State interpretations of P.L. 86-272 overturned in recent decisions.

Two recent state court decisions have invalidated state regulations that adopted a relatively aggressive interpretation of P.L. 86-272. In general, P.L. 86-272 prohibits states from imposing an income tax on out-of-state sellers whose in-state activities are limited to the solicitation of orders, provided the orders are sent outside the state for approval and the goods are shipped or delivered from a point outside the state. Several states, as well as the Multistate Tax Commission (MTC), have interpreted P.L. 86-272 as protecting only the delivery of goods via common carrier, not delivery in privately owned vehicles. Recent decisions from the Virginia Supreme Court and a Massachusetts superior court reject this interpretation of P.L. 86-272 and provide ammunition for taxpayers to challenge a narrow interpretation in other states.

Background: the MTC Interpretation

In 1994, the MTC issued a report (the "phase II statement") addressing various issues of uncertainty surrounding P.L. 86-272 and advocating a uniform interpretation of the legislation to be applied by the MTC's member states. One of the specific issues addressed in the phase II statement is whether the delivery of goods into a state in a vendor's private vehicles exceeds the protection of P.L. 86-272. The MTC concluded that, although P.L. 86-272 clearly protects the shipment or delivery of goods into the state, neither of those terms necessarily incorporates the concept of delivery in the vendor's private vehicles. Because this conclusion was controversial, the phase II statement also provided alternate language that could be adopted by member states to treat the delivery of goods in private vehicles as a protected activity. To date, approximately 15 states have adopted the phase II statement. Several states have issued rulings or regulations incorporating the MTC's position that delivery in private vehicles is unprotected, while Oregon and Rhode Island adopted the alternate language.

Recent Interpretations

Although the narrow interpretation of "delivery" seemed to be gaining wide acceptance, recent decisions have found it contrary to Federal law. For example, in Department of Taxation v. National Private Truck Council, 1/10/97, the Virginia Supreme Court struck down Va. Reg. section 630-3-401(G)(1), which limited P.L. 86-272 protection to the shipment of goods into Virginia by common carrier. The court explained that P.L. 86-272 extends immunity to the solicitation of orders and to the shipment or delivery of the goods ordered. In drafting P.L. 86-272, Congress did not specify any particular method of delivery necessary to qualify for this immunity. Therefore, by placing restrictions or conditions on the means of delivery, the Virginia regulation violated the plain meaning of P.L. 86-272.

Similarly, in National Private Truck Council v. Commissioner of Revenue, 1/3/97, a Massachusetts superior court invalidated Mass. Regs. 830 CMR 63.39.1(5) (1993), which extended P.L. 86-272 protection only to deliveries made by common or contract carrier. The court held that the regulation was inconsistent with and preempted by P.L. 86-272. If the solicited goods are shipped or delivered from a point outside the state, the corporation is protected by P.L. 86-272 from taxation, regardless of how the delivery is made. Thus, the court determined that a reasonable and sensible construction of the term "delivery" in P.L. 86-272 did not limit it solely to deliveries made by common or contract carrier.

Conclusion

As illustrated by these recent decisions, the debate over the limitations of the protection provided by P.L. 86-272, and more specifically, the definition of "delivery," is certain to continue. The decisions by the Virginia and Massachusetts courts demonstrate that taxpayers may successfully challenge a state rule that unnecessarily limits the immunity provided by P.L. 86-272. Further, the rationale applied in these decisions may be used in other states to challenge similar narrow interpretations of the Federal statute.

From Katia A. Luedtke, J.D., and Glenn D. Todd, J.D., LL.M., Washington, D.C.