SC REVENUE RULING #97-15
SUBJECT: Public Law 86-272 and South Carolina Income Tax
EFFECTIVE DATE: Applies to all periods open under the statute.
SUPERSEDES: SC Revenue Rulings #93-10, #91-16, and all previous
documents and any oral directives in conflict herewith.
REFERENCE: 15 U.S.C. Section 381
S.C. Code Ann. Section 12-6-510 (Supp. 1996)
S.C. Code Ann. Section 12-6-530 (Supp. 1996)
AUTHORITY: S.C. Code Ann. Section 12-4-320 (Supp. 1996)
SC Revenue Procedure #94-1
SCOPE: A Revenue Ruling is the Department of Revenue=s official
advisory opinion of how laws administered by the Department
are to be applied to a specific issue or a specific set of
facts, and is provided as guidance for all persons or a
particular group. It is valid and remains in effect until
superseded or modified by a change in the statute or regulations
or a subsequent court decision, Revenue Ruling or Revenue Procedure.
In 1985 the Multistate Tax
Commission ("MTC") issued guidelines on the effect of
15 U.S.C. Section 381 ("Public Law 86-272") on the
power of a state to impose a tax on income derived from within
its borders. The Department of Revenue published guidelines in SC
Revenue Ruling #91-16 and SC Revenue Ruling #93-10 to better
clarify South Carolina's position on the impact of Public Law
86-272 on income taxation. The MTC adopted revised guidelines in
1994 in response to the U.S. Supreme Court decision in Wisconsin
Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214
This ruling supersedes SC Revenue
Ruling #91-16 and SC Revenue Ruling #93-10 and is largely based
upon Wrigley and the MTC's 1994 guidelines. Its purpose is to
provide assistance in determining whether Public Law 86-272
protects certain activities from South Carolina taxation.
South Carolina Code '12-6-510
imposes an income tax on the taxable income of individuals,
estates, and trusts. South Carolina Code '12-6-530 imposes an
income tax on corporations and reads, in part:
An income tax is imposed
annually at the rate of five percent on the South Carolina
taxable income of every corporation...transacting,
conducting, or doing business within this State or having
income within this State, regardless of whether these
activities are carried on in intrastate, interstate, or
Public Law 86-272, as codified at
15 U.S.C. Section 381, places certain limits on the power of a
state to impose a tax on the income derived from within its
borders. It reads, in pertinent part:
(a) No State, or political
subdivision thereof, shall have power to impose... a net
income tax on the income derived within such State by any
person from interstate commerce if the only business
activities within such State by or on behalf of such person
during such taxable year are either, or both, of the
(1) the solicitation of
orders by such person, or his representative, in such
State for sales of tangible personal property, which
orders are sent outside the State for approval or
rejection, and, if approved, are filled by shipment or
delivery from a point outside the State; and
(2) the solicitation of
orders by such person, or his representative, in such
State in the name of or for the benefit of a prospective
customer of such person, if orders by such customer to
such person to enable such customer to fill orders
resulting from such solicitation are orders described in
(b) The provisions of
subsection (a) of this section shall not apply to the
imposition of a net income tax by any State, or political
subdivision thereof, with respect to -
(1) any corporation which
is incorporated under the laws of such State; or
(2) any individual who,
under the laws of such State, is domiciled in, or a
resident of, such State.
(c) For purposes of subsection
(a) of this section, a person shall not be considered to have
engaged in business activities within a State during any
taxable year merely by reason of sales in such State, or the
solicitation of orders for sales in such State, of tangible
personal property on behalf of such person by one or more
independent contractors, or by reason of the maintenance, of
an office in such State by one or more independent
contractors whose activities on behalf of such person in such
State consist solely of making sales, or soliciting orders
for sales, of tangible personal property.
(d) For purposes of this
(1) the term
"independent contractor" means a commission
agent, broker, or other independent contractor who is
engaged in selling, or soliciting orders for the sale of,
tangible personal property for more than one principal
and who holds himself out as such in the regular course
of his business activities; and
(2) the term
"representative" does not include an
independent contractor. (Emphasis added.)
Public Law 86-272 restricts a
state from imposing a net income tax on income derived from
within its borders from interstate commerce if the only business
activity of the company within the state consists of the
solicitation of orders for sales of tangible personal property,
which orders are to be sent outside the taxing state for
acceptance or rejection, and, if accepted, are filled by shipment
or delivery from a point outside the state. The term "net
income tax" includes a franchise tax measured by net income.
In Wrigley, the Court considered,
among other issues, the meaning of the phrase "solicitation
of orders" and established a "proper standard" for
application of the phrase. The Court's opinion states, in part:
...We proceed, therefore, to
describe what we think the proper standard to be. Once it is
acknowledged, as we have concluded it must be, that
"solicitation of orders" covers more than what is
strictly essential to making requests for purchases, the next
(and perhaps the only other) clear line is the one between
those activities that are entirely ancillary to requests for
purchases - those that serve no independent business function
apart from their connection to the soliciting of orders - and
those activities that the company would have reason to engage
in anyway, but chooses to allocate to its in-state sales
Accordingly, "solicitation of
orders" extends beyond the sole act of inviting an order and
includes the entire process associated with the invitation (e.g.
a company car or a stock of free samples provided to a salesman).
"Solicitation of orders" does not include activities
apart from the invitation of orders that the company has reason
to do anyway (e.g. repair or services activities by sales
personnel). Further, the Court determined that the maintenance of
an office in a taxing state was not protected by Public Law
86-272 under any circumstances.
The Court also examined whether de
minimis or insignificant activity apart from solicitation of
orders by the company within the taxing state resulted in the
loss of immunity from taxation. With respect to this issue, the
...whether in-state activity
other than "solicitation of orders" is sufficiently
de minimis to avoid loss of the tax immunity conferred by 381
depends upon whether that activity establishes a nontrivial
additional connection with the taxing State.
* * * *
...We need not decide whether
any of the nonimmune activities was de minimis in isolation;
taken together, they clearly are not....
Therefore, if a company engages in
business activity other than solicitation of orders, the activity
serves an independent business function other than the
solicitation of orders, and the activity is not trivial, the
protection of Public Law 86-272 is lost. Further, any business
activities, other than the solicitation of orders, are viewed in
the aggregate, rather than separately.
NATURE OF SALES
Only the solicitation to sell
tangible personal property is afforded immunity under Public Law
86-272. The leasing, renting, licensing or other disposition of
tangible personal property, or transactions involving real
property or intangibles, such as franchises, patents, copyrights,
trademarks, service marks and the like are not protected
activities under Public Law 86-272. The selling or providing of
services is also not protected.
The sale or delivery and the
solicitation for the sale or delivery of any type of service that
is not either (1) ancillary to solicitation or (2) otherwise set
forth as a protected activity in this Ruling is also not
protected under Public Law 86-272.
SOLICITATION OF ORDERS AND
ACTIVITIES ANCILLARY TO SOLICITATION
For an in-state activity to be a
protected activity under Public Law 86-272, it must be limited
solely to solicitation (except for de minimis activities
described in this section and certain activities conducted by
independent contractors described later in this Ruling.)
Solicitation means (1) speech or conduct that explicitly or
implicitly invites an order; and (2) activities that neither
explicitly nor implicitly invite an order, but are entirely
ancillary to requests for an order.
Ancillary activities are those
activities that serve no independent business function for the
seller apart from their connection to the solicitation of orders.
Activities that a seller would engage in apart from soliciting
orders are not considered as ancillary to the solicitation of
orders. The mere assignment of activities to sales personnel does
not, merely by such assignment, make such activities ancillary to
solicitation of orders. Additionally, activities that seek to
promote sales are not necessarily ancillary, because Public Law
86-272 does not protect activities that facilitate sales; it only
protects ancillary activities that facilitate the request for an
order. The conducting of activities not falling within the
foregoing definition of solicitation will cause a company to lose
its protection from a net income tax afforded by Public Law
86-272, unless the disqualifying activities, taken together, are
de minimis or are otherwise permitted under this Ruling.
De minimis activities are those
that, when taken together, establish only a trivial connection
with the taxing state. An activity conducted within a taxing
state on a regular or systematic basis or pursuant to a company
policy (whether such policy is in writing or not) will not
normally be considered trivial. Whether or not an activity
consists of a trivial or non-trivial connection with the state is
to be measured on both a qualitative and quantitative basis. If
such activity either qualitatively or quantitatively creates a
non-trivial connection with the taxing state, then such activity
exceeds the protection of Public Law 86-272. Establishing that
the disqualifying activities only account for a relatively small
part of the business conducted within the taxing state is not
determinative of whether a de minimis level of activity exists.
The relative economic importance of the disqualifying in-state
activities, as compared to the protected activities, does not
determine whether the conduct of the disqualifying activities
within the taxing state is inconsistent with the limited
protection afforded by Public Law 86-272.
The following activities within
South Carolina (assuming they are not of a de minimis level) are
not considered solicitation of orders or ancillary thereto or
otherwise protected under Public Law 86-272 and will cause
otherwise protected sales to lose their protection under the
Making repairs or
providing maintenance or service to the property sold or
to be sold.
Collecting current or
delinquent accounts, whether directly or by third
parties, through assignment or otherwise.
supervision of installation at or after shipment or
courses, seminars or lectures for personnel other than
personnel involved only in solicitation.
Providing any kind of
technical assistance or service including, but not
limited to, engineering assistance or design service,
when one of the purposes thereof is other than the
facilitation of the solicitation of orders.
or otherwise assisting in resolving customer complaints,
other than facilitating communication between the company
and the customer when the purpose of such mediation is to
ingratiate the sales personnel with the customer.
Approving or accepting
Securing deposits on
Picking up, replacing,
giving credit for, or purchasing damaged, outdated or
Hiring, training, or
supervising personnel, other than personnel involved only
Using agency stock checks
or any other process or means by which sales are made
within South Carolina by sales personnel.
Maintaining a sample or
display room in excess of two weeks (14 days) at any one
location within South Carolina during the tax year.
Carrying samples for sale,
exchange or distribution in any manner for consideration
or other value.
Owning, leasing, using, or
maintaining any of the following facilities or property
within South Carolina:
Any kind of office
other than an in-home office as described as
permitted under unprotected activity 17 and protected
Meeting place for
directors, officers or employees, except when not
done on a regular or systematic basis during the tax
Stock of goods other
than samples for sales personnel or that are used
entirely ancillary to solicitation.
service that is publicly attributed to the company or
the agent(s) of the company in their representative
Mobile stores, i.e.
vehicles with drivers who are sales personnel making
sales from the vehicles.
Real property or
fixtures to real property of any kind.
Maintaining, by any
employee or other representative, an office or place of
business of any kind (other than an in-home office
located within the residence of the employee or
representative that (i) is not publicly attributed to the
company or to the employee or representative of the
company in an employee or representative capacity, and
(ii) so long as the use of such office is limited to
soliciting and receiving orders from customers; for
transmitting such orders outside South Carolina for
acceptance or rejection by the company; or for such other
activities that are protected under Public Law 86-272 or
under the protected activities of this Ruling).
A telephone listing or other public listing within South
Carolina for the company or for an employee or
representative of the company in such capacity or other
indications through advertising or business literature
that the company or its employee or representative can be
contacted at a specific address within South Carolina
shall normally be determined as the company maintaining
within South Carolina an office or place of business
attributable to the company or to its employee or
representative in a representative capacity. However the
normal distribution and use of business cards and
stationery identifying the employee's or representative's
name, address, telephone and fax numbers and affiliation
with the company shall not, by itself, be considered as
advertising or otherwise publicly attributing an office
to the company or its employee or representative.
The maintenance of any office or other place of business
in this state that does not strictly qualify as an
"in home" office as described above shall, by
itself, cause the loss of protection under this Ruling.
For the purpose of this subsection, it is not relevant
whether the company pays directly, indirectly, or not at
all for the cost of maintaining such in-home office.
Entering into franchising
or licensing agreements; selling or otherwise disposing
of franchises and licenses; or selling or otherwise
transferring tangible personal property pursuant to such
franchise or license by the franchisor or licensor to its
franchisee or licensee within the state.
Conducting any activity
not listed below under "Protected Activities"
which is not entirely ancillary to requests for orders,
even if such activity helps to increase purchases.
The following activities within
South Carolina will not cause the loss of protection for
otherwise protected sales:
Soliciting orders for
sales by any type of advertising.
Soliciting of orders by a
South Carolina resident employee or representative of the
company, so long as such person does not maintain or use
any office or other place of business in the state other
than an "in-home" office as described above in
the unprotected activity 17.
Carrying samples and
promotional materials only for display or for
distribution without charge or other consideration.
Furnishing and setting up
display racks and advising customers on the display of
the company's products without charge or other
Providing automobiles to
sales personnel for their use in conducting protected
Passing orders, inquiries
and complaints on to the home office.
activities; i.e. the solicitation of indirect customers
for the company's goods. For example, a manufacturer's
solicitation of retailers to buy the manufacturer's goods
from the manufacturer's wholesale customers would be
protected if such solicitation activities are otherwise
Coordinating shipment or
delivery without payment or other consideration and
providing information relating thereto either prior or
subsequent to the placement of an order.
Checking of customers'
inventories without charge therefor (for re-order, but
not for other purposes such as quality control).
Maintaining a sample or
display room for two weeks (14 days) or less at any one
location within South Carolina during the tax year.
Recruiting, training or
evaluating sales personnel, including occasionally using
homes, hotels or similar places for meetings with sales
between the company and the customer when the purpose of
such mediation is to ingratiate the sales personnel with
Owning, leasing, using or
maintaining personal property for use in the employee or
representative's "in-home" office or automobile
that is solely limited to the conducting of protected
activities. Therefore, the use of personal property such
as a cellular telephone, facsimile machine, duplicating
equipment, personal computer and computer software that
is limited to the carrying on of protected solicitation
and activity entirely ancillary to such solicitation or
permitted by this Ruling under the protected activities
section shall not, by itself, remove the protection under
Shipping or delivering
goods to a purchaser in this state from a point outside
this state by any means of transportation, including
private carrier, irrespective of whether a delivery fee
ACTIVITIES BY INDEPENDENT
Public Law 86-272 affords immunity
from taxation to certain activities within a state if conducted
by an independent contractor that would not be afforded if
performed by the company or its employees or other
representatives. Independent contractors may engage in the
following limited activities within South Carolina without the
company's loss of immunity:
Maintaining an office.
Sales representatives who
represent a single principal are not considered to be independent
contractors. Such representatives are subject to the same
limitations as employees of the taxpayer.