Minnesota rules market reports exceed P.L. 86-272 protection

On Aug. 7, 2024, the Minnesota Supreme Court held that the market research reports prepared by a taxpayer’s sales representatives in Minnesota went beyond the “solicitation of orders” that are protected under Public Law (P.L.) 86-272.¹ The court also determined that the reports were not a permitted de minimis activity because the representatives prepared over 1,600 reports during the two tax years at issue. As a result, the taxpayer was subject to Minnesota corporate income and franchise tax because its sales representatives engaged in activities creating sufficient nexus with the state.

Background

The taxpayer, based in Wisconsin, is a seller of industrial and packaging products. While the taxpayer’s business is based on internet and catalog sales, the taxpayer also employed sales representatives who regularly visited customers in Minnesota. The taxpayer had nexus with Minnesota through its operation of a distribution center in the state until September 2013. Following the move of its distribution center to Wisconsin, the taxpayer claimed an exemption from Minnesota income and franchise tax for the 2014 tax year and did not file a Minnesota tax return for 2015.

During the 2014 and 2015 tax years at issue, the taxpayer employed approximately 24 sales representatives whose territory included Minnesota customers, and each sales representative was expected to manage up to 7,000 accounts. The representatives were required to record Sales Notes for every customer visit which provided a summary of the visit. In addition, the taxpayer mandated that each representative prepare at least two Market News Notes every week that included a much wider variety of information, including customers’ special delivery needs, bulk pricing requests, complaints about product or service quality, need for certain products, and what products customers were buying from competitors. Furthermore, the Market News Notes contained information about the taxpayer’s competitors such as detailed product information. The Market News Notes were entered into a shared sales database and intended to be shared with different departments on a weekly basis.

In 2017, the Minnesota Commissioner of Revenue determined that the taxpayer was subject to Minnesota income and franchise tax for the 2014 and 2015 tax years. The Commissioner denied the taxpayer’s appeal of this assessment and the taxpayer subsequently filed an appeal with the Minnesota Tax Court. In affirming the assessment, the court held that the regular and systematic preparation of the Market News Notes that were accessible to non-sales personnel went beyond mere solicitation of orders for purposes of tax immunity under P.L. 86-272.² The taxpayer appealed the Tax Court’s decision to the Minnesota Supreme Court.

Activities of sales representatives created nexus with state

The Minnesota Supreme Court held that the preparation of the Market News Notes by the taxpayer’s sales representatives in the state during 2014 and 2015 subjected the taxpayer to Minnesota income and franchise tax. In affirming the tax assessment, the court first reviewed P.L. 86-272 and the relevant case law. P.L. 86-272 is a 1959 federal law that limits the state taxation of income from sales of tangible personal property if the taxpayer’s only business activities in the state are the solicitation of orders that are approved and shipped from outside the state.³ This federal law is directly incorporated into the Minnesota law governing the minimum contacts required for jurisdiction to tax a trade or business.⁴

The key term “solicitation of orders” is not defined by P.L. 86-272, but the U.S. Supreme Court interpreted this phrase in Wisconsin Department of Revenue v. William Wrigley, Jr., Co.⁵ According to the Court, protected solicitation of orders includes activities that are “entirely ancillary” to requests for purchases (those that serve no independent business function apart from their connection to soliciting orders). However, activities that have a business purpose independent of soliciting orders that are assigned to in-state sales representatives are not protected under P.L. 86-272. The Court explained that business activities that help increase purchases but are not ancillary to requesting purchases cannot be converted to protected “solicitation” by being assigned to sales representatives. Furthermore, the Court held that in-state activities that go beyond the solicitation of orders are protected by P.L. 86-272 if they are de minimis activities. Courts make this determination by considering whether the activity establishes a nontrivial additional connection with the taxing state. If the activities are de minimis, they do not create the requisite nexus to support taxation.

The Minnesota Supreme Court held that the preparation of Market News Notes by the taxpayer’s sales representatives in Minnesota was not protected as solicitation of orders under P.L. 86-272. The taxpayer unsuccessfully argued that the creation of the Market News Notes was a protected activity because it was part of the taxpayer’s sales process. In rejecting this argument, the court explained that Wrigley made clear that simply because a company makes a particular activity part of its sales process, this does not mean that the activity is protected by P.L. 86-272. However, the court was required to decide whether the preparation and sharing of the Market News Notes by the taxpayer’s Minnesota sales team went beyond the bounds of solicitation of orders under P.L. 86-272 as interpreted by Wrigley. The court concluded that the Market News Notes were not protected activities because the taxpayer had good reason to prepare the notes regardless of whether it had a sales force. The Market News Notes provided information that was more relevant to departments other than the taxpayer’s sales department. For example, comments in the Market News Notes regarding warehouse issues were directed to the warehouse department. The court also noted that the Market News Notes were stored in a sales department database that was accessible to other departments. According to the court, the purpose of the Market News Notes “clearly went beyond effectuating more effective requests for purchase.”

After determining that the preparation of the Market News Notes was not protected as a solicitation of orders, the court concluded that the activity was not a de minimis activity for purposes of P.L. 86-272. The taxpayer argued that even if some aspects of the preparation of Market News Notes fell outside the protection of P.L. 86-272, those activities were de minimis and did not create the necessary nexus to support the imposition of Minnesota income and franchise tax. The basis for this argument was that the taxpayer’s sales team had many more customers and prepared many more Sales Notes than the total number of Market News Notes. In rejecting the taxpayer’s argument, the court noted that the relative magnitude of the unprotected activities was not a compelling reason to find only a trivial connection with Minnesota. The court explained that the fact the taxpayer’s 24 sales representatives prepared over 1,600 individual Market News Notes in Minnesota during the two years at issue indicated that the activity was regular and systematic.

Commentary

The Minnesota Supreme Court’s decision provides valuable insight regarding the scope of P.L. 86-272 protection and the application of the U.S. Supreme Court’s Wrigley decision. Cases concerning P.L. 86-272 require a careful consideration of the facts and the specific activities that a taxpayer’s sales representatives perform in a state. In this case, the more traditional activities conducted by the taxpayer’s representatives in Minnesota in the form of Sales Notes were protected by P.L. 86-272 because they were considered to fall within the solicitation of orders. However, the Market News Notes prepared by the sales representatives were more akin to market research outside the scope of the sales function. The information in these reports was entered in a database and shared with other departments. The court explained that this was a marketing function outside the scope of soliciting sales. The fact that the preparation of the Market News Notes was assigned to sales representatives in Minnesota did not transform this activity to a protected solicitation of orders. The Market News Notes were a necessary marketing activity that would be performed outside the sales function.

The court’s analysis should be useful in making P.L. 86-272 determinations in Minnesota, and potentially in other states, for businesses with traditional operational models in which their physical presence is limited to employees engaged in the sales process. The activities of sales representatives in a state need to be carefully evaluated in determining whether the scope of P.L. 86-272 is exceeded and a company has nexus with a state. In this particular case, the taxpayer thought it no longer had nexus with Minnesota after closing its distribution center in the state, but it continued to have nexus based on its sales representatives’ activities in Minnesota.

It should be noted that the Minnesota Supreme Court’s decision did not address the Minnesota Tax Court’s analysis regarding other aspects of Uline’s business which in the view of the Tax Court, did not violate P.L. 86-272 protection. These aspects included: (i) Uline’s participation in job fairs and recruitment efforts in Minnesota; (ii) sales representatives’ roles in customer complaints and returns; and (iii) a Uline executive’s occasional work from his Minnesota residence. Since the Tax Court ruled against the Commissioner on these issues, and the Commissioner did not preserve an appeal based on this aspect of the Tax Court’s decision, the Supreme Court limited its analysis to the activity surrounding the development of the Market News Notes. Given that disposition, it is fair to say that taxpayers could continue to rely upon the Tax Court’s analysis with respect to the three issues that were decided in favor of Uline as a means to consider whether such limited activities could qualify for P.L. 86-272 protection.