440 Mass. 224 | Mass. | 2003
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
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.
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
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
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 “[activities that take place after a sale
This court first addressed the definition of “solicitation of orders” in the Kennametal case. We concluded that “no bright line . . . distinguishes] 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 Revenue, 427 Mass. 357, 362 (1998).
A decision of the board will not be reversed or modified if it is based on a correct application of the law and if it is based on substantial evidence. See Kennametal, Inc. v. Commissioner of Revenue, supra at 43, and cases cited. We consider whether the evidence is sufficient to support the board’s findings. See id., and cases cited. However, our review of the sufficiency of the evidence is limited to “whether a contrary conclusion is not merely a possible but a necessary inference from the findings.” Id., quoting Commissioner of Revenue v. Houghton Mifflin Co., 423 Mass. 42, 43 (1996).
The board applied the appropriate legal standard, and reasonably could conclude that the activities of the Alcoa sales staff exceeded the solicitation of orders. The board found that the activities of Alcoa’s DSMs relative to warranty claims were not entirely ancillary to the solicitation of orders, and instead had independent business purposes. These purposes included increasing general sales of Alcoa’s products and the enhancement of Alcoa’s general reputation among buyers. DSM involvement in warranty claims may also have helped to decrease the number of direct calls to Alcoa’s warranty claims office. See Amgen Inc. v. Commissioner of Revenue, supra at 362. While these activities may have enhanced the reputation of the company and increased purchases of Alcoa products generally, they were not entirely ancillary to the sales staff’s job of soliciting purchases. See Wrigley, supra at 229; Kennametal, Inc. v. Commissioner of Revenue, supra at 42. Alcoa would have reason to engage in the resolution of warranty claims irrespective of
It is true, as Alcoa claims, that 830 Code Mass. Regs. § 63.39.1(5)(c)(4) provides that “[p]assing inquiries and complaints on to home office” is among the “activities that ordinarily fall within the scope of ‘solicitation’ under Pub. L. 86-272.” The board’s findings of fact, however, indicate that DSM activities exceeded this description. Based on the board’s findings, other provisions of the regulations are probably more apt, for instance “handling customer complaints (other than by referral to home office),” 830 Code Mass. Regs. § 63.39.1(5)(d)(7), which the regulation describes as falling outside the scope of solicitation.
Alcoa contends that this case is distinguishable from our Kennametal and Amgen decisions, because the DSMs did not possess or impart complicated information about Alcoa’s products. Alcoa concedes that the DSMs did at times convey information about the company’s products, but insists that the DSMs were “classic sales staff” without technical expertise. This would distinguish this case, the argument goes, from the qualifications and activities of the Kennametal engineer-salespeople and the nurses who accompanied Amgen sales representatives on their rounds, reviewing patient charts and answering questions about Amgen’s medical products, and who also gave programs on Amgen products to health groups. See Amgen Inc. v. Commissioner of Revenue, supra at 358-359. This argument misses the point. The holdings in these cases were not predicated on the technical nature of the activity involved, but on whether that activity was or was not entirely ancillary to the solicitation of orders. See Amgen Inc. v. Commissioner of Revenue, supra at 361-362; Kennametal, Inc. v. Commissioner of Revenue, supra at 44. We simply held that the board could reasonably conclude that the activities of these particular engineer-salesmen and nurses served independent business purposes, and were not merely part of the solicitation
Alcoa argues alternatively that if we conclude that the activities of the DSMs in relation to warranty claims were not immune from State taxation under Pub. L. 86-272, we should find that some or all of these activities were de minimis. The Wrigley Court recognized an exception for de minimis activities, to avoid results that would render “a company liable for hundreds of thousands of dollars in taxes if one of its salesmen sells a 10-cent item in state.” Wrigley, supra at 231. To qualify for the de minimis exception, the nonimmune activities of the company must be analyzed as a whole (and not individually), Kennametal, Inc. v. Commissioner of Revenue, supra at 42 n.5, to determine whether they constitute a “nontrivial additional connection with the State,” Wrigley, supra at 235. In Wrigley, although the activities that were not ancillary to the solicitation of orders accounted for only 0.00007 per cent of Wrigley’s annual sales in Wisconsin, and thus were not relatively large in magnitude, they were conducted “as a matter of regular company policy, on a continuing basis” and were not de minimis. Id.
In this case, the board found that warranty claims acted on by Alcoa’s DSMs constituted more than one-third of warranty claims nationwide between 1994 and 1996. Throughout the same period, DSMs in Massachusetts made regular visits to warranty claim sites,
Alcoa also urges us to reverse the decision of the board because two of the board’s findings of fact were not based on substantial evidence. First, Alcoa claims that the finding that the DSMs remitted samples of Alcoa products to the warranty claims department is not based on substantial evidence. However, in an August 28, 1998, letter to the commissioner,
Second, Alcoa maintains that the board’s use of the phrase “ ‘initiation’ of warranty claims” to describe DSM activities is not based on substantial evidence. Alcoa concedes that the DSMs responded to customer inquiries and complaints, but insists that this passive role cannot be characterized as “initiation.” It is unnecessary for us to resolve this essentially semantic argument. In an absolute sense, Alcoa is correct that these claims, like almost all warranty claims in every industry, are initially made by customers, not employees of the manufacturer. The same could be said for service calls, installation requests, and countless other business activities. This passive nature alone, however, does not make the warranty process
Finally, Alcoa cautions that if the board’s opinion stands, there will be “precious little room for interstate sellers of goods to deploy solicitors in the Commonwealth’ ’ without exposing the seller to excise taxation. The warranty-related activities in question, Alcoa argues, are “bound up” in the solicitation process and necessary for maintaining customer relations in this particular industry. Nothing prevents Alcoa from providing any service it wishes to its customers, except its desire to avoid the taxes associated with “doing business” in the Commonwealth. It may be true that the seller of a product that eventually becomes attached to a home or building cannot leave the entire warranty process to customers, as would more easily be the case if the product were a small appliance or an article of clothing. But the Wrigley Court is quite clear that an industry-by-industry approach is not to be applied, as it would “render the limitations of [Pub. L. 86-272] toothless, permitting ‘solicitation of orders’ to be whatever a particular industry wants its salesmen to do.” Wrigley, supra at 227.
The decision of the board is affirmed.
So ordered.
The additional assessments were $51,833, $36,931, and $86,992 for the tax years 1994, 1995, and 1996, respectively.
We also noted that the frequent resolution of customer complaints concerning the use of Kennametal products was not ancillary to the solicitation of orders by the sales staff, and distinguishable from the infrequent presale
During his testimony before the board, Alcoa’s regional sales manager (and a former DSM) Terrance Costello admitted that if it were not for the DSM activities with regard to warranty issues, Alcoa ultimately may have had to send “some other employee” to Massachusetts to follow up on those claims.
DSMs made an average of 1.73, 1.60, and 1.31 visits per month to Massachusetts warranty claim sites in 1994, 1995, and 1996, respectively.
Although Pawlos testified that some of the information she provided in her initial correspondence with the commissioner was less than accurate, that information primarily related to Alcoa’s video program training sessions, which is not an issue in this appeal. Pawlos testified that the incorrect information in this correspondence was “corrected” by Alcoa’s answers to the commissioner’s interrogatories and a letter from Alcoa’s attorneys dated April 4, 2001. Neither explicitly corrects the August 28, 1998, letter on the issue of remitting samples, except for a general denial that DSMs performed any “warranty work.”
In addition, the language in Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39 (1997), and Amgen Inc. v. Commissioner of Revenue, 427 Mass. 357 (1998), lends no support to the notion that the court would have decided those cases differently if it could have been shown that the activities in question were conducted only in response to customer requests. The only post-Wrigley case we can find that hints at such a distinction is Linear Films, Inc., v. State ex rel. Okla. Tax Comm’n, 876 P.2d 301 (Okla. Ct. App. 1994), cited by neither party here, which conjectures that “trouble shooting,” as opposed to taking responsibility for correcting problems, would be considered protected by Pub. L. 86-272 in other States. This case was decided by another State’s intermediate appellate court, and we are not persuaded by its reasoning.