Current corporate income tax developments.

• Author: Boucher, Karen J.
• Position: Part 1 - State law

EXECUTIVE SUMMARY

* In some states, the taxpayer's delivery of goods in its own vehicles does not constitute nexus (e.g., Massachusetts and New York); in others (e.g., Indiana and Texas, it does.

* Some states have held that, while certain services were beyond "mere solicitation," the were de minimis and, thus, did not trigger nexus.

* New York, Iowa and Tennessee have promulgated new nexus exemptions.

As has been the trend in recent years, states continue to try to increase revenues by expanding the activities that constitute nexus for corporate tax purposes. Part I of this two-part article focuses on significant nexus activities that will affect the majority of taxpayers and highlights the novel approaches demonstrated by some of the more aggressive states.

As with prior years, over the past 15 months an overwhelming number of state statutes were modified, added and deleted; court cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued or withdrawn. Because it is impractical to summarize all of these activities, Part I of this article focuses on significant nexus activities that will affect the majority of taxpayers and highlights the novel approaches demonstrated by some of the more aggressive states. Part II, in the September issue, will address tax base and apportionment issues.

Nexus

PL. 86-272 prohibits a state from taxing a business when its only connection with the state is the solicitation of orders for sales of tangible personal property that are sent out of the state for approval or rejection, and, if approved, filled and shipped by the business from a point outside the state. A number of state cases and rulings have addressed whether the taxpayer's in-state activities fall with the protection of P.L. 86-272.

Activities Exceed Solicitation

* Massachusetts

In Kennametal Inc. v. Comm'r of Rev.,(1) the Massachusetts Supreme Court narrowly interpreted the U.S. Supreme Court's decision in Wisconsin Dep't of Rev. (DOR) v. William Wrigley, Jr., Co.,(2) to impose Massachusetts' corporate excise tax. Under P.L. 86-272, taxpayers can solicit tangible personal property sales in a state without becoming subject to its income tax. Wrigley provided the first guidance as to what constituted "solicitation" under P.L. 86-272, defining it as any activities "entirely ancillary to requests for purchases" that do not serve any independent business purposes.

The Massachusetts Supreme Court ruled that the taxpayer's frequent in-plant presentations, inventory analysis for tool standardization programs and testing of samples exceeded solicitation. According to the court, these activities not only invited orders, but also ingratiated customers to the company and assisted them in making buying decisions.

* Massachusetts

In Amgen, Inc. v. Comm'r of Rev.,(3) the taxpayer was held liable for Massachusetts corporate income tax, because its activities in the state exceeded mere order solicitation. The taxpayer was a Delaware corporation with its primary place of business in California. It developed two new pharmaceutical products; its activities in Massachusetts were primarily the selling of these products. The taxpayer also monitored the research and clinical studies performed in Massachusetts, provided multi-day educational seminars and maintained ownership and control of the supplies used in such studies and retained employees to review specific patient charts and answer patient-specific questions. Additionally, the taxpayer was involved in patent infringement litigation in Massachusetts.

The taxpayer asserted that all of these activities were protected because they were ancillary to order solicitation, and therefore should not subject it to tax in Massachusetts. However, the Massachusetts Appellate Tax Board ruled that the activities were not ancillary to order solicitation; rather, they had an independent business purpose that subjected the company to Massachusetts corporate income tax for the years in question.

In-State Delivery/Backhauling in Company-Owned Vehicles

* Indiana

An S corporation that printed and delivered newspapers for numerous customers, including customers in Indiana, was doing business there; thus, its shareholders were required to report their share of the company's income or loss derived from Indiana sources.(4) Generally, a taxpayer is doing business in Indiana for apportionment purposes if it operates a business enterprise or activity in the state, including merchandise distribution to customers directly from company-owned vehicles when title passes at the time of distribution. In the instant case, the taxpayer owned a Kentucky printing plant at which a majority of its production was for local customers. However, some of the customers served by the Kentucky plant were from the surrounding states, including Indiana. Because the taxpayer delivered newspapers to its Indiana customers' business place using its own trucks and sent salespeople into Indiana for business, its activities there exceeded mere order solicitation.

* Massachusetts

The Massachusetts Supreme Judicial Court affirmed a Superior Court decision that PL. 86-272 protection extends to companies that limit their activities within...