On Dec. 20, 2019, the Maryland Court of Special Appeals held that a foreign company’s activities in the state exceeded the protection of the solicitation of orders for tangible personal property under Public Law (P.L.) 86-272.1 While the Court of Special Appeals upheld the Maryland Tax Court’s original decision, the Court of Special Appeals interpreted the scope of P.L. 86-272 somewhat more broadly than the Tax Court.
During 2011 and 2012, Blue Buffalo Company, Ltd., a Delaware corporation headquartered and domiciled in Connecticut, sold premium pet products in Maryland. Blue Buffalo employed several individuals in Maryland, including a distributor sales manager, one account manager, two regional demo managers and several dozen in-store sales representatives called “Pet Detectives.” Blue Buffalo’s employees engaged in various activities within Maryland including: (i) community and customer relations activities intended to build customer relationships and community goodwill; (ii) product training activities designed to educate retailers; and (iii) retail services, such as inventory management and competitive market research.
For the 2011 and 2012 tax years, Blue Buffalo originally filed Maryland corporate income tax returns and paid more than $700,000 in tax to the state. After further evaluation, Blue Buffalo later filed a refund claim for all taxes paid, based on its understanding that it was immune from income taxation due to the protection of P.L. 86-272.2 The Maryland Comptroller denied the refund claims, and Blue Buffalo proceeded to file an appeal with the Maryland Tax Court.
The Tax Court considered whether the activities of Blue Buffalo’s Maryland employees indeed fell under the P.L. 86-272 umbrella. Generally speaking, P.L. 86-272 prohibits states from imposing an income tax on foreign corporations when that corporation’s activities are limited to “mere solicitation of orders” for the sale of tangible personal property if approval and shipment of orders occurs outside the taxing state. The Court found that Blue Buffalo’s in-state employees’ activities were not safeguarded because such activities had an independent business purpose beyond mere requests for orders. Specifically, activities such as attending pet-related events, encouraging in-store purchases, product training, education on selling points, performing quality control, reworking displays, and collecting competitive information, had alternative business purposes that went beyond solicitation. This decision was upheld by the Maryland Tax Court, where it was agreed that many of the activities had an independent business purpose. The taxpayer appealed this decision to the Maryland Court of Special Appeals.
Maryland Court of Special Appeals parses activities through P.L. 86-272t
In reviewing the decision of the Tax Court, the Court of Special Appeals went into extensive detail over whether Blue Buffalo’s activities exceeded the scope of P.L. 86-272. At the outset, the Court clarified that P.L. 86-272 protected both direct solicitation, the process of encouraging customers to make purchases, as well as missionary sales, the act of soliciting the final consumer to purchase a product from third-party retailers, who will then replenish their stock. The Court also discussed the precedent of Wisconsin Department of Revenue v. William Wrigley, Jr., Co.,3 where the U.S. Supreme Court held that P.L. 86-272 covers the entire sales process, including activities which are ancillary to solicitation. The Supreme Court found that activities are ancillary when they serve no independent business purpose beyond facilitating solicitation, and non-ancillary activities must establish a non-trivial connection to the taxing state in order to support an income tax.
Citing these authorities, the Court applied a two-step analysis: (i) whether Blue Buffalo’s in-state activities were entirely ancillary to solicitation, meaning that they served no independent business purposes other than the request for orders; and (ii) whether Blue Buffalo’s non-ancillary activities were de minimis. In doing so, the Court examined the three specific areas in which the Tax Court found Blue Buffalo to have an independent business purpose: consumer relations, product trainings, and retail services.
The Court of Special Appeals determined that Blue Buffalo’s consumer relations activities, such as sales representatives’ attendance of pet-related community events, and efforts to persuade customers to make purchases, were protected activities of missionary sales techniques. While these activities fostered community and customer goodwill, that in and of itself was not enough for such activities to have an independent business purpose (and hence lose P.L. 86-272 protection). Since the distribution sales manager’s attendance of community events was considered by the Court to be an implicit invitation for orders, such activity was treated in a manner similar to the mediation of credit disputes in Wrigley, which facilitated orders by ingratiating the salesperson to customers. While the Court held there are circumstances in which the attendance of community events could have an independent business purpose, as was the case in Wrigley, it ultimately decided that Blue Buffalo’s activities in this area were ancillary to solicitation.
The Court also determined that Blue Buffalo’s trainings were protected on the basis that their only purpose was solicitation. The Court reasoned that training sessions may have an independent business purpose, especially when they are intended to instruct the purchaser on how to use the product, but when such sessions are intended to persuade clients to purchase a product, the business purpose is pure solicitation. Blue Buffalo’s trainings were limited to educating retailers (their potential customers) on merchandising plans and key sales points, such as the nutritional value of the product. The Court distinguished Blue Buffalo’s product advocacy focused training from the complex trainings offered by an industrial device manufacturer, which the Massachusetts Supreme Court held to be an activity not protected by P.L. 86-272.4 Distinguishing this case, the Court of Special Appeals noted that the manufacturer has an independent business interest of ensuring that customers can operate the product. Because Blue Buffalo’s trainings and educational programs were only intended to inform their customers on the value of their product, the Court categorized these activities as ancillary to solicitation.
Lastly, the Court analyzed the nature of Blue Buffalo’s retail services, finding many of these activities, including the reworking of product displays and inventory checks without providing replacement stock, were ancillary to solicitation. This conclusion was based on the reasoning that product display consulting is clearly within the realm of solicitation. Unlike Wrigley, Blue Buffalo’s sales representatives did not maintain a personal inventory, did not charge retailers for replacements, and were not permitted to handle orders directly. Rather, they simply asked retailers to fill empty shelves. Additionally, Blue Buffalo’s sales representatives’ efforts to gather and relay information regarding customer returns was a protected activity, as a function of ingratiating the customer and facilitating future purchases.
However, the Court found that quality control activities, such as an incident of a representative’s restocking shelves on a single occasion, and another incident of a sales representative pulling bad product from the retailer shelves, were not ancillary to solicitation. These activities served an independent business purpose (that of quality control), and are not classifiable as solicitation solely because they were carried out by the salesforce. Further, the competitive research completed by sales representatives and the account manager were not protected because Blue Buffalo had reason to gather this information regardless of its solicitation efforts.
Once it analyzed Blue Buffalo’s protected and unprotected activities, the Court proceeded to determine whether Blue Buffalo’s unprotected activities were effectively de minimis. Based on the frequency and substantiality of these non-protected activities, the Court found that if analyzed alone, the isolated quality control efforts could have been considered de minimis. It also questioned the substantiality of the sales representative’s comments, but focused on the actions and job requirements of the account manager. The account manager’s comments indicated that the collection of competitive information was a function of her responsibilities, and completed on a regular basis. The Court held that the responsibilities of the account manager combined with the smaller functions of the sales representatives exceeded the scope of P.L. 86-272, resulting in the denial of Blue Buffalo’s refund claim.
The decision of the Maryland Court of Special Appeals provides some clarity on what activities are considered to be protected by P.L. 86-272 in Maryland. While the Court upheld the decision of the Maryland Tax Court, its extensive analysis is valuable from a local, as well as national perspective. For businesses with limited operations in Maryland, the Court of Special Appeals’ significant expansion of the scope of protected activities from the Tax Court’s conception is noteworthy. The Court of Special Appeals’ view that consumer relations activities, sales-oriented training and educational activities, display reorganization and inventory checks, even when taken together, can be protected solicitation under certain circumstances may expand the universe of businesses that should revisit their P.L. 86-272 status. In particular, the distinction between complex training and events solely geared towards product promotion may be useful for manufacturers with sales in Maryland to consider.
By the same token, the Court of Special Appeals ensured that the de minimis concept remains a relatively low bar to cross into taxability. It remains the case that just a couple of instances of relatively minor activities that violate P.L. 86-272 (in this case, the provision of non-technical quality assurance and competitive intelligence services) were enough to lose the protection of the rule. Viewed as a whole, the Court of Special Appeals’ interpretation of P.L. 86-272 is at the same time broad and narrow – broad from the perspective of expanding the concept of what is considered ancillary to solicitation and thus protecting the business from taxation, but narrow from the perspective of the very low level of unprotected activity that subjects the business to taxation.
From a broader perspective, since there is relatively little case law nationwide on this issue, businesses that either rely on, or are thinking about utilizing P.L. 86-272 protection in states other than Maryland also have some level of persuasive guidance to consider beyond Wrigley. It will be interesting to see whether other state courts decide to apply the Court of Special Appeals’ P.L. 86-272 analysis (in conjunction with Wrigley) to corporate income tax nexus challenges.
1 Blue Buffalo Co. v. Comptroller of the Treasury, Md. Ct. Spec. App., No. 495 (Dec. 20, 2019), affirming Maryland Tax Court, No. 16-IN-00-0364 (Aug. 30, 2017).
2 Pub. L. No. 86-272, 73 Stat. 555 (1959), 15 U.S.C. § 381.
3 505 U.S. 214 (1992).
4 Kennametal Inc. v. Comm’r. of Rev., 686 N.E.2d 436 (Mass. 1997).
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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