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Time to Pay Up: Public Law 86-272 Does Not Protect Watch Distributor's Merchandising Activities

On cross motions for summary judgment, the Minnesota Tax Court held the activities of an out-of-state watch and jewelry distributor (Taxpayer) went beyond mere solicitation of orders for tangible goods in the state of Minnesota and established suffici

June 27, 2012

On cross motions for summary judgment, the Minnesota Tax Court held the activities of an out-of-state watch and jewelry distributor (Taxpayer) went beyond mere solicitation of orders for tangible goods in the state of Minnesota and established sufficient nexus to impose Minnesota’s corporate franchise tax. Skagen Designs Ltd. v. Comm’r of Revenue, Minn. Tax. Ct., No. 8168-R (Apr. 23, 2012). The Taxpayer employed two types of employees in Minnesota, sales representatives and merchandisers (Merchandisers). The application of Public Law 86-272 to the Merchandisers’ activities, including completing weekly reports, maintaining product floor maps, holding product training sessions and inspecting display cases, were at issue before the court.

The court found that with one exception, the Merchandisers’ in-state activities exceeded the protection of Public Law 86-272 because such activities had no connection to the solicitation of sales and otherwise served an independent business purpose. The weekly reports, for example, were submitted by the Merchandisers to the Taxpayer for inventory management or quality control purposes and not for reorder purposes. The court noted that, while the reports allowed the Taxpayer to collect valuable market data and may have facilitated sales, they did not facilitate the requesting of sales. Similarly, the court found that floor mapping was not ancillary to requesting purchases merely because it was display-related; rather, the maps were prepared for the competitive purpose of tracking competitors’ displays. Moreover, the training and informational seminars conducted by the Merchandisers for in-state retailers’ sales associates did not facilitate requests for orders from the in-state retailers but instead served to increase general sales, to improve product performance, and to relieve the Taxpayer from having to produce detailed product manuals for its retailers. Therefore, according to the court, these seminars also served independent business purposes. On the other hand, the court found the Merchandisers’ inspection, rearranging, and refilling of display cases to be an essential component of soliciting sales from retail customers and that this activity qualified for protection under Public Law 86-272.

The court determined that, when taken together, the Taxpayer’s non-immune activities could not be considered de minimis. Because the Merchandisers generated and submitted to the Taxpayer weekly reports for each in-state retailer, monthly photos, and floor maps each time a competitor’s position in the retailer’s watch department changed, and the Merchandisers conducted training presentations, the activities established a nontrivial connection to the state of Minnesota and sufficient nexus for the state to impose its corporate franchise tax on the Taxpayer.

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