Rethinking scope of delivery under P.L. 86-272.

• Author: Brennan, Becky L.
• Position: Interstate Income Tax Act of 1959

In the modern economy, where companies frequently have large out-of-state markets, many states have increased their efforts to tax companies that are domiciled outside of their borders. There is a trend among states to broaden their tax base by implementing factor presence economic nexus standards. However, since 1959, the Interstate Income Tax Act, P.L. 86-272, has protected certain taxpayers from any requirement to pay income tax. P.L. 86-272 prohibits imposition of state income tax on an outof-state company with state activities that are limited to solicitation of orders for sales of tangible personal property and delivery of the property if the orders are sent outside of the state for approval and fulfillment.

The meaning of "solicitation," one of the key elements of P.L. 86-272, has received significant attention from the U.S. Supreme Court. The Court has not provided similar guidance as it relates to the meaning of the "delivery" element of the test. As a result, the definition of "delivery" has been left up to the states, many of which have narrowed the definition either through regulations or rulings.

Further Clarification on Scope of "Delivery" Is Needed

It has been suggested that the term "delivery" for purposes of P.L. 86-272 protection should be subject to the same standard as was established in Wrigley, 505 U.S. 214 (1992), for "solicitation." Specifically, delivery-related activities that have no business purpose outside of the delivery of orders should be protected from state taxation. While this argument is compelling, there is room for certain delivery-related activities that do serve a separate business purpose and would not, therefore, be protected under a Wrigley-tyyie. of analysis.

In Wrigley, the state of Wisconsin argued for a narrow interpretation of solicitation that was limited to those activities leading to placement of orders. The taxpayer argued that its activities fell under the protection granted by P.L. 86-272 because it sent orders outside of the state for approval. Ultimately, the Supreme Court concluded that "the statutory phrase uses the term 'solicitation in a more general sense that includes not merely the ultimate act of inviting an order but the entire process associated with the invitation." The Court determined that solicitation includes activities that are ancillary to requests for purchases.

Following are delivery-related activities that may be ancillary to the delivery process as well as certain circumstances in which these activities would not be protected under P.L. 86-272.

Backhauling

Backhauling is when a company-owned vehicle carries a load of product on its return trip after...