Which South Carolina activities did RR 97-15 treat as protected or unprotected under Public Law 86-272?

Plain-English summary

South Carolina Revenue Ruling 97-15 explained when Public Law 86-272 limited the state's power to impose a net income tax on an out-of-state seller.

The protection applied only to interstate sales of tangible personal property when the seller's South Carolina activities were limited to soliciting orders, the orders went outside the state for approval or rejection, and approved orders were filled from outside the state. Services, real property, intangibles, leasing, licensing, and other transactions were outside that basic protection.

Following Wisconsin Department of Revenue v. William Wrigley, Jr., Co., the ruling protected activities entirely ancillary to requesting orders—activities serving no independent business function apart from solicitation. Other in-state activities could destroy protection unless, taken together, they created only a trivial additional connection with South Carolina.

Examples from the ruling

Protected activities included advertising, free samples and promotional materials, setting up product displays without charge, passing orders and complaints to the home office, checking inventory for reorders without charge, short-term sample rooms, recruiting or evaluating sales personnel, protected in-home-office equipment, and shipping goods from outside South Carolina.

Unprotected activities included repairs and service, collections, credit investigations, installation, technical assistance serving another purpose, order approval, repossession, taking deposits, handling returns, non-sales personnel training, carrying samples for sale, maintaining offices or warehouses, holding inventory beyond protected samples, licensing or franchising, and other activities with an independent business function.

Independent contractors could solicit sales, make sales, and maintain an office without removing the seller's protection under the limited conditions described. A representative serving only one principal was not treated as an independent contractor.

Common questions

Q: Did any activity that helped sales count as protected solicitation? No. The ruling distinguished helping sales generally from activities entirely ancillary to asking for orders.

Q: Could a small unprotected activity be ignored? Possibly, but all unprotected activities had to be aggregated, and regular or systematic activity normally was not trivial.

Q: Did Public Law 86-272 protect service or intangible transactions? No. The ruling limited the protection to qualifying sales of tangible personal property.

Q: Did later SC nexus guidance discard RR 97-15? RR 16-11 treated nexus as a separate analysis and expressly directed readers to RR 97-15 for Public Law 86-272 protection.

Citations and references

• 15 U.S.C. § 381 (Public Law 86-272)
• S.C. Code Ann. §§ 12-6-510 and 12-6-530 (income tax provisions cited)
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992)
• SC Revenue Rulings #91-16 and #93-10 (expressly superseded by RR 97-15)
• SC Revenue Ruling #16-11 (later nexus guidance referring readers to RR 97-15): https://dor.sc.gov/sites/dor/files/policies/RR16-11.pdf

Subject

Public Law 86-272 and South Carolina Income Tax

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR97-15.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

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.
INTRODUCTION

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 (1992)
(“Wrigley”).
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.
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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 foreign commerce....
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
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; 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 paragraph (1).
(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.

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(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 section (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 force....(footnote omitted)
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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 Court held:
...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.

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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 nontrivial 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.
UNPROTECTED ACTIVITIES
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 Public Law:
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1.

Making repairs or providing maintenance or service to the property sold or to be
sold.

2.

Collecting current or delinquent accounts, whether directly or by third parties,
through assignment or otherwise.

3.

Investigating credit worthiness.

4.

Installation or supervision of installation at or after shipment or delivery.

5.

Conducting training courses, seminars or lectures for personnel other than
personnel involved only in solicitation.

6.

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.

7.

Investigating, handling, 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.

8.

Approving or accepting orders.

9.

Repossessing property.

10.

Securing deposits on sales.

11.

Picking up, replacing, giving credit for, or purchasing damaged, outdated or
returned property.

12.

Hiring, training, or supervising personnel, other than personnel involved only in
solicitation.

13.

Using agency stock checks or any other process or means by which sales are made
within South Carolina by sales personnel.

14.

Maintaining a sample or display room in excess of two weeks (14 days) at any one
location within South Carolina during the tax year.

15.

Carrying samples for sale, exchange or distribution in any manner for
consideration or other value.
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16.

17.

Owning, leasing, using, or maintaining any of the following facilities or property
within South Carolina:
a.

Repair shop.

b.

Parts department.

c.

Any kind of office other than an in-home office as described as permitted
under unprotected activity 17 and protected activity 2.

d.

Warehouse.

e.

Meeting place for directors, officers or employees, except when not done on
a regular or systematic basis during the tax year.

f.

Stock of goods other than samples for sales personnel or that are used
entirely ancillary to solicitation.

g.

Telephone answering service that is publicly attributed to the company or
the agent(s) of the company in their representative status.

h.

Mobile stores, i.e. vehicles with drivers who are sales personnel making
sales from the vehicles.

i.

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
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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.
18.

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.

19.

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.
PROTECTED ACTIVITIES

The following activities within South Carolina will not cause the loss of protection for
otherwise protected sales:
1.

Soliciting orders for sales by any type of advertising.

2.

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.

3.

Carrying samples and promotional materials only for display or for distribution
without charge or other consideration.

4.

Furnishing and setting up display racks 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.
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6.

Passing orders, inquiries and complaints on to the home office.

7.

Missionary sales 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 immune.

8.

Coordinating shipment or delivery without payment or other consideration and
providing information relating thereto either prior or subsequent to the placement
of an order.

9.

Checking of customers= inventories without 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 at any one
location within South Carolina 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.

Facilitating communication between the company and the customer when the
purpose of such mediation is to ingratiate the sales personnel with the customer.

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. 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 this
Ruling.

14.

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 is charged.
ACTIVITIES BY INDEPENDENT CONTRACTORS

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:
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1.

Soliciting sales.

2.

Making sales.

3.

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.

SOUTH CAROLINA DEPARTMENTOF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director

Columbia, South Carolina
October 22
, 1997

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