Did ABC's South Carolina quality-control and customer-complaint visits exceed Public Law 86-272 solicitation protection?

Plain-English summary

South Carolina Private Letter Ruling 91-4 held that ABC's in-state quality-control and customer-complaint visits exceeded protected solicitation under Public Law 86-272.

ABC's salespeople only visited South Carolina intermittently to solicit orders and maintain customer relationships; all orders were approved and shipped from outside the state. But when a customer rejected yarn, ABC sent a technician or plant manager to inspect it, decide whether it was defective, propose return or contract remedies, or advise the customer how to adjust machinery or processes.

The Commission treated those activities as remedying customer complaints rather than soliciting orders. It therefore required ABC to file South Carolina income-tax returns, pay the historical corporate income tax, and pay the annual license fee.

ABC's South Carolina activities

ABC manufactured cotton/polyester yarn outside South Carolina and had no in-state sales employees. Its sales visits, order approval, and shipment pattern otherwise fit the basic Public Law 86-272 structure for interstate sales of tangible personal property.

The additional customer-service visits changed the result. ABC personnel could:

• inspect rejected yarn at the customer's location;
• determine whether the product was defective;
• agree to a return;
• propose contractual remedies; or
• if the yarn was not defective, instruct the customer how to adjust machinery or production processes.

These were post-sale quality and complaint functions with an independent purpose beyond requesting orders.

Why Public Law 86-272 did not protect ABC

Public Law 86-272 restricted a state's power to impose net income tax when a seller's only in-state activity was solicitation of orders for tangible personal property, with orders approved and filled from outside the state.

The PLR relied on the Department's then-current Revenue Ruling 91-16, which listed remedying customer complaints as an unprotected activity. It also cited Chattanooga Glass Co. v. Strickland, where customer-complaint work was one of the activities found to exceed solicitation.

Because ABC's technicians and managers carried out those functions in South Carolina, its activities were not limited to solicitation.

Result for ABC

The ruling required ABC to:

• file South Carolina corporate income-tax returns;
• pay South Carolina income tax under the historical foreign-corporation provision; and
• pay the historical annual corporate license fee.

The conclusion applied only to ABC's stated facts. The PLR had no precedential value for other taxpayers.

What this means for you

Out-of-state manufacturers

Review post-sale visits separately from sales solicitation. Product inspection, warranty decisions, technical advice, returns, and complaint remedies can serve business purposes beyond requesting orders.

Sales and service teams

Do not assume that intermittent visits are protected merely because the company has no permanent South Carolina employees. RR 91-4 focused on what personnel did during the visits.

Current taxpayers

Use current guidance. The PLR relied on RR 91-16, which RR 97-15 later superseded, and subsequent legal developments may change the analysis.

Common questions

Q: Were ABC's sales visits themselves the problem?

A: No. The ruling focused on the additional quality-control and complaint-remedy visits.

Q: Did inspecting allegedly defective yarn exceed solicitation?

A: Yes. The technician or manager was performing a post-sale quality and remedy function.

Q: What if the yarn was not defective?

A: Advising the customer how to adjust machinery or processes still exceeded solicitation under the ruling.

Q: Did ABC have to pay only income tax?

A: No. The ruling also required the historical annual license fee.

Q: Can another company rely on PLR 91-4?

A: No. It applied only to ABC's specific facts and expressly had no precedential value.

Citations and references

• 15 U.S.C. § 381(a) — Public Law 86-272 solicitation protection
• S.C. Code Ann. § 12-7-230(A) — historical foreign-corporation income tax
• S.C. Code Ann. §§ 12-19-20 and 12-19-70 — historical annual license fee
• Chattanooga Glass Co. v. Strickland, 244 Ga. 603, 261 S.E.2d 599 (1979)
• SC Revenue Ruling 91-16 — historical guidance used in the PLR
• SC Revenue Ruling 97-15 — later ruling expressly superseding RR 91-16: https://dor.sc.gov/sites/dor/files/policies/RR97-15.pdf

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR91-4.pdf

Original ruling text

SC PRIVATE LETTER RULING #91-4

TO:

ABC, Inc.

SUBJECT:

Nexus - Activities Exceeding Solicitation
(Income Tax)

TAX ANALYST:

Steve Hallman

REFERENCES:

15 U.S.C. Section 381(a)
S.C. Code Ann. Section 12-7-230(A) (Supp. 1990)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Enacted June 1991)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request.
Private Letter Rulings have no precedential value and are not intended for
distribution.

Question:
Do the activities of ABC, Inc. in this State create sufficient nexus to require payment of South
Carolina income taxes, pursuant to S.C. Code Section 12-7-230(A)?
Facts:
ABC, Inc. is incorporated under the laws of North Carolina, where its principal place of business
and corporate headquarters are located. The corporation is engaged in the business of processing
cotton and synthetic fibers into finished cotton/polyester yarn. ABC does not employ salesmen
in this State, but salesmen intermittently visit the State to solicit orders and maintain customer
relations. All orders are approved and shipped from outside South Carolina.
In the event a South Carolina customer rejects a delivered product, a quality control technician
will normally visit the customer location in this State. Under certain circumstances, if the
customer complaint warrants more extensive attention, a plant manager from outside South
Carolina, will personally visit the customer. The quality control technician or plant manager will
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inspect the product at the customer's location to determine whether the yarn is defective. If the
product is found to be defective, the technician or manager may agree to have the yarn returned
or propose contractual remedies. If the yarn is not found to be defective, ABC's personnel will
advise and instruct the customer how to adjust their machinery or process to be compatible with
the yarn.
Discussion:
Section 12-7-230(A) of the Code of Laws of South Carolina states, in part:
...every foreign corporation transacting, conducting, doing business, or having an income
within the jurisdiction of this State, whether or not the corporation is engaged in or the
income derived from intrastate, interstate, or foreign commerce, shall make a return and
shall pay annually an income tax equivalent to five percent of a proportion of its entire net
income, to be determined as provided in this chapter. The term "transacting",
"conducting", or "doing business", as used in this section, includes the engaging in or the
transacting of any activity in this State for the purpose of financial profit or gain....
Public Law 86-272, as codified at 15 U.S.C. 381-385, restricts a state from imposing a tax on
income derived under certain conditions. Code Section 381(a) reads, in part:
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, of the following:
(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;...
In summary, South Carolina imposes an income tax on foreign corporations doing business in
this State, but federal statute prohibits the State from imposing a net income tax on those foreign
corporations whose only activity in the State is mere solicitation. Therefore, it must be
determined whether ABC's activities in the State exceed solicitation.
S.C. Revenue Ruling #91-16 establishes guidelines for determining whether certain acts carried
on within this State exceed the protection afforded by 15 U.S.C. Section 381(a). Pursuant to this
ruling, remedying customer complaints is an activity that, if carried on within this State, will
cause otherwise protected sales to lose the immunity provided by Public Law 86-272 as it
exceeds solicitation.
In Chattanooga Glass Company v. Strickland, 244 Ga. 603, 261 S.E.2d 599 (1979), the Supreme
Court of Georgia held that a taxpayer who carries on an activity in a state which exceeds
"solicitation" is not afforded the protection of Public Law 86-272. In that case a Delaware
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company which manufactured bottles at plants scattered throughout several states, not including
Georgia, solicited sales from Georgia customers. It also remedied customer complaints
regarding previously purchased merchandise, purchased raw materials, and maintained
containers for storage of its purchased raw materials in the State of Georgia. In reaching its
decision the court reviewed relevant definitions of the term "solicitation" from other jurisdictions
and concluded that:
...the instate activities of the present appellant exceeded "solicitation" both when the
appellant remedied customer complaints regarding previously purchased products and
when it maintained containers for the storage of its purchased raw materials....
Conclusion:
Visits made by quality control technicians and plant managers to insure quality control and to
remedy customer complaints exceed "solicitation". Therefore, ABC is not protected by Public
Law 86-272 and is required to file returns with and pay income taxes to South Carolina, pursuant
to S.C. Code Section 12-7-230(A).
Note: In accordance with the provisions of Code Sections 12-19-20 and 12-19-70, ABC is also
required to pay an annual license fee.
SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

s/T. R. McConnell
T. R. McConnell, Commissioner
Columbia, South Carolina
October 25
, 1991

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