In Uline, Inc. v. Comm'r. of Rev., A23-1561 (Minn. 2024), the Minnesota Supreme Court (Court), affirming the Minnesota Tax Court's decision, held that certain activities conducted by a multistate business were not ancillary to solicitation simply because they were assigned to sales representatives and, therefore, those activities were not protected by PL 86-272.

Background

The taxpayer, an S corporation headquartered in Wisconsin, sold industrial and packaging products, which were shipped via common carrier from distribution centers located in the United States. The taxpayer had no offices or other facilities in Minnesota but employed sales representatives who called on Minnesota customers. The taxpayer did not file Minnesota income tax returns, primarily relying on PL 86-272. Upon a review of the taxpayer's activities within the state, the Minnesota Department of Revenue (Department) concluded that certain activities performed by non-sales personnel and sales personnel were nexus-creating and not protected by PL 86-272. The Minnesota Tax Court agreed, ruling that the taxpayer's activities were unprotected by PL 86-272 (see Tax Alert 2023-1267). The taxpayer appealed to the Court.

The Court's review focused on the preparation of "Market News Notes" by sales representatives, which documented information about customers, such as special delivery needs, bulk pricing requests, complaints about products or services, the need for certain products, and what products customers were buying from competitors. The reports also documented information about competitors, such as product pricing, lead times, payment terms, and rebates and discounts. To denote the nature of the information, the reports were organized by the following topics: competitor, operational, and marketing, and those reports were actively directed to other departments via a shared database. The company mandated a goal that a sales representative prepare at least two "Market News Notes" each week, and training manuals stressed the importance of the preparation of these reports.

The Court then went on to analyze the taxpayer's facts in light of William Wrigley, Jr. Co. v. Wis. Dep't. of Rev., 465 N.W.2d 800 (Wis. 1991), noting that PL 86-272 protects solicitation and activities entirely ancillary to solicitation, i.e., those activities that serve no independent business function apart from their connection to a request for purchases. The Court first rejected the taxpayer's argument that the preparation of the reports was a component of solicitation, finding that an activity is not converted into solicitation merely by assigning it to sales representatives. The Court concluded that the record showed the reports went beyond "effectuating more effective requests for purchases" as other departments benefitted from them and, accordingly, were not ancillary to solicitation. The Court also rejected the argument that the activities were de minimis because the company had a policy regarding the preparation of the reports and 1,600 reports were prepared during the two-year period at issue, giving rise to a nontrivial connection with Minnesota.

Implications

The Court's decision affirmed the Tax Court's analysis, starting with whether activities consisted of minimum contacts for nexus purposes and then evaluating whether otherwise nexus-creating activities were protected by PL 86-272, including de minimis considerations. The court's decision suggests that activities designed to increase sales are not necessarily ancillary to the request for an order, i.e., solicitation. In 2021, the Department of Revenue also circulated a draft revenue notice on the adoption of the Multistate Tax Commission's revised statement of information on PL 86-272, which focuses on internet-related activities. (See Tax Alert 2021-1608). The Department has not formally issued the guidance but has indicated that it is going to follow the Commission's guidance retroactively. EY will continue to monitor developments in this area.