. 101 (a)) • Sec. 101. (a) No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after the date of the enactment of this Act, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following: • (1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and • (2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1). Gupta: Wirtschaftsuniversitaet

  6. P.L. 86-272 (Sec. 101 (b)) • Sec. 101. (b) The provisions of subsection (a) shall not apply to the imposition of a net income tax by any State, or political subdivision thereof, with respect to— • (1) any corporation which is incorporated under the laws of such State; or • (2) any individual who, under the laws of such State, is domiciled in, or a resident of, such State. Gupta: Wirtschaftsuniversitaet

  7. P.L. 86-272 (Sec. 101 (c)) • Sec. 101. (c) For purposes of subsection (a), a person shall not be considered to have engaged in business activities within a State during any taxable year merely by reason of sales in such State, or the solicitation of orders for sales in such State, of tangible personal property on behalf of such person by one or more independent contractors, or by reason of the maintenance of an office in such State by one or more independent contractors whose activities on behalf of such person in such State consist solely of making sales, or soliciting orders for sales, of tangible personal property. Gupta: Wirtschaftsuniversitaet

  8. P.L. 86-272 (Sec. 101 (d)) • Sec. 101. (d) For purposes of this section— • (1) the term “independent contractor” means a commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for thesale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities; and • (2) the term “representative” does not include an independent contractor. Gupta: Wirtschaftsuniversitaet

  9. Analysis of P.L. 86-272 • What is the purpose of P.L. 86-272? • Restrict states’ income taxation of companies who merely solicit orders for tangible personal property • What is the scope of P.L. 86-272 (i.e., what are the limitations of the statute)? • Imposition of net income taxes • Sale of tangible personal property • Solicitation and related activities • Local warehousing • Sales office • Domestic corporations • Independent contractors Gupta: Wirtschaftsuniversitaet

  10. Requirement #1: Imposition of net income taxes • The law applies only to net income taxes • A “net income tax” is defined as “any tax imposed on, or measured by, net income” • Does the law apply to general business taxes imposed by states? Examples: • Michigan’s Single Business Tax (SBT) is a form of a value-added tax • http://www.michigan.gov/documents/98-1SBT_114674_7.pdf • Wisconsin’s Business and Occupation (B&O) Tax is measured by gross receipts Gupta: Wirtschaftsuniversitaet

  11. Requirement #2:Sale of tangible personal property • This excludes from protection the purchase of services, such as travel (airlines, railroads), transportation, telecommunication, etc. • Trickier situation: a sale involving both the sale of property and a service (e.g., sale of a machine and its installation) • Would the protection depend on the extent of the service component? • Should the service component be only “incidental” in nature? Gupta: Wirtschaftsuniversitaet

  12. Requirement #3:Solicitation and related activities • The immunity is granted explicitly to the “solicitation of orders” • What is “solicitation”? • The term solicitation is not defined; hence, its scope is controversial • e.g., does collecting a deposit go beyond solicitation? • Two categories of solicitation protected by statute • direct solicitation (from the prospective customer by the seller or its representative), and • indirect solicitation (“in the name of or for the benefit of a prospective customer”) Gupta: Wirtschaftsuniversitaet

  13. Requirement #4:Local warehousing • Are local warehousing and delivery from such warehouse protected? • No; “shipment or delivery must be from a point outside the state” • Would protection be given if the mail or common carrier is used? • Would protection be given if the vendor’s own trucks are used? • would also appear to be ok since the test is the point of origin of the shipment, not the mode of shipment -- differing treatment by the states Gupta: Wirtschaftsuniversitaet

  14. Requirement #5:Sales office • The law protects the “maintenance of an office … by one or more independent contractors” • The law’s history suggests that maintenance of a sales office within a state ends the taxpayer’s immunity from taxation • What about other types of offices, such as an employment office, a purchasing office, a repair shop, etc.? • What about the rental of a hotel suite (for use by salespersons)? • What about the use of a salesperson’s home as the business office? Gupta: Wirtschaftsuniversitaet

  15. Requirement #6:Domestic corporations • Do domestic corporations enjoy immunity (are protected) under PL 86-272? • Similarly, are individuals domiciled in the state protected under PL 86-272? Gupta: Wirtschaftsuniversitaet

  16. Requirement #7:Independent sales representatives or contractors • The law’s immunity extends beyond the taxpayer to his “representative” • “Representative” is defined as one that “does not include an independent contractor” • An “independent contractor” is defined as a commission agent, broker or other who sells or solicits orders for the sale of TPP for more than one principal • Is the immunity to an independent sales representative or contractor different from an employee sales representative? • The independent representative or contractor may accept orders (perhaps complete sales) within the state • The independent representative or contractor may have his or her own sales office within the state Gupta: Wirtschaftsuniversitaet

  17. Protected Activities: Willis Committee • Usual or frequent activity in the State by employees soliciting orders without authority to accept them • Usual or frequent activity in the State by employees displaying goods or engaged in other promotional activity, but not soliciting or taking orders • Solicitation activity by nonemployee representatives, conducted through an office or other business location in the State • Usual or frequent solicitation activity by nonemployee representatives • Delivery of goods in the State in company-operated vehicles, regardless of frequency Gupta: Wirtschaftsuniversitaet

  18. Taxable Activities: Willis Committee • Maintenance of any business location in the State • Ownership of real property in the State • Ownership of a stock of goods in a public warehouse • Ownership of a stock of goods in the hands of a distributor or other nonemployee representative, if used to fill orders for the owner’s account • Usual or frequent activity in the State by employees soliciting orders with authority to accept them • Usual or frequent activity in the State by employees engaged in purchasing activity or in the performance of service (including installation, assembly, and repair of equipment) • Operation of mobile stores in the State, regardless of frequency • Other unclassified activities Gupta: Wirtschaftsuniversitaet

  19. WrigleyWisconsin Department of Revenue v. William Wrigley, Jr., Co.505 U.S. 214 (USSC, 1992) • Facts? • No real property in Wisconsin • Only employees in state = sales personnel, including regional manager • Regional manager only had home office • Issue? • Was taxpayer subject to income tax in Wisconsin under P.L. 86-272? • Holding? • Did Wrigley have nexus in Wisconsin? - Yes • Was Wrigley protected by P.L. 86-272? - No • P.L. 86-272 only applies to solicitation and “ancillary activities,” i.e., activities necessitated solely by having sales personnel in state • De minimis exception Gupta: Wirtschaftsuniversitaet

  20. Wrigley • Protected Activities • Recruiting and training sales reps • Homes offices • Resolving credit disputes for sales reps • Taxable Activities • Replacing inventory • Accepting sales through stock checks - ok if free • Storage of inventory • De minimis exception? • Yes, the law admits the possibility of the normal application of the de minimis principle • Depends upon whether the “activity establishes a nontrivial additional connection with the taxing state” Gupta: Wirtschaftsuniversitaet

  21. Protected Activities-MTC • Employees • Soliciting orders for sales by any type of advertising • Soliciting of orders by an in-state resident employee or representative, so long as such person does not maintain or use any office in the state other than an in-home office • Carrying samples and promotional materials for display or distribution without charge • Furnishing and setting up display racks • Providing cars to sales personnel • Passing orders, inquiries and complaints on to the home office • Missionary sales activities, i.e., the solicitation of indirect customers for the company’s goods • Coordinating shipment or delivery w/o charge • Checking customers’ inventories w/o charge Gupta: Wirtschaftsuniversitaet

  22. Protected Activities-MTC • Maintaining a sample or display room for two weeks or less at any one location w/in the State • Recruiting, training or evaluating sales personnel • Mediating direct customer complaints • Owning, leasing, using or maintaining personal property for use in the employee’s in-home office or car that is solely limited to the conducting of protected activities • Independent Contractors • Everything allowed to employees • Allowed to accept orders • Allowed to maintain an office • Must represent multiple principals Gupta: Wirtschaftsuniversitaet

  23. Making repairs or serving property sold Collecting current or delinquent accounts Investigating credit worthiness Installation Training non-soliciting personnel Providing technical assistance Resolving customer complaints Approving or accepting orders Repossessing property Securing deposits on sales Picking up or replacing returned property Recruiting non-soliciting personnel Carrying samples for sale Owning, leasing or using in-state facilities Consigning a stock of goods Entering into franchise or license agreements Delivery of goods by private carrier Taxable Activities-MTC Gupta: Wirtschaftsuniversitaet

  24. Group I • Picking up or replacing returned property • Providing cars to sales personnel • Making repairs or serving property sold • Maintaining an office • Accepting sales through stock checks • Providing technical assistance • Soliciting orders for sales by any type of advertising • Carrying samples for sale • Checking customers’ inventories Gupta: Wirtschaftsuniversitaet

  25. Group II • Soliciting of orders by an in-state resident employee or representative • Repossessing property • Passing orders, inquiries and complaints on to the home office • Investigating credit worthiness • Collecting current or delinquent accounts • Consigning a stock of goods • Maintaining a sample or display room Gupta: Wirtschaftsuniversitaet

  26. Group III • Entering into franchise or license agreements • Missionary sales activities, i.e., the solicitation of indirect customers for the company’s goods • Replacing inventory • Accepting or approving orders • Carrying samples and promotional materials for display or distribution • Resolving customer complaints • Recruiting, training or evaluating personnel • Installation Gupta: Wirtschaftsuniversitaet

  27. Group IV • Storing inventory • Owning, leasing, using or maintaining personal property for use in the employee’s in-home office or car • Delivery of goods by private carrier • Coordinating shipment or delivery • Mediating customer complaints • Training personnel • Furnishing and setting up display racks • Securing deposits on sales Gupta: Wirtschaftsuniversitaet

  28. In-Home Offices • Must not be attributed to Company • Used only to solicit and receive orders • What about a listing in Yellow Pages? • MTC would not exempt • What about rep using home office on Company business cards? • MTC would exempt • Does not matter whether Company pays for home office expenses Gupta: Wirtschaftsuniversitaet

  29. Arizona’s Interpretation of PL 96-272 • CTR 99-5, supersedes by CTR 95-2 • Largely adopts MTC regulations Gupta: Wirtschaftsuniversitaet

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