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Minnesota Court Addresses Public Law 86-272 Nexus Activities

Tax Development Jul 11, 2023

Minnesota Court Addresses Public Law 86-272 Nexus Activities

The Minnesota Tax Court rejected a Wisconsin company’s reliance on Public Law 86-272 (“P.L. 86-272”), which prohibits states from imposing income taxes on out-of-state businesses whose only activity in the state is solicitation of tangible personal property.

Uline Inc. (“Uline”) is a Wisconsin-based business-to-business catalog and internet-based distributor of industrial and packaging products. Inventory was stored in seven distribution centers around the country, and sales were shipped to customers through common carriers. Uline has no physical location, warehouse, or office in Minnesota and did not own or lease any personal property in the state during the years at issue. Uline employed approximately 24 sales representatives whose territories included Minnesota customers and who were expected to manage up to 7,000 accounts on average. Some of these representatives were residents of Minnesota.

After meeting with customers, sales representatives prepared two types of documentation regarding the sales calls: sales notes and market news notes. Sales notes recorded the date and time of a customer visit and summarized pertinent information about the customer’s business, its product needs, and other helpful information about key customer contacts. Market news notes documented information sales representatives collected from customers, such as information about their special delivery needs, bulk pricing requests, complaints about product or service quality, needs for certain products, and what products customers are buying from Uline competitors. They also documented the information sales representatives obtained from customers about Uline’s competitors, including detailed product information such as manufacturer and brand, competitors’ product pricing, product lead time, payment terms, annual rebates, and discounts. Market news notes were entered into a Uline sales department database, which was accessible by Uline employees in the sales department and other departments.

Upon closing its Minnesota distribution center in 2014, Uline filed a final S corporation return with Minnesota for the 2014 tax year, claiming it was exempt from Minnesota income or franchise tax pursuant to Minnesota statutes Section 290.015(3)(a), and P.L. 86-272. Uline did not file a 2015 Minnesota S corporation return. The Commissioner of Revenue (“Commissioner”) determined upon investigation that Uline was subject to the taxes imposed by Chapter 290, that its business activities in Minnesota during the years at issue exceeded the protections of P.L. 86-272, and that Uline was not exempt from income tax. In addition, the Commissioner assessed a 10% penalty under Minnesota statutes Section 289A.60(5) and a 20% penalty for substantial understatement of tax owed under Minnesota statutes Section 289A.60(4.93). Uline timely filed an administrative appeal of the audit report, which the Commissioner denied. In his denial, the Commissioner determined that Uline was subject to the taxes imposed by Chapter 290 and that its business activities in Minnesota exceeded the protection of P.L. 86-272.

Upon appeal, the Tax Court held1 that the activities of the sales representatives exceeded the protection of P.L. 86-272 when reviewed through the findings in another Wisconsin case—Wrigley.2 The Wrigley case produced a list of protected and unprotected activities under P.L. 86-272 and established a de minimis rule. The Court found that the creation of the market news notes report would not be considered an ancillary sales activity because it created market data on its competition, with no relationship to the sale to customers. The Court did, however, reverse the penalties imposed, finding that Uline had substantial authority for its position.

While the result was bad news for the taxpayer, the takeaway is that courts are still using the analysis set forth in Wrigley to evaluate nexus. This analysis shies away from the trend to look at economic presence and use internet-based activity to establish nexus. Should you have questions about your filing obligations based on your activity in a particular jurisdiction, contact the Ryan experts listed below.

1 Uline, Inc. v. Commissioner of Revenue, Minn. T.C. 9435-R (June 23, 2023).

2 Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 223, 112 S. Ct. 2447, 2453, 120 L.Ed.2d 174 (1992).


Mark L. Nachbar

Mary Bernard

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