Nexus perplexus: a survey of recent developments.

The issue of state income tax nexus has certainly received a great deal of attention in the past few years. In 1992, this issue rose to the highest level possible--the Supreme Court of the United States. Most readers of The Tax Executive are likely familiar with the Court's decision in Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 Ct. 2447 (1992). In Wrigley, the issue was whether the taxpayer's activities in Wisconsin went beyond those activities protected by Public Law No. 86-272. That statute, which was enacted in 1959, prohibits a State from imposing an income tax where a taxpayer's activities are limited to --

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.

The Supreme Court in Wrigley drew a line between activities that constitute protected solicitation and other activities that go beyond the protection of Public Law No. 86-272. It thus drew a line between "those activities that are entirely ancillary to requests for purchases--those that serve no independent business function apart from their connection to the soliciting of orders--and those activities that the company would have reason to engage in anyway but chooses to allocate to its in-state force." The Court also held that the federal statute embodies a de minimis rule, with the test being whether the activity in question "establishes a nontrivial additional connection with the taxing state." Triviality is determined by examining the activities on a cumulative basis.

Several States have already revised their regulations to conform to the Supreme Court's holding in Wrigley. This article discusses recent developments in state income tax nexus, with particular emphasis on how the States have responded to Wrigley.

Massachusetts

The Massachusetts Department of Revenue issued Regulation 830 CMR 63.39.1 (effective January 1, 1993) before the Wrigley decision. This regulation sets forth the circumstances under which a foreign corporation is subject to Massachusetts excise tax. There are several provisions in the regulation that merit particular attention.

First, according to the regulation, a corporation that is merely qualified to do business in Massachusetts must file a return with the Commonwealth and pay the excise tax. On May 5, 1993, however, the Massachusetts Appellate Tax Board held that--

a corporation's mere qualification to do business in

Massachusetts does not constitute a sufficient

business activity to deprive a corporation of the

protection of Public Law 86-272. Another activity that Massachusetts considers to be outside the scope of mere solicitation is the hiring, training, or supervision of personnel. Such activities, according to Wrigley, are entirely ancillary to requests for purchases.

Example 8 in the Massachusetts regulation provides that delivery of product in a corporation's own truck creates nexus for excise tax purposes. This position is contrary to Public Law No. 86-272, which states that goods may be 'shipped or delivered' from a source outside the state without vitiating the protections afforded by the federal statute. Massachusetts distinguishes between deliveries made by common carrier, for which an exception to Massachusetts' tax jurisdiction is provided, and deliveries made in a corporation's own truck. In September 1993, the National Private Truck Council filed a complaint in Massachusetts Superior Court challenging the regulation. The NPTC seeks a declaratory judgment that the regulation contravenes Public Law No. 86-272, the Due Process and Commerce Clauses of the United States Constitution, the Massachusetts Constitution, and a related Massachusetts statute (G.L. c.63 [sections] 39). At this writing, the case is pending.

Finally, a foreign corporation is not subject to Massachusetts excise tax if its contacts are limited exclusively to ownership of tangible personal property stored in a licensed public warehouse in Massachusetts. Therefore, a foreign corporation whose Massachusetts activities are limited to delivering goods by common carrier to a certified public warehouse in Massachusetts would not be subject to excise tax.

New Jersey

New Jersey Courts have historically taken a narrow view of what constitutes solicitation for purposes of the corporation business tax. For example, in the Clairol Inc. v. Kingsley, 262 A.2d 213 (N.J. App. Div.), aff'd, 270 A.2d 702 (N.J. 1970), appeal dismissed, 402 U.S. 902 (1971), the court decided that the corporation was subject to tax based on the presence of detail people and their leased automobiles in the State. The detail people, who were residents, viewed displays, carried sample goods, took inventory, and provided technical assistance. The company itself owned no property and did not maintain any office in New Jersey. In the March-April 1990 issue of State Tax News, the New Jersey Division of Taxation discussed the effect of Public Law No. 86-272 on New Jersey's Corporation Tax. The Clairol case, among others, was cited as evidence of New Jersey's narrow interpretation of the term 'solicitation." The publication also stated that a foreign corporation holding a certificate of authority is considered subject to taxation, notwithstanding Public Law. No. 86-272, because the possession of the certificate itself establishes sufficient nexus with the State.

Recently, the Division unsuccessfully sought to impose the corporation business tax on a commercial printer based in Philadelphia. In Pomco Graphics, Inc. v. Director of Taxation, Dkt. No. 04-16-1526-89-CB (N.J. Tax Court Sept. 1, 1993), the court referred to the new tests established in Wrigley in deciding that all of Pomco's in-state activities were "entirely ancillary to requests for purchases." The court therefore rejected the Division's argument that Pomco was engaged in selling printing services rather than tangible personal property. Further, the court said the acquisition of a casino service license by Pomco was an activity clearly ancillary to the solicitation of orders. The court held that Pomco's "sole purpose in securing a casino service license was to enable it to legally solicit orders for its paper products from New Jersey casinos."

Finally, New Jersey has adopted the Multistate Tax Commission's revised Statement of Information Under Public Law 86-272 with one exception: Corporate ownership of an automobile registered in New Jersey for New Jersey resident sales personnel will subject the corporation to taxation in New Jersey, and, therefore, will not be an immune activity.

New York State

New York State's Regulation [subsections] 1-3.2 and 1-3.4 were amended July 1, 1992, to reflect the Wrigley decision. Consistent with the Supreme Court's holding, Regulation [section] 13.4(9)(iv) states that "[t]he solicitation of orders includes offering tangible personal property for sale or pursuing offers for the purchase of tangible personal property and those ancillary activities, other than maintaining an office, that serve no independent business function apart from their connection to the solicitation of orders." In addition, the New York regulations provide a de minimis exception for activities that exceed solicitation of orders.

New York has issued a number of advisory opinions relating to nexus in years prior to the Wrigley decision. Several of these are worthy of mention. For example, in American Crane Corp., TSB-A-91(19)C, the Department of Taxation and Finance held that a North Carolina crane manufacturer was "doing business" on the basis of repair work performed in New York for a maximum of two weeks a year. The Department concluded that repair work exceeds solicitation and is not protected under Public Law No. 86-272. Presumably, however, American Crane's New York activities would be considered de minimis under the amended New York regulations.

In Blenheim Franchise Shows, Inc., TSB-A-91(21)C, a foreign corporation rented space in a New York State convention center for three days in connection with a franchise show. This was 1 of 43 franchise shows held by the corporation during 1990. The Department held that Blenheim's activities constituted doing business in New York. Again, such limited presence would most likely be de minimis under the amended New York regulations.

Finally, in Quantum Resources Corp., TSB-A-91(2)C, a foreign corporation leasing temporary employees to its clients in New York was subject to New York State franchise tax. The corporation's activities in New York were limited to engaging temporary employees to provide services at the client's facilities. The leased employees used the client's equipment and supplies and were under the client's supervision. Since Quantum's employees provided services in New York (an unprotected activity), the corporation was considered to be doing business. The Department came to this conclusion even though the corporation did not employ capital, own or lease property, or maintain an office in New York.

New York City 

New York City has amended its rules with respect to activities that will subject a corporation to the New York City general corporation tax. These rules, effective December 22, 1992, conform with New York State's regulations and reflect the Supreme Court's holding in Wrigley.

Under N.YC. Gen. Corp. Tax Reg. [sections] 11-03, a tax is imposed on every domestic and foreign corporation, with certain exceptions, that does business, employs capital, owns or leases property in New York City or that maintains an office in the City. The amended rule defines the above terms and includes examples of corporations that are subject to tax because they are engaged in one or more of these activities in the City. As an indication of the City's narrow view of "ancillary" to requests for orders, one example provides that a foreign corporation whose activities are limited to the leasing of an unstaffed exhibit booth for two weeks a year creates nexus with the City.

New York City has rescinded its longstanding policy by amending Gen. Corp. Tax Reg. [sections] 11-04(a)(11) to provide that "[t]he applicability of Public Law 86-272 to taxes imposed by New York City is determined by the nature of the corporation's activities in the entire state." In other words, a company whose activity in New York City is limited to solicitation of orders may be subject to New York City General Corporation Tax by virtue of unprotected activities carried on elsewhere in New York State (i.e., maintenance of inventory in an upstate warehouse). The Department of Finance has stated that this revision will only be applied prospectively.

Pennsylvania

Pennsylvania imposes both a Corporate Net Income Tax (CNI) and a Capital Stock/Franchise tax. The Commonwealth uses different nexus standards in determining whether a taxpayer is subject to a particular tax.

Every domestic corporation is subject to the Capital Stock Tax, no matter what it is doing in Pennsylvania. The Foreign Franchise Tax is a tax for the privilege of doing business in Pennsylvania. The applicable statute, as amended in 1986, imposes the franchise tax on every foreign corporation "doing business in . . . or carrying on activities . . . including solicitation or either owning or having capital or property employed or used in the Commonwealth . . . ." In Clairol, Inc. v. Commonwealth, 518 A.2d 1165 (Pa. 1986), the Pennsylvania Supreme Court held that solicitation itself was sufficient to subject the corporation to foreign franchise tax. As a result, it is possible for a corporation to be subject to Pennsylvania franchise tax but not the CNI tax.

The imposition of Pennsylvania CNI tax is circumscribed by Public Law. No. 86-272. In United States Tobacco Co. v. Commonwealth, 386 A.2d 471 (Pa. 1978), the court concluded that solicitation should be broadly defined. As stated by the court:

Appellant's only contacts with this state-visiting

retail outlets, introducing new products, and advising

retailers on making attractive displays of

appellant's products--are inextricably related to

solicitation .... Solicitation cannot mean that a

foreign corporation may do no more than send

salespeople into another state who leave brochures

describing their employer's products, hoping the

prospective customer will then take the initiative

to contact the employer for a possible sale. The court also found it insignificant that salespeople were furnished with automobiles registered in the state. Of course, United State Tobacco Co. pre-dates the U.S. Supreme Court's decision in Wrigley, so it is questionable whether Pennsylvania will continue to embrace such a broad interpretation of nexus in the future.

Virginia

In P.D. 92-230 (November 9, 1992), Virginia's Commissioner of Taxation ruled that a corporation that delivers tangible personal property into Virginia in its own trucks is subject to Virginia income tax. The operation of a taxpayer's trucks on Virginia highways is considered to exceed solicitation under Public Law No. 86-272. The ruling also states that the regular use of Virginia highways is not a de minimis non-ancillary activity. This decision overrules the Department's previous policy of allowing out-of-state taxpayers to use their own trucks to deliver goods into Virginia without losing Public Law No. 86-272 protection.

Another ruling, P.D. 93-59 (March 11, 1993), dealt with the use of leased trucks on Virginia highways. An out-of-state corporation that employed leased trucks to deliver goods to customers, including those in Virginia, was held to have a taxable nexus with Virginia. The trucks were leased by the taxpayer and driven by the taxpayer's employees. Regular and continued use of Virginia highways for delivery of goods by the taxpayer's employees is an independent business function separate from solicitation, the Commissioner concluded. And such activity is not considered de minimis.

Wrigley held that "Providing a car ... to salesmen is part of the solicitation of orders . . . ." The opinion states: We hardly think the statute had in mind only day-trips into the taxing jurisdiction by empty-handed drummers on foot." By the same token, it would be difficult to accomplish delivery of goods without the use of a truck!

In today's multistate environment, corporate tax professionals must deal with a myriad of constantly changing nexus rules and regulations. Although Wrigley has helped to clarify the scope of activities protected by Public Law No. 86-272, the decision by no means established a brightline test that would have minimized disputes. The de minimis rule, while a step in the right direction, will certainly be at the core of future nexus controversies.

Jonathan A. Liss is Supervisor of State Income and Franchise Taxes for Rohm and Haas Company in Philadelphia. He is a member of Tax Executives Institute's Philadelphia Chapter, as well the Committee on State Taxation and the Philadelphia Chamber of Commerce-Local Tax Committee. He received a B.S. in Accounting from Drexel University and an M.S. degree in Taxation from Temple University.