A.Section 101 of
Public Law 86-272, codified at 15 U.S.C. §§
381 - 384, prohibits a
state from taxing the income of a foreign corporation whose only business
activities within the state consist of "solicitation of orders" for tangible
personal property, provided that the orders are sent outside the state for
approval or rejection and the tangible personal property is shipped or
delivered from out of state. For purposes of 15 U.S.C. §§
381 - 384 (
Public Law 86-272), solicitation is defined as follows:
1. Solicitation means speech or conduct which
explicitly or implicitly invites an order and activities that neither
explicitly, nor implicitly, invite an order, but which are entirely ancillary
to requests for an order.
a. Ancillary
activities are those activities that serve no independent business function for
the seller apart from their connection 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.
Activities not entirely ancillary include those that the company would have
reason to engage in anyway, but chooses to allocate to its in-state sales
force. Activities that seek to promote sales are not ancillary unless, taken as
whole, they are de minimis.
b. De
minimis activities are those that, when taken together as a whole, 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, shall not ordinarily 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
15 U.S.C. §
381 ( P.L. 86-272).
c. Example
(1) Corporation H, a manufacturer located
outside Rhode Island, sends a small team of officers and employees into Rhode
Island to meet with potential suppliers for purposes of a plant tour. The
officers and employees are in Rhode Island for two days and conduct no other
activity in the state. This is de minimis activity and the connection with
Rhode Island is only trivial. As a result of the immunity afforded by
15 U.S.C. §
381 ( P.L. 86-272), Rhode Island is not
permitted to impose tax.
2. Only the solicitation for orders of
tangible personal property is afforded protection under 15 U.S.C. §§
381 - 384 ( Public Law 86-272); therefore, the leasing, renting, licensing or
other disposition of tangible personal property, or transactions involving
intangibles, such as franchises, patents, copyrights, trademarks, service
marks, and the like, or any other type of property are not protected activities
under 15 U.S.C. §§
381 - 384 ( Public Law 86-272). The solicitation,
sale, or performance of any type of service is also not protected under 15
U.S.C. §§
381 - 384 ( Public Law 86-272) unless entirely ancillary to
solicitation for an order for tangible personal property, de minimis, or
otherwise protected under this regulation.
B. In accordance with 15 U.S.C. §§
381 - 384 ( Public Law 86-272), certain activities of foreign corporations shall
be considered protected activities for purposes of corporate income tax nexus.
This means that companies engaged in such activities, and nothing more, shall
not through such activities alone be considered to have corporate income tax
nexus with the State. The protection from state taxation afforded by 15 U.S.C.
§§
381 - 384 ( Public Law 86-272) and under the provisions of this
Part shall be determined on a tax-year by tax-year basis. Therefore, if at any
time during a tax year the company conducts activities that are not protected
by 15 U.S.C. §§
381 - 384 ( Public Law 86-272) or this regulation,
then no sales in this state or income earned by a company attributed to this
state during any part of that year will be protected from taxation under 15
U.S.C. §§
381 - 384 ( Public Law 86-272) or this Regulation. The
effect of a company's activities is cumulative and all activities must be
considered as a whole when determining corporate income tax nexus. The
protected activities enumerated below are intended as guidelines; they are not
exhaustive and will not precisely describe the activities of many foreign
corporations. In light of the foregoing, the following activities shall be
considered protected activities for purposes of corporate income tax nexus in
this State:
1. Soliciting orders for sales of
tangible personal property through advertising activities that do not make use
of a physical presence in the State.
2. Soliciting of orders for tangible personal
property by an in-state 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 in this
Regulation.
3. Carrying samples of
tangible goods and related promotional materials only for display or
distribution without charge or other consideration.
4. Furnishing and setting up display racks of
tangible goods and advising customers on the display of the company's products
without charge or other consideration.
5. Providing automobiles to sales personnel
for their use in conducting protected activities.
6. Passing orders, inquiries, and complaints
related to tangible goods on to the home office.
7. Missionary sales activities; i.e., the
solicitation of indirect customers for the company's tangible 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 immune.
8. Coordinating shipment or delivery without
payment or other consideration and providing information relating thereto
either prior to or subsequent to the placement of an order for tangible
goods.
9. Checking of customers'
inventories without a charge therefore (for re-order, but not for other
purposes such as quality control).
10. Maintaining a sample or display room for
two weeks (14 days) or less within the state during the tax year.
11. Recruiting, training or evaluating sales
personnel, including occasionally using homes, hotels, or similar places for
meetings with sales personnel.
12.
Mediating direct customer complaints when the purpose thereof is solely for
ingratiating the sales personnel with the customer and facilitating requests
for orders of tangible goods.
13.
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. The use of personal property
such as a cellular telephone, fax 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, by itself,
will not remove the protection under regulation.
14. Shipping or delivering tangible goods
into this state by means of private vehicle, rail, water, air or other carrier,
irrespective of whether a shipment or delivery fee or other charge is imposed,
directly or indirectly, upon the purchaser.
15. Non-controlling ownership of shares in a
corporation that does business in Rhode Island.
16. Depositing of funds or maintaining
securities brokerage accounts with financial institutions unrelated to the
foreign corporation that do business in Rhode Island.
C. Independent contractors.
1. Independent contractors may engage in the
following limited activities within the State on behalf of an out-of-state
hiring company, without the hiring company's loss of immunity:
a. Soliciting orders for sales of tangible
personal property.
b. Making sales
of qualifying tangible personal property.
c. Maintaining an office.
2. Sales representatives who
represent a single principal are not considered to be independent contractors
and are subject to the same limitations as those provided under 15 U.S.C.
§§
381 - 384 ( Public Law 86-272). Maintenance of a stock of goods in
the State by the independent contractor under consignment or any other type of
arrangement with the out-of-state hiring company, except for purposes of
display and solicitation, shall remove the hiring company's protection from
taxation under 15 U.S.C. §§
381 - 384 ( Public Law 86-272), unless
such activities are de minimis.
D. A company that registers or otherwise
voluntarily qualifies to do business within this state does not, by that fact
alone, lose its protection under Public Law 86-272. Where, separate from or
ancillary to such registration or qualification, a company receives and seeks
to use or protect any additional benefit or protection from the State through
activity not otherwise protected under 15 U.S.C. §§
381 - 384 ( Public
Law 86-272) or this Regulation, the protection afforded by 15 U.S.C.
§§
381 - 384 ( Public Law 86-272) shall be lost.
E. Federal Limitations. A foreign
corporation's activities will not subject it to the corporate income tax
jurisdiction of Rhode Island if the United States Constitution or laws of the
United States preclude the exercise of jurisdiction.
