Rethinking Scope of Delivery Under P.L. 86-272

By Becky L. Brennan, CPA, Chicago, and Brandon T. Newton, CPA, Nashville, Tenn.

Editor: Howard Wagner, CPA

In the modern economy, where companies frequently have large out-of-state markets, many states have increased their efforts to tax companies that are domiciled outside of their borders. There is a trend among states to broaden their tax base by implementing factor presence economic nexus standards. However, since 1959, the Interstate Income Tax Act, P.L. 86-272, has protected certain taxpayers from any requirement to pay income tax. P.L. 86-272 prohibits imposition of state income tax on an out-of-state company with state activities that are limited to solicitation of orders for sales of tangible personal property and delivery of the property if the orders are sent outside of the state for approval and fulfillment.

The meaning of "solicitation," one of the key elements of P.L. 86-272, has received significant attention from the U.S. Supreme Court. The Court has not provided similar guidance as it relates to the meaning of the "delivery" element of the test. As a result, the definition of "delivery" has been left up to the states, many of which have narrowed the definition either through regulations or rulings.

Further Clarification on Scope of "Delivery" Is Needed

It has been suggested that the term "delivery" for purposes of P.L. 86-272 protection should be subject to the same standard as was established in Wrigley, 505 U.S. 214 (1992), for "solicitation." Specifically, delivery-related activities that have no business purpose outside of the delivery of orders should be protected from state taxation. While this argument is compelling, there is room for certain delivery-related activities that do serve a separate business purpose and would not, therefore, be protected under a Wrigley-type of analysis.

In Wrigley, the state of Wisconsin argued for a narrow interpretation of solicitation that was limited to those activities leading to placement of orders. The taxpayer argued that its activities fell under the protection granted by P.L. 86-272 because it sent orders outside of the state for approval. Ultimately, the Supreme Court concluded that "the statutory phrase uses the term 'solicitation' in a more general sense that includes not merely the ultimate act of inviting an order but the entire process associated with the invitation." The Court determined that solicitation includes activities that are ancillary to requests for purchases.

Following are delivery-related activities that may be ancillary to the delivery process as well as certain circumstances in which these activities would not be protected under P.L. 86-272.


Backhauling is when a company-owned vehicle carries a load of product on its return trip after completing a delivery. Backhauling can involve defective product, product that does not meet customer specifications, or scrap from the delivery that will be recycled. It also could take the form of transporting a payload on behalf of a third party to avoid driving a truck with no revenue-generating activity.

Wrigley applied an analysis that is based on whether the activity is "ancillary." Applying this same principle to backhauling would support the treatment of certain backhauling activities as protected activities under P.L. 86-272. In the case of backhauling defective product or product that does not meet customer specifications, the company's vehicle would not even be in the state to pick up the return load, except to make a delivery. Consequently, in this case there is no exclusive business reason for backhauling, except for the delivery.

Some states have provided rulings or have determined in litigation that backhauling activities create nexus (see, e.g., Tennessee Department of Revenue, Rev. Rul. 97-15; Chester A. Asher, Inc.,22 N.J. Tax 582 (2006)). However, these rulings primarily have focused on whether backhauling is ancillary to the solicitation of orders as opposed to whether it is ancillary to delivery.

For example, in 1997, the Tennessee Department of Revenue ruled that "when company employees in company vehicles come into Tennessee and pick-up defective products, trim and scrap from customers, haul it out of Tennessee for recycling and give the customers credit on their accounts, such activities clearly exceed solicitation of sales activities protected by Public Law 86-272." The Tennessee Department of Revenue did not rule on whether these activities exceed the definition of delivery.

In the case of backhauling in the form of the pickup and delivery of goods on behalf of another business, this represents a separate and distinct revenue stream from that of the product being sold. As such, this is a service activity, which is unprotected by P.L. 86-272 because the law only applies to tangible personal property.

The State of New York Commissioner of Taxation and Finance dealt with this issue in a 1997 advisory opinion in which it stated that a foreign manufacturer's backhauling activities post-delivery are activities that go beyond the solicitation of orders under P.L. 86-272 and subject the manufacturing company to franchise tax under Article 9-A unless they are deemed to be de minimis (New York Department of Taxation and Finance TSB-A-97(8)C (1997)). This ruling distinguishes backhauling activities that involve the pickup of products that do not meet customer specifications or of trim and scrap from backhauling activities unrelated to the delivery of the company's products.

Inventory Kept in a State for Delivery

Under the proposed standard, if inventory is kept in a state for the sole purpose of furthering a delivery, it may not be deemed to be in the state. Note, though, that inventory that passes through a state on its way to a known delivery destination and inventory staged near a customer location, such as under a just-in-time inventory agreement, are treated differently.

Two cases examine a taxpayer's right to apportion and support the conclusion that inventory in the state with a known delivery destination is not deemed to be inventory in the state for purposes of P.L. 86-272.

In a 1963 case, John Ownbey Co. v. Butler, 211 Tenn. 366 (1963), the Tennessee Supreme Court ruled that a company was not doing business in states to which it shipped goods stored in an agent's warehouse for delivery. It is not clear from the case when title transferred to the representative.

The Colorado Supreme Court also ruled on this issue in a 1973 case, Coors Porcelain Co. v. State, 183 Colo. 325 (1973). The court concluded that the company was not doing business outside of the state:

The only possible extension by Coors' out-of-state representatives beyond the solicitation of orders is the statement that "on occasion they possessed Coors products for shipment to the customer and also retained Coors products which have been rejected by the customer by delivery." It appears that these acts are not in common practice and are the exception rather than the rule.

The Colorado court concluded that a company is not doing business strictly due to occasionally having inventory in the state when the inventory is maintained by sales representatives to be shipped to a customer for delivery.

Both of these cases deal with scenarios where inventory is in a state only after an order for the product has been placed. In a case where inventory remains in a state prior to customer purchase, this is considered not to be ancillary to delivery.

Delivery by Company-Owned Vehicles

Since delivery is not defined through statute or case law, many states have tried to limit the definition of delivery to the delivery of goods executed by a third-party carrier. It is common for many companies to deliver goods using their own vehicles instead of hiring a contract carrier to transport their products. Under this strict definition, these companies are left unprotected by P.L. 86-272.

Over the years, two notable lawsuits have been filed by the National Private Truck Council, a national trade association dedicated exclusively to representing private motor carrier fleets. In these lawsuits, the courts have taken the position that delivery by company-owned vehicles is considered a protected activity.

In National Private Truck Council v. Commissioner of Revenue, 426Mass. 324(1997), the association challenged a Massachusetts regulation that limited the definition of delivery to delivery by a common carrier. The only activity of many of its members in Massachusetts, who were not incorporated or located in the state, was "solicitation" of sales, as defined under P.L. 86-272. The orders were sent outside of the state for approval and filled from a point outside of the state. The members then used the company-owned vehicles to make the deliveries to Massachusetts customers.

Under the state regulation, "if the sole activity of the corporation in Massachusetts is the solicitation by the corporation's representatives of orders for the sale of tangible personal property, provided that the orders are sent outside Massachusetts for approval or rejection, and provided that the orders are filled by shipment or delivery by common carrier or contract carrier from a point outside of Massachusetts," a foreign corporation would be exempt from state taxation (830 Mass. Code Regs. §63.39.1(5)(a)). The state's commissioner of revenue argued that the word "delivery" refers to a transaction in which title passes to the customer at a point outside of the state.

The court rejected the state commissioner's argument, concluding that the term "delivery" in the context of P.L. 86-272 is not limited to out-of-state deliveries. The state Supreme Judicial Court (SJC) affirmed. It held that "the statute refers to shipment or delivery 'from' a point outside the State, not 'at' a point outside the State. The language requires only that the goods originate from out-of-State, not that the transfer of goods to the buyer occurs outside the taxing State."

The year after the SJC's decision, the Massachusetts Department of Revenue issued Technical Information Release 98-13 related to the ruling. The release added that in Massachusetts, " 'delivery' is defined to include both delivery by common or contract carrier, and also delivery by use of the corporation's own vehicles."

Also in 1997, the National Private Truck Council (National Private Truck Council v. Virginia, 253 Va. 74 (1997)) challenged a Virginia regulation on an issue similar to that involved in the Massachusetts lawsuit. The Virginia Department of Revenue had adopted a regulation in which the delivery of goods immune from taxation included only those that used a common carrier. After further review, the Virginia Supreme Court noted that P.L. 86-272 "does not specify common carrier, contract or private carrier, or any other particular method of delivery." It concluded that with the lack of specification in the federal statute, the Virginia Department of Revenue could not limit the protection offered by P.L. 86-272.

Although the Multistate Tax Commission's Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 guidelines on P.L. 86-272 have removed delivery by company-owned vehicles from the list of unprotected activities, they did not add it to the list of protected activities. The definition of "delivery" still is not clearly defined, which has left many out-of-state corporations vulnerable to a state's discretionary opinion.


Applying a Wrigley-type of analysis to certain delivery-related activities could support the determination that if those activities serve no autonomous business function, they would be protected under P.L. 86-272. However, companies need to specifically understand the nature of the delivery-related activities under the terms presented. Additionally, although P.L. 86-272 protects businesses from income taxes, it does not protect them from franchise taxes and gross receipts taxes. Many states are taking advantage of the lack of federal authority on this issue, leaving multistate companies with uncertainty when determining filing requirements on a state-by-state basis. In cases where the states have not provided specific guidance on the subject, companies should consider whether their delivery-related activities are ancillary to the delivery process.


Howard Wagner is a director with Crowe Horwath LLP in Louisville, Ky.

For additional information about these items, contact Mr. Wagner at 502-420-4567 or

Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.

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