Did four annual paid Texas product-training seminars defeat P.L. 86-272 protection for a medical-products manufacturer?

Plain-English summary

Four recurring paid product-training seminars were not protected by P.L. 86-272 and created earned-surplus nexus.

The foreign medical-products manufacturer otherwise limited its Texas representatives to displaying and demonstrating products, answering questions, and sending all orders outside Texas for approval and shipment.

It also planned four one-day Texas seminars each year to teach customers how to fit its devices. Attendees paid about $55-$60, and seminar revenue was expected to be less than 0.5% of total revenue.

Rule 3.554(d)(5) treated training classes and seminars for people other than solicitation-only personnel as doing business unless de minimis. Because the seminars were regularly conducted each year, Texas did not treat them as trivial. They were not protected under P.L. 86-272, so the company was subject to earned surplus.

What this means for you

Manufacturers with in-state customer education

Low revenue did not make recurring training de minimis when it was a regular company activity.

Tax professionals

Separate protected solicitation from customer training and evaluate recurrence, not only revenue percentage.

Common questions

Q: Were the seminars protected solicitation?
A: No.

Q: Did revenue below 0.5% make them de minimis?
A: No.

Q: Which former component applied?
A: Earned surplus.

Citations and references

• Texas Tax Code Sec. 171.001(a)
• Public Law 86-272, 15 U.S.C. Sec. 381
• 34 Tex. Admin. Code Sec. 3.554(c)(3) and (d)(5)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9701101L

Original ruling text

January 21, 1997

Dear **:

Thank you for your letter concerning your client's exposure to the earned
surplus component of the Texas franchise tax.

You stated in your letter that your client, the Company, is a foreign
(non-Texas) corporation engaged in the business of manufacturing medical
products, including prosthetic devices and related accessories. Products
manufactured by the Company are sold at wholesale to independent retailers
located throughout the United States. The Company does not sell directly to
the ultimate consumer. None of the Company's Texas based customers are
directly or indirectly affiliated with the Company.

The Company employs a limited number of sales representatives to service
accounts in the state of Texas. The sales representatives' in-state activities
are limited to merely displaying and/or demonstrating the Company's products to
potential and existing customers, as well as answering customer questions.
They do not make sales of products to customers. All orders for products must
be sent to the Company's out-of-state office for approval and shipment.

Periodically, the Company will conduct small, one-day seminars in Texas for
existing and prospective customers for the purpose of demonstrating the proper
methods for fitting the devices sold by the Company. Seminars are usually
conducted in private conference centers rented by the Company. Prospective
seminar participants are notified of the seminars through direct mailings.
Participants will be required to pay a fee of approximately $55-$60 in order to
attend. It is anticipated that four seminars will be conducted on an annual
basis in Texas. The revenue from the seminars will cover costs including
facilities, course materials, and lunch. The revenues generated from the
seminars will be less than one-half of one percent (0.5%).

Your question was stated as follows:

Assuming that the Texas activities of Company sales representatives do not
exceed the mere solicitation of orders, will the Company lose its protection
under Public Law 86-272 as a result of conducting the four one-day seminars
described above?

Texas Tax Code (TTC) Section 171.001(a) imposes a franchise tax on "each
corporation that does business in this state or that is chartered or authorized
to do business in this state." The phrase "doing business" for the earned
surplus component is defined in franchise tax rule 3.554. Subsection (d)(5) of
the rule states that "conducting training classes, seminars, or lectures for
personnel other than personnel involved only in solicitation" constitutes
doing business in Texas, assuming that this activity is not of a de minimis
level.

The term de minimis is defined in subsection (c)(3) of the rule as those
"activities that, when taken together, establish only a trivial connection with
Texas." The definition goes on to state
that "an activity regularly conducted within Texas pursuant to a company policy
or on a continuous basis shall normally not be considered trivial."

Based on the information stated above and the arguments presented in your
January 2, 1997 letter, we have determined that the training seminars in
question do not represent a protected activity under PL 86-272 and that your
client will be subject to the earned surplus component of the tax.

This response is based on the facts presented. If there are different or
additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,
Janet Spies
Tax Policy Division