As previously reported, a tobacco manufacturer seeks U.S. Supreme Court review of an Oregon ruling that its activities were not protected by Public Law 86-272.1 The review petition looks beyond the manufacturer’s precise activities to request broad clarification on protected activities in the internet era. Although P.L. 86-272 may not itself be a nexus law, historically it greatly limited states’ ability to impose income tax. This longstanding federal law prohibits states from imposing an income tax on an out-of-state business whose activities in the state are limited to soliciting sales of tangible personal property. Following the Multistate Tax Commission’s 2021 revised statement on the law, however, an increasing number of states take the position that a variety of commonplace internet activities are not protected.2 The manufacturer’s petition characterizes the MTC’s revised statement as a “source of confusion and controversy” amid recurring “conflicting and inconsistent interpretations” nationwide, and argues that the statement represents an attempt to rewrite the law rather than to interpret it.3 As the Court mulls the request for review, Checkpoint Catalyst’s survey of state tax agencies on their approaches is worth revisiting. While the California, New Jersey, and New York agencies have officially adopted approaches similar to the MTC statement revisions, a number of state tax agencies indicated that they are informally following the statement; others indicated an intention to move toward formal adoption.
The Oregon case.
In June, the Oregon Supreme Court ruled that an out-of-state tobacco manufacturer breached the protection of P.L. 86-272 because the manufacturer’s representatives took “prebook orders” in addition to more conventional “sell sheet orders” on behalf of the manufacturer’s wholesaler customers.4 The prebook orders involved a form generated by the manufacturer and completed by the manufacturer’s representatives on behalf of the Oregon retailers who were the manufacturer’s indirect customers. After completion by the manufacturer’s sales representative, each prebook order was signed by the retailer and then sent by the representative to the wholesaler. Incentive agreements between the manufacturer and wholesalers required the wholesaler to accept and process these prebook orders, and any wholesalers who breached the incentive agreements lost future incentive payments and were required to repay incentive payments already received. According to the court, the representatives were not merely “enabling” the wholesalers to sell the tobacco products to retailers but were essentially requiring wholesalers to sell the products and facilitating prebook order sales, activities which exceeded the solicitation protected by P.L. 86-272.
The petition to the U.S. Supreme Court.
In its petition for certiorari, the manufacturer seeks clarification from the U.S. Supreme Court concerning which activities constitute protected solicitation under P.L. 86-272. Arguing that Oregon Supreme Court decision directly conflicts with the U.S. Supreme Court’s 1992 decision in Wrigley,5 the manufacturer construes the prebook orders as protected “missionary activities” that are ancillary to solicitation.
The brief also characterizes the MTC’s revised statement as a “source of confusion and controversy” amid recurring “conflicting and inconsistent interpretations” of the statute nationwide. According to the manufacturer, the MTC’s revised statement “goes beyond interpretation and effectively rewrites the statute by creating new categories of unprotected activities that are not based on the plain language or legislative history.” The MTC’s revised statement takes the position that a business can breach P.L. 86-272 protection by conducting many commonplace activities over the internet, including but not limited to: selling streaming entertainment, providing post-sale assistance to customers by electronic chat or e-mail, using internet cookies for purposes exceeding solicitation, transmitting code or other electronic instructions for or fixes to previously purchased products, and inviting viewers in the state to apply for non-sales jobs through the business’ website.6
Proposed amendment to P.L. 86-272.
Earlier this year, the confusion surrounding P.L. 86-272 led three Congressional representatives to propose H.R. 8021, which would have amended the law and explicitly defined protected solicitation to include “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.” The proposal stalled in committee.
Our survey on states’ approaches.
Whether or not the U.S. Supreme Court grants certiorari remains to be seen, but the prevailing uncertainty surrounding P.L. 86-272 immunity is undeniable. More than four years after the MTC’s revised statement was finalized, only three state tax agencies–in California, New Jersey, and New York–have officially adopted approaches substantially similar to the MTC’s. Even in those states, policies may be in flux. As discussed in a previous article, the California guidance was voided by a state court for procedural reasons; New York’s regulations are being challenged; and a 2023 New Jersey Tax Court ruling reaffirmed that nexus must be established before narrowed interpretations of P.L. 86-272 protection come into play.
Checkpoint Catalyst’s survey of state tax agencies’ approaches confirms that many states are following the statement informally or preparing to follow it formally in whole or in part. Few agencies conclusively ruled out the possibility that they are following the revised statement. A detailed overview of the survey findings appears in Cornett and Newton-Clarke, Multistate Survey: Income Tax Immunity Erodes as States Follow MTC Statement on P.L. 86 – 272, State Tax Update, 08/06/2024.
Additional Checkpoint resources.
Two Nexus Assistant Charts incorporate the findings of Checkpoint Catalyst’s survey for each state, alongside the state’s relevant laws, regulations, rulings, guidance, and historical approach:
- P.L. 86-272 and MTC Conformity–Conformity to MTC Statement on P.L. 86-272 (2021 Revision); and
- P.L. 86-272 and MTC Conformity–Conformity to MTC Statement on P.L. 86-272 (Any Version).
Checkpoint Catalyst subscribers may preview these charts in Catalyst Topic #1002: Nexus (Corporate Income and Business Activity Tax), Quick Look. Filtering, sorting, and other deeper chart functionalities are available only in the Nexus Assistant charts tool itself.
In-depth overviews of each state’s approach to P.L. 86-272 and nexus are available in Catalyst Topic #1002: Nexus (Corporate Income and Business Activity Tax).
1 Santa Fe Natural Tobacco Co. v. Dept. of Rev., Or. S. Ct., Dkt. No. SC S069820, 06/20/2024, cert. filed, U.S. S. Ct., Dkt. No. 24-551, 11/15/2024.
3 Petition for Writ of Certiorai, Santa Fe Natural Tobacco Co. v. Dept. of Rev., Or. S. Ct., filed 11/11/2024.
4 Santa Fe Natural Tobacco Co. v. Dept. of Rev., Or. S. Ct., Dkt. No. SC S069820, 06/20/2024, cert. filed, U.S. S. Ct., Dkt. No. 24-551, 11/15/2024.
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