Alcoa Building Products, Inc. v. Commissioner of Revenue, SJC-08939 (Mass. 10/21/2003), SJC-08939.
| Decision Date | 21 October 2003 |
| Docket Number | SJC-08939. |
| Citation | 440 Mass. 224 |
| Parties | ALCOA BUILDING PRODUCTS, INC. vs . COMMISSIONER OF REVENUE. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, Sosman, & Cordy, JJ.
Taxation, Abatement, Corporate excise, Appellate Tax Board: appeal to Supreme Judicial Court. Administrative Law, Agency's interpretation of statute, Substantial evidence.
Appeal from a decision of the Appellate Tax Board on July 7, 2000.
The Supreme Judicial Court granted an application for direct appellate review.
William Hazel for the taxpayer.
Thomas A. Barnico, Assistant Attorney General, for the Commissioner of Revenue.
This is an appeal from a decision of the Appellate Tax Board (board) affirming the denial by the Commissioner of Revenue (commissioner) of applications by Alcoa Building Products, Inc. (Alcoa), for the abatement of corporate excise taxes assessed for the tax years 1994, 1995, and 1996. Alcoa claims that the board erred in finding that activities engaged in by Alcoa sales representatives in Massachusetts during the relevant time period exceeded the "solicitation of orders," thereby causing Alcoa to forfeit immunity from State taxation under Pub. L. 86-272. Instead, Alcoa argues that its salespeople were merely "[p]assing inquiries and complaints on to home office," which according to 830 Code Mass. Regs. § 63.39.1 (5)(c)(4) (1993), falls within the scope of solicitation. Alcoa also challenges certain factual findings of the board as not supported by substantial evidence, and argues that some of the aforementioned activities were in any case de minimis. We conclude that there was substantial evidence to support the board's findings of fact, and that the board did not err in concluding that Alcoa's activities during the relevant time period exceeded the protection of Pub. L. 86-272. Accordingly, we affirm the decision of the board.
Background. We summarize the findings of fact and report of the board. Alcoa, a corporation organized under the laws of Ohio, is in the business of manufacturing and selling building products, including vinyl siding. At no time relevant to this appeal did Alcoa maintain an office, facility, warehouse, or other place of business in Massachusetts. For the tax years 1994-1996, Alcoa timely paid the minimum excise of $456 each year. The commissioner conducted an audit of Alcoa, and after much correspondence between the parties, the commissioner issued to Alcoa a notice of assessment dated December 28, 1999, in which the commissioner assessed additional corporate excises for the tax years at issue.1 Alcoa filed applications for abatement for each tax year, which were denied by the commissioner. Alcoa subsequently appealed to the board.
During the tax years at issue, Alcoa employed either four or five district sales managers (DSMs), some of whom lived in Massachusetts, and all of whom were assigned sales territories within the State. The DSMs traveled throughout their respective territories, building relationships with customers and soliciting orders for Alcoa products. The orders themselves were sent out of State to Alcoa headquarters, where they were accepted or rejected. In addition to visiting distributors to solicit orders, DSMs also participated in activities relating to the warranty claims process. DSMs consistently visited construction sites after sales had taken place to investigate the merit of warranty claims. These on-site visits were considered part of their job, a form of "damage control" designed to protect the DSMs's relationships with their customers, and also to promote Alcoa's reputation. During these inspection visits, DSMs often would explain to customers that their problem resulted from incorrect use of the product rather than from any defect. When the product was defective, DSMs, as a courtesy, frequently assisted customers with the filing of the warranty claims by filling out paper work and remitting defective product samples to Alcoa's warranty claims department. DSMs did not have authority to resolve warranty claims, but from 1994 through 1996, Alcoa's DSMs were responsible for "initiating" over one-third of all warranty claims nationwide. Because of the nature of warranty claims, these activities all occurred after the sale of the product in question. It is the characterization of these warranty-related activities that is at issue in this case.
The board determined these activities of the DSMs had "independent business purposes" beyond the "solicitation of orders," thereby exceeding the protection of Pub. L. 86-272 and exposing Alcoa to excise taxation by the Commonwealth. Alcoa appealed the board's ruling and we granted its application for direct appellate review.
Discussion. A brief review of the State excise tax and the limitations imposed on it by Federal law is helpful in understanding the underlying dispute. General Laws c. 63, § 39, imposes an excise on "every foreign corporation . . . actually doing business in the commonwealth." However, this taxing authority is limited by Congress's power to regulate interstate commerce pursuant to the commerce clause of the United States Constitution. Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39, 41 (1997), cert. denied, 523 U.S. 1059 (1998). Congress, in 1959, enacted 15 U.S.C. §§ 381-384, also known as Pub. L. 86-272. See id. at 39. The statute was promulgated in part to "allay the apprehension of businessmen that 'mere solicitation' would subject them to state taxation." Heublein, Inc. v. South Carolina Tax Comm'n, 409 U.S. 275, 280 (1972). It establishes a "minimum standard" for the imposition of a State net income tax based on solicitation of interstate sales, Wisconsin Dep't of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 222 (1992) (Wrigley), and "expressly restricts the authority of a State to impose an income tax on foreign corporations whose business within the State consists solely of `the solicitation of orders . . . for sales of tangible personal property, which orders are [then] sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State.'" Kennametal, Inc. v. Commissioner of Revenue, supra at 41, quoting Pub. L. 86-272. Public Law 86-272, however, does not define the term "solicitation of orders." Kennametal, Inc. v. Commissioner of Revenue, supra.
In Wrigley, supra at 228, the United States Supreme Court concluded that "solicitation of orders" is "more than what is strictly essential to making requests for purchases" (emphasis in original). Thus, some activities conducted by salespeople might go beyond verbally or impliedly requesting a customer to make purchases, id. at 223, but still be protected activities under Pub. L. 86-272. Id. at 225.
Where the Wrigley Court drew a line, however, was "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." Id. at 228-229. Thus, providing the sales force with company vehicles or free samples would be part of the "solicitation of orders," as there is no independent business reason for those activities. Id. at 229. By contrast, involving salespeople in "repair and servicing may help to increase purchases; but it is not ancillary to requesting purchases, and cannot be converted into `solicitation' by merely being assigned to salesmen" (emphasis in original). Id. While the Court refused to hold that all postsale activities are per se not part of the solicitation of orders, it did note that "[a]ctivities that take place after a sale will ordinarily not be entirely ancillary" to the solicitation of orders. Id. at 230. Wrigley sales staff's replacement of stale chewing gum, supplying gum through "agency stock checks," rental of storage space, and storage of gum in-State were not entirely ancillary to the solicitation of orders because they served separate business purposes. Id. at 232-233. The replacement of stale gum, for example, would increase general sales, but "Wrigley would wish to attend to the replacement of spoiled product whether or not it employed a sales force," and therefore it was not merely facilitating the salesmen's solicitation of orders. Id. at 233. On the other hand, Wrigley's recruitment and training of sales staff, as well as the in-State sales staff's periodic intervention in credit disputes between customers and the Wrigley home office, were entirely ancillary because they served no function but to facilitate the solicitation of orders. Id. at 234.
This court first addressed the definition of "solicitation of orders" in the Kennametal case. We concluded that "no bright line . . . distinguish[es] those activities that are entirely ancillary to the solicitation of orders from those that also serve an independent business function." Kennametal, Inc. v. Commissioner of Revenue, supra at 45. Instead, the activities "occur along a continuum" and "must be considered on an individual basis." Id. The Kennametal sales force in Massachusetts, which consisted primarily of engineers, id. at 40, used samples to test the performance of products, prepared reports based on those tests, prepared inventory analyses, and often made in-plant presentations. Id. at 44-45. We concluded that these activities were not entirely ancillary to the solicitation of orders because they served independent business purposes, id. at 45, that is, even if Kennametal had no sales force in Massachusetts, it had other reasons to provide these services. Under Wrigley, although these activities may have increased general sales, they did not "facilitate the actual solicitation of orders." Id. See Wrigley, supra at 228; Amgen Inc. v. Commissioner of...
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