Minnesota Tax Court Holds Merchandisers Create Corporate Income Tax Nexus For Out-Of-State Distributor

The Minnesota Tax Court has held that the in-state activities of merchandisers employed by an out-of-state distributor created corporate income tax nexus for the distributor.1 Specifically, the merchandisers' activities exceeded the mere "solicitation of orders" which would be afforded immunity from a state's income tax under Public Law 86-272 (P.L. 86-272).2 The merchandisers' training sessions provided to retail store employees, and their preparation of store reports, photos, and floor maps, were not ancillary to the "solicitation of orders" or the "requesting" of orders. Instead, the training sessions and the prepared materials served independent business purposes. In addition, when taken together, the merchandisers' non-immune activities were not de minimis and, as a result, the out-of-state distributor was subject to Minnesota's corporate income tax.

Background

Skagen Designs, Ltd. was headquartered in Nevada and distributed watches and jewelry to retail department stores, including stores located in Minnesota. Skagen employed Minnesota merchandisers, on a part-time basis, who visited retailers' stores in Minnesota.3 During these visits, the merchandisers inspected, re-arranged, and re-filled watch cases or towers to be displayed in accordance with a plan developed by Skagen. They also maintained detailed floor maps of the stores that carried their products, keeping track of changes in the positions of the products of each competitor. In addition, the merchandisers provided training on Skagen products to the retailers' employees, assisted with in-store sales events by being present on the sales floors to answer questions from customers, reviewed price adjustments and markdowns of Skagen products, and periodically submitted store photos and reports to the regional merchandising manager. These merchandisers were not responsible for selling any Skagen products, did not accept any sales orders and did not interact with Skagen's actual sales representatives.

The Minnesota Commissioner of Revenue determined that Skagen was required to file and apportion its income to Minnesota because the merchandisers' in-state activities exceeded the protection provided by P.L. 86-272. Skagen protested this finding and the Commissioner denied the protest and reaffirmed the original finding that the income tax, as applied to Skagen, was proper. Skagen filed an appeal to the Tax Court and the parties subsequently filed cross motions for summary judgment.

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