Minnesota Supreme Court Rules that Market Research is Not Protected Under P.L. 86-272

By: Tracey Stewart, SALT Senior Associate

At a glance 

• The main takeaway: The preparation of “Market News Notes” by a taxpayer’s sales representatives was deemed an unprotected activity under P.L. 86-272 and therefore, the taxpayer created Minnesota income tax nexus.
• Assess the impact: Sellers of tangible personal property with sales representatives in multiple states should closely examine the activities performed by those individuals and implement a policy that outlines what activities they can and cannot perform.
• Take the next step: Aprio’s State and Local Tax (SALT) team can advise businesses on the state income tax issues and how to potentially minimize tax filing obligations.

Schedule a free consultation today to learn more!

The full story

Last year, our SALT team wrote an article about a Minnesota Tax Court decision that concluded that although several activities conducted by a taxpayer in Minnesota were protected under Public Law (P.L.) 86-272, one specific activity, the preparation of Market News Notes, was unprotected, and therefore, the taxpayer was subject to the state’s income tax. The taxpayer in that case appealed that decision to the Minnesota Supreme Court, and on August 7, 2024, the Court issued its opinion upholding the tax court’s decision.[1]

What is P.L. 86-272?

Enacted in 1959, P.L. 86-272 is a federal law that generally prohibits states from imposing a net income-based tax if the business’s only activities in a state are limited to “solicitation of orders” for sales of tangible personal property, as long as the approval of orders occurs outside the state and the shipment or delivery originated outside the state. The law does not specifically identify what activities constitute protected solicitation, though the U.S. Supreme Court has held that such activities include more than just a verbal request for orders but may also include other activities that are “entirely ancillary to requests for purchases.” These are “activities that serve no independent business function apart from their connection to the soliciting of orders.” These protected activities are distinguished from unprotected activities, which the U.S. Supreme Court described as “activities that the company would have reason to engage in anyway but chooses to allocate to its in-state sales force.”[2] If a taxpayer engages in an activity deemed by the state to be unprotected and such activity is not de minimis, the taxpayer will be subject to the state’s income tax.

The Multistate Tax Commission (MTC), an intergovernmental state tax agency whose mission is to promote uniform and consistent tax policy and administration among the states, published a document called “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting State Under Public Law 86-272.” This statement, adopted in 1986 and last revised in 2021, describes P.L. 86-272 and lists certain activities that the MTC views as protected and unprotected with regard to the “solicitation of orders.” Many states, either formally or informally, adopt this statement as their own guidance and interpretation.[3]   

A closer look at the case

The specific activity at issue in this case, was the preparation of “Market News Notes” by the taxpayer’s in-state sales force.[4] These notes documented a broad array of information, such as

• Customers’ special delivery needs
• Bulk pricing requests
• Complaints about product or service quality
• The need for certain products
• What products customers are buying from the taxpayer’s competitors 

The notes also included information about the taxpayer’s competitors themselves, including detailed product information such as manufacturer and brand, product pricing, product lead time, payment terms, annual rebates, and discounts. The notes were uploaded into a shared sales database which was accessible by other departments, and specific comments related to particular departments were directed to those departments.

The ruling explained

Applying the “solicitation of orders” standard described above, the Court classified these notes as market research. The Court then recognized that this information is helpful to sales representatives in their endeavor to solicit orders. However, the Court explained that whether an activity is helpful to solicit orders is not the test. In this case, the Court concluded that the preparation of the notes went beyond solicitation because the market research was used by other departments and that the taxpayer had good reason to engage in this activity “whether or not the company has a sales force.” The Court stated that activities that are “not ancillary to requesting purchases . . . cannot be converted into ‘solicitation’ by merely being assigned to” sales representatives.[5]

The Court also evaluated whether the activities were de minimis, as required by P.L. 86-272. Despite the taxpayer’s argument that the notes were a small part of its operations, the Court found that the systematic preparation of over 1,600 Market News Notes in two years to be a substantial non-trivial activity.

Therefore, the Court upheld the tax court decision, concluding that this activity was unprotected and not de minimis, and accordingly, the taxpayer was subject to Minnesota income tax.

The bottom line

Sellers of tangible personal property that have sales representatives in multiple states should closely examine the activities performed by those individuals. Implementing a policy that outlines the activities that sales representatives can and cannot perform can potentially help reduce a taxpayer’s state income tax liability. Businesses should refer to the specific state guidance as well as the MTC’s statement.   

Aprio’s SALT team has experience in advising taxpayers on these types of state income tax issues, and we can assist your business with potentially limiting its state income tax filing obligations. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

---

[1] Uline Inc. v. Comm’r of Revenue, No. A23-1561, Minnesota Supreme Court, August 7, 2024.

[2] See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). 

[3] Many activities, such as the one that is the subject of this case, are not specifically addressed in that statement.

[4] The taxpayer had approximately 24 sales representatives whose territory included Minnesota, and each representative had a company-mandated goal of preparing at least two Market News Notes each week.

[5] Citing Wrigley, 505 U.S. at 229.