Is "mere delivery" a protected activity?

The Interstate Commerce Tax Act (EL. 86-272) provides that the shipment and delivery of tangible personal property (TPP) from a point outside a state to a customer located in that state are protected activities and do not trigger a state corporate net income tax return filing requirement. The relevant portion of EL. 86-272 states, in part:

No State ... shall have power to impose ... 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....

Unfortunately, P.L. 86-272 does not provide guidance as to whether delivery by a company in its own vehicles will comprise a protected activity under Federal law. Further, there is a general lack of other Federal guidance on whether this activity is protected. While Federal authority on the issue may be lacking, Arizona, Florida, Illinois, Massachusetts, Nebraska, New York, New Jersey, South Carolina, Texas and Virginia have all provided explicit authority on whether P.L. 86-272 protection extends to delivery in company-owned vehicles. All of these states, with the exception of Florida and Illinois, view this type of delivery as a protected activity that does not trigger a net income tax return filing requirement. Further, the level of the authority enumerating these positions varies dramatically from state to state. Massachusetts's highest authority, the state supreme court, held that this type of delivery is protected, while the Florida Department of Revenue (DOR) has stated its position in a less authoritative technical assistance advisory.

The States' Positions

The following is an overview of the above-mentioned States' current positions.

Arizona: Delivery by private vehicle or by any other method or carrier is an explicitly protected activity under P.L. 86-272; see AZ Corporate Tax Ruling 99-5 (5/25/99).

Florida: Delivery of TPP in company-owned vehicles is an unprotected activity; see FL Technical Assistance Advisement No. 95(C)1-004 (3/17/95).

Illinois: Delivery of TPP in company-owned vehicles requires the filing of an income tax return; see IL DOR. General Information Letter IT 000002-GIL (1/11/00).

Massachusetts: The state supreme judicial court overruled a regulation that had historically required companies delivering in private vehicles to file net income tax returns; see Nat'l Private Truck Council, Inc. v. Comm'r of Rev 688 NE2d 936 (1997), cert. den.

Nebraska: Similarly, a revenue ruling, citing Nat'l Private Truck Council, Inc., concluded that deliveries into the state by a company using its own vehicles is also a protected activity; see. NE Revenue Ruling 24-01-01 (2/22/01).

New Jersey: The Division of Revenue indicated that mere delivery in company-owned trucks was a protected activity under P.L. 86-272, as long as it did not involve pick-up, set-up, installation, removal, pouring and inserting; see 25 NJ State Tax News 4 (Spring 1996). This policy was later confirmed in a court decision, even though the taxpayer was ultimately subject to corporation business tax because its activities exceeded mere delivery; see Chester A. Asher, Inc., 22 NJ Tax 582 (2006).

New York: Delivering typeset negatives to in-state customers is a protected activity under P.L. 86-272; see NY Advisory Opinion No. TSB-A-84(11)C (9/11/84).

South Carolina: Delivery of TPP in company-owned delivery trucks is a protected activity; see SC Revenue Ruling 98-3 (1/21/98).

Texas: A comptroller's decision, citing both the Massachusetts Supreme Court case discussed above and the Virginia Supreme Court case discussed below, provided that this type of activity was protected under P.L. 86-272 for earned surplus purposes, and overruled a previous comptroller's decision indicating that delivery in company-owned vehicles was unprotected; see. TX Comptroller's Decision No. 36,590 (1/20/00).

Virginia: The state supreme court overruled a regulation that had subjected companies to a net income tax filing requirement if they used their own truck fleets to deliver TPP, and indicated that this type of delivery was protected; see Dep't of Tax' n v. Nat'l Private Truck Council, 480 SE2d 500 (1997).

MTC 

Prior to July 2001, the Multistate Tax Commission (MTC) explicitly indicated that the delivery of TPP in company-owned vehicles was an unprotected activity under P.L. 86-272. Specifically, the July 1994 Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 (MTC document) indicated, in part:

A. UNPROTECTED ACTIVITIES:

The following in-state activities (assuming they are not of a de minimis level) are not considered as either solicitation of orders or ancillary thereto or otherwise protected under P.L. 86-272 and will cause otherwise protected sales to lose their protection under the Public Law:

...

20. Shipping or delivering goods into this state by means of private vehicle, rail, water, air or other carrier, irrespective of whether a shipment or delivery fee or other charge is imposed, directly or indirectly, upon the purchaser....

However, in July 2001, this item 20 was revised to read "[RESERVED]"; the MTC document no longer explicitly indicated that this type of delivery was unprotected. However, nor did the MTC document explicitly mention that delivery in company-owned vehicles was a protected activity. Because numerous jurisdictions are MTC participants (21 as Compact Members, 5 as Sovereignty Members, 18 as Associate Members and 3 as Project Members), it is not unreasonable to conclude that many of the MTC member jurisdictions that impose a net income tax subsequent to the issuance of the 2001 MTC document, may now in practice consider that delivery in company-owned vehicles is an activity protected by P.L. 86-272 that does not require the filing of a net income tax return.

A Limited Trend?

Without explicit Federal authority, such as a U.S. Supreme Court decision or legislation addressing whether delivery in company-owned vehicles is a protected activity under P.L. 86-272, a multi-jurisdictional taxpayer is unable to depend on a single standard when determining whether to file a net income tax return in a state in which its activities, in addition to the solicitation of sales of TPP, consist solely of delivering TPP to in-state customers in company-owned vehicles. However, based on all of the above-mentioned authority, it is not unreasonable to conclude that the states are currently trending toward the applicability of P.L. 86-272 protection to "mere" delivery in company-owned vehicles.

Why? First, eight of the 10 above-mentioned states with explicit authority currently treat this type of delivery as protected. Further, both Massachusetts and Virginia courts stuck down regulations that historically subjected delivery in company-owned vehicles to a net income tax return filing requirement. Similarly, the Texas comptroller overruled its own decision and indicated that this type of delivery was a protected activity under P.L. 86-272. Moreover, even the MTC has reversed its policy of treating delivery in company-owned vehicles as an explicitly unprotected activity, by removing this type of delivery from its list of unprotected activities. Finally, it does not appear that the trend extends beyond the "mere" delivery of TPP in company-owned vehicles, because none of the abovementioned authority explicitly mentions that potentially related activities (such as backhauling, pick-up, set-up, installation, removal, pouring, inserting, etc.) are also protected.

FROM GARY PERIC, J.D., CPA, AND SEAN O'LEARY, J.D., OAK BROOK, IL