Does an out-of-state wholesaler lose Public Law 86-272 protection in Colorado when its in-state employee supervises a sales team, oversees major-account contracts, and develops sales strategy?

Plain-English summary

An out-of-state wholesaler asked whether its Colorado activities stay within the protection of Public Law 86-272, the federal law that stops a state from taxing the income of an out-of-state business whose only in-state activity is soliciting orders for tangible personal property (orders approved and shipped from outside the state).

The facts: the wholesaler ships products by common carrier to third parties' Colorado distribution centers, which then forward the goods out of state — a convenience for out-of-state customers. It has one full-time Colorado employee who solicits sales (but not from Colorado customers) and also supervises a sales team — reviewing travel schedules and sales proposals, overseeing contracts for major accounts, and developing and implementing strategies to increase revenue.

The Department assumed the company crosses the payroll nexus threshold (over $50,000), so it has substantial nexus. The only question is whether P.L. 86-272 still shields it. The governing rule, drawn from the U.S. Supreme Court's decision in Wrigley (505 U.S. 214), is that protection is not lost for activities that are merely closely related to solicitation — but it is lost once the employee does more than that. The Department's bright-line examples of activities that exceed the shield: regularly accepting returns or regularly handling warranty claims.

Here the Department declined to decide. It would not say in a General Information Letter whether "overseeing contracts for major accounts" and "developing strategies for sales" are close enough to solicitation to stay protected. That's a fact-intensive call — and a candid example of a GIL's limits. A taxpayer who needs certainty has to request a (binding, fee-based) private letter ruling.

Compare [[gil-13-009-c-corporation-income-tax-return]], where P.L. 86-272 didn't apply at all because the company sold a service rather than tangible goods, and [[gil-16-001-lcc-employee-in-colorado]], which lays out the full nexus-threshold set and notes that accepting returns/warranty claims breaks the shield.

What this means for you

Out-of-state wholesalers and manufacturers with in-state sales staff

A Colorado employee whose job is genuinely soliciting orders — plus things closely tied to soliciting — can keep you inside P.L. 86-272. But layering on management duties (handling returns, warranty claims, and arguably major-account contract administration) risks crossing the line into unprotected activity, which would make your Colorado-apportioned income taxable. The more your in-state person runs the business rather than solicits, the shakier the shield.

What clearly breaks the protection

The Department names two activities outright: regularly accepting returns and regularly handling warranty claims. If your in-state employee does either as a routine matter, expect to owe Colorado corporate income tax.

Accountants and tax professionals

This ruling is useful precisely because the Department refused to bless the gray-zone duties. Treat "overseeing major-account contracts" and "developing sales strategy" as unresolved — document the employee's actual activities, and if the stakes are high, get a private letter ruling rather than relying on the closely-related-to-solicitation argument.

Common questions

Q: Does supervising a sales team break P.L. 86-272 protection?
A: The Department wouldn't say. Activities closely related to solicitation are protected, but it declined to rule whether overseeing major-account contracts and developing sales strategy stay on the protected side.

Q: What activities clearly lose the protection?
A: Regularly accepting returns and regularly handling warranty claims are the Department's stated examples of activity that exceeds P.L. 86-272.

Q: Did the company have nexus?
A: The Department assumed it exceeded the $50,000 payroll threshold, so it had substantial nexus. P.L. 86-272 was the only thing that could still prevent a tax obligation.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, not binding on the Department. For a binding answer on your facts, request a private letter ruling (which requires a fee).

Citations and references

Statutes, rules, and cases:
- Department Regulation 39-22-301.1 (substantial-nexus thresholds)
- 15 U.S.C. § 381 (Public Law 86-272)
- Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992) (protection survives activity closely related to solicitation)
- Coors Porcelain Co. v. State of Colorado, 183 Colo. 325, 517 P.2d 838 (1973)

Related rulings:
- [[gil-13-009-c-corporation-income-tax-return]] — P.L. 86-272 inapplicable to a seller of services
- [[gil-16-001-lcc-employee-in-colorado]] — full nexus thresholds; returns/warranty claims break the shield

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: GIL-13-021.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-13-021
August 20, 2013
XXXXXXXXXXXXXX
ATTN: XXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Public Law 86-272
Dear XXXXXXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance to determine
whether Company exceeds the minimum standards of Public Law 86-272.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues
and is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings, please see
Department regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
Does Company exceed the minimum standards of Public Law 86-272?
Background
Company is a wholesaler based outside of Colorado. Company ships products via common carrier
to third-parties who have distribution centers in Colorado. The third-parties accept delivery at their
distribution centers and then ship the product to locations outside Colorado. Company has one fulltime employee who works in Colorado and is responsible for soliciting sales in order to meet and
exceed Company’s sales and financial goals. This employee does not solicit sales from customers
located in Colorado. Employee supervises the solicitation activities of a sales team, including
reviewing the sales teams’ travel schedules and sales proposals, overseeing contracts for major

accounts, and developing and implementing strategies to increase solicitation revenue. Although
Company ships products to Colorado, this is done as a convenience to out-of-state customers who
have distribution centers in Colorado but who are based in other states.
Discussion
A corporation must file a Colorado corporate income tax return if it does business in Colorado
or derives income from Colorado sources. A corporation is doing business in Colorado if it has
substantial nexus with Colorado. Substantial nexus is established when a company has
property, payroll, or sales that exceed any one of the following thresholds in any tax period:
(i) a dollar amount of $50,000 of property; or
(ii) a dollar amount of $50,000 of payroll; or
(iii) a dollar amount of $500,000 of sales; or
(iv) twenty-five percent of total property, total payroll or total sales.1
For purposes of this ruling, we assume Company exceeds the payroll threshold. Although
Company has substantial nexus, Company will not have any income tax obligation in Colorado
if it falls within the ambit of P.L 86-272, which states, in pertinent part,
(a) No state, or political subdivision thereof, shall have power to impose, for any taxable
year ending after September 14, 1959, 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,
the following:
(1) The solicitation of orders by such person, or his representative, in such State
for sales of tangible personal property, which 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 of 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 paragraph (1).
...
(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.2
More specifically, a corporation will not have a Colorado income tax filing obligation if its only
activity in Colorado is soliciting sales of tangible personal property and the sales orders are
sent out of Colorado for acceptance and fulfillment. P.L. 86-272 applies only to those

1
2

Department Regulation 39-22-301.1
15 U.S.C. § 381.

2

businesses engaged in the interstate commerce of selling tangible personal property and does
not apply to the sale of services.3
The issue raised in your request is directed at employee activities that are not, in the strictest
sense, solicitation activities but, rather, are activities related to solicitation activities. You
correctly noted that the protection of P.L. 86-272 is not lost if the employee engages in
activities that are closely related to solicitation activities.4 However, if the employee is doing
more than activities closely related to solicitations, then Company exceeds the protections of
P.L. 86-272. For example, a company whose employee regularly accepts returns on behalf of
a company or regularly handles warranty claims will likely be viewed as having engaged in
activities that exceed those protected by P.L. 86-272 and, therefore, subject the company to a
Colorado income tax filing obligation. We cannot rule in a general information letter, such as
this, whether the activities you outline, particularly the “overseeing contracts of major accounts”
and “developing strategies for sales,” are activities so closely related to the solicitation as to fall
within the protection of P.L. 86-272.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

3

4

Other states have reached the same conclusion. See, Statement of Information Concerning Practices of
Multistate Tax Commission and Signatory States Under Public Law 86-272; Arizona Corporate Tax Ruling No.
99-5; Connecticut Informational Publication No. 2010(29.1), 12/28/2010; Florida Technical Assistance
Advisement 99(C)1-002, 06/03/1999; Ill. Admin. Code 100.9720, Nexus.
Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 US 214 (1992). Coors Porcelain Co. v. State
of Colorado, 183 Colo. 325, 517 P.2d 838 (1973).

3