U.S. Supreme Court clarifies state taxation of out-of-state corporations.

• Author: Wood, Robert W.

Through its ruling in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 112 Sup. Ct. 2447 (1992), the U.S. Supreme Court provided clarification of the Federal law that protects out-of-state corporations from state income tax when their in-state activities are limited to the solicitation of sales.

PL 86-272 prohibits a state from taxing the income of a corporation whose only in-state business activities consist of solicitation of orders for tangible goods, provided the orders are sent out-of-state for approval and the goods are delivered from out-of-state. Historically, the parameters of PL 86-272 were not clear, particularly the definition of the term "solicitation." The subject of extensive litigation since the law's passage in 1959, solicitation has been interpreted broadly by some state courts , while others have viewed it very narrowly.

The Supreme Court's, Wrigley decision provides some clarity. First, the Court held that the term "solicitation of orders" includes all activities that are "entirely ancillary" to requests for orders. Ancillary activities are those with no independent business function apart from their connection with soliciting orders. Second, the Court held that there is a de minimis exception for activities that are not entirely ancillary. The test of whether in-state activity, other than solicitation of orders, is sufficiently de minimis to avoid a corporation losing its tax immunity in a particular state depends on whether that activity establishes a "nontrivial additional connection with the taxing state."

The Supreme Court held that Wrigley's activities in Wisconsin went beyond "solicitation," thereby subjecting the company's income to Wisconsin corporate franchise tax. In holding that Wrigley's business activities in Wisconsin exceeded PL 86-272, the Court detemiined that some of its activities were protected while others were not.

As a result of the Wrigley decision, many activities that were historically questionable in various states are now protected, including (1) providing company autmobiles and computers; (2) handling some customer complaints; (3) training Of sales representatives; (4) carrying samples; (5) arranging displays and Providing promotional advice; and (6) intervention in credit disputes. However, in Wrigley, activities deemed not ancillary to solicitation included the replacement of stale gum, the supply of gum to new customers and the storage of gum. The hst of protected and...