The challenges in establishing protection under Public Law 86-272 (“P.L. 86-272”) were on display in a recent decision of the Minnesota Tax Court. Uline, Inc. v. Commissioner of Revenue, Minn. Tax Court, No. 9435-R (June 23, 2023).

Facts: Uline, Inc. (“Uline”) is a business-to-business catalog and web-based distributor of shipping, industrial, and packaging products throughout North America, having its corporate headquarters in Wisconsin. Uline ships products to customers from seven distribution centers maintained throughout the United States. Through 2013, Uline operated a distribution center in Minnesota, but closed it late that year and opened a new distribution center in Wisconsin, which serviced Minnesota. Thereafter, Uline did not maintain an office, distribution center, or other place of business in the State, although (as discussed below) it did have a sales representative in Minnesota.

Uline filed a final Minnesota tax return for the 2014 tax year, claiming exemption from Minnesota corporate franchise tax under P.L. 86-272. This federal law exempts out-of-state businesses from state and local income tax where the in-state activities do not exceed the solicitation of orders for the sale of tangible personal property. Following an audit, the Minnesota Department of Revenue assessed tax against Uline, concluding that it was subject to tax in both 2014 and 2015, on the grounds that its Minnesota activities exceeded the protections of P.L. 86-272.

Uline employed approximately 24 sales representatives whose territories included Minnesota customers. Between one and four times per year, the sales representatives visited customers in Minnesota to solicit orders and also provided samples and made demonstrations free of charge. While customers could place orders through the Uline web site or by phone, orders were also placed with the sales representatives directly during their visits.

Tax Court Decision: The Tax Court evaluated whether Uline’s Minnesota business activities exceeded solicitation within the meaning of P.L. 86-272, applying the guidelines regarding the phrase “solicitation of orders” set out in the 1992 U.S. Supreme Court decision in Wisconsin v. Wm. Wrigley, Jr. The Court first considered the in-state activities of Uline’s non-sales representative employees—specifically, attendance at Minnesota job fairs and an executive who periodically made business calls and answered e-mails from his home in Minnesota—and found they did not result in nexus.

The Court found that the ten occasions (over a two-year period) in which Uline’s in-state sales representatives accepted product returns from customers was not entirely ancillary to protected solicitation but was nonetheless de minimis and would not defeat P.L. 86-272 protections. More problematic was another function of the sales representatives – they were required to regularly prepare “market news notes” from customers that they visited, which principally included obtaining information about Uline’s competitors’ pricing and discounts, and what customers were purchasing from those competitors. This information was then made accessible to both sales representatives and non-sales personnel at Uline.

The court concluded that while this practice unquestionably facilitated sales in general, it did not, as found to be essential in Wrigley, “facilitate the requesting of sales” by Uline’s customers. Moreover, it held that the activity of collecting and reporting competitor data was not de minimis, noting that the Minnesota sales representatives together produced more than 1,600 individual market news notes over the two years in issue. Therefore, the Tax Court held that Uline was subject to Minnesota corporate tax.

The Takeaway: One takeaway from this decision is it illustrates how careful a business needs to be to not inadvertently cross the line from protected solicitation to activities that exceed solicitation. Another is that a business that files a final state tax return should expect heightened scrutiny by state tax auditors.