Did a pharmaceutical company's South Carolina representatives stay within Public Law 86-272's protection for soliciting orders?

Plain-English summary

South Carolina Private Letter Ruling 88-19 held that XYZ Corporation's combined in-state activities went beyond protected solicitation under Public Law 86-272 and created South Carolina corporate income-tax nexus.

Three activity groups drove the result:

• Professional Division representatives wrote up promotional orders for independent wholesalers and immediately paid pharmacies rebates from an XYZ bank account, which the Commission treated as effectively accepting orders.
• Broker managers supervised and directed independent brokers.
• National-account managers coordinated promotional programs and customer marketing strategies rather than soliciting orders.

The Commission also said that if XYZ reduced its activity to mere protected solicitation but remained legally qualified to do business in South Carolina, it still would have to file an annual report and pay an apportioned corporate license fee, even though no income tax would be imposed.

XYZ's pharmaceutical business

XYZ was a Delaware corporation with its main offices outside South Carolina. It manufactured prescription and over-the-counter drugs and distributed them throughout the United States.

After a corporate reorganization, XYZ no longer included a division that had held inventory in several states. Its only South Carolina presence consisted of personnel in two marketing divisions:

• the Professional Division, which marketed prescription drugs; and
• the Consumer Products Division, which marketed over-the-counter drugs.

XYZ asserted that ordinary orders were approved or rejected at corporate headquarters in New Jersey and filled from inventory outside South Carolina.

Activities that resembled protected solicitation

Professional Division representatives visited physicians, hospitals, clinics, nursing homes, and pharmacists to explain products, dosages, therapeutic value, and side effects. They carried literature and samples but did not make on-the-spot sales.

The representatives could not set prices, grant credit, accept customer payments, resolve shipment or damage issues, or accept or reject ordinary orders. Corporate headquarters handled those functions.

Independent brokers in the Consumer Products Division solicited orders without authority to accept or reject them and were paid only by commission. Professional sales representatives encouraged physicians to use consumer products and left samples and literature without writing orders.

Those facts formed the solicitation background, but the Commission evaluated all in-state activities together.

Promotional orders and rebates exceeded solicitation

Approximately quarterly, Professional Division representatives visited pharmacies with special promotional deals normally available through independent wholesalers.

When a pharmacy ordered the required amount, the representative:

• wrote up the order;
• sent it to the independent wholesaler; and
• immediately wrote the pharmacy a rebate check from XYZ's New Jersey bank account under headquarters instructions.

The Commission called this procedure tantamount to accepting an order on the wholesaler's behalf. Acceptance went beyond solicitation protected by Public Law 86-272.

Broker supervision exceeded solicitation

XYZ employed broker managers who directed independent brokers and accompanied them in customer solicitation activity.

The ruling treated hiring, training, or supervising sales personnel as activity outside protected solicitation, relying on the William Wrigley matter and Multistate Tax Commission Resolution 1985-4.

The broker managers' supervisory role therefore counted against Public Law 86-272 protection.

National-account marketing exceeded solicitation

Three national-account managers worked with major pharmaceutical customers that bought directly from XYZ headquarters.

They set up and coordinated promotional programs and directed customers' nationwide marketing strategies by warehouse. The Commission found those functions different from requesting orders for new business and outside protected solicitation.

Filing and license fee if XYZ reduced its activity

Because the Commission found nexus, XYZ's alternative no-nexus question was technically moot.

The ruling nevertheless explained that a corporation legally qualified to do business in South Carolina had to file an annual report under section 12-19-20 and pay the corporate license fee under section 12-19-70.

If XYZ limited its South Carolina business activity to protected solicitation, no income tax would be imposed under the ruling's assumption, but the license-fee base would be apportioned using the income-tax apportionment ratios.

What this means for you

Pharmaceutical and consumer-product companies

PLR 88-19 looked beyond job titles and ordinary order-approval limits. Promotional rebates, personnel supervision, and customer marketing coordination caused the combined activity to exceed solicitation.

Remote sellers using representatives

Representatives can create risk even without authority to approve ordinary orders. The Commission treated writing promotional orders and issuing immediate rebates as functional acceptance.

Sales management teams

Supervising independent brokers was not treated as merely ancillary solicitation under South Carolina's narrow interpretation in the ruling.

National-account teams

Coordinating promotional programs and directing customers' marketing strategies were distinguished from soliciting orders.

Legally qualified corporations

Public Law 86-272 income-tax protection did not eliminate the annual-report and corporate-license-fee obligations described in the ruling.

Readers applying the ruling today

PLR 88-19 applied a 1988 South Carolina interpretation of Public Law 86-272 to detailed pharmaceutical sales practices. Current federal protection, state guidance, digital activity, employee and contractor functions, qualification status, and license-fee rules must be checked independently.

Common questions

Q: Did XYZ qualify for Public Law 86-272 protection?

A: No. The Commission held that the combined Professional and Consumer Products Division activities exceeded solicitation.

Q: Which pharmacy activity was treated as order acceptance?

A: Representatives wrote up promotional orders, sent them to independent wholesalers, and immediately issued pharmacy rebate checks.

Q: Did supervising independent brokers matter?

A: Yes. The ruling treated supervision of sales personnel as a nonprotected activity.

Q: Were national-account managers merely soliciting orders?

A: No. They coordinated promotions and directed customer marketing strategies rather than seeking new orders.

Q: Did working from home or keeping samples alone decide the case?

A: The ruling described those facts, but its stated reasons focused on promotional order acceptance and rebates, broker supervision, and national-account marketing activities.

Q: If XYZ performed only solicitation, would it file nothing?

A: No. If legally qualified to do business in South Carolina, it still had to file an annual report and pay the apportioned corporate license fee.

Q: Can another company rely on PLR 88-19?

A: No. The ruling states that it applied only to XYZ's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• 15 U.S.C. section 381, Public Law 86-272 — interstate solicitation protection
• S.C. Code sections 12-7-230 and 12-7-250 (Supp. 1987) — corporate income-tax provisions cited in the ruling
• S.C. Code sections 12-19-20 and 12-19-70 — annual report and corporate license fee
• Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959), and United States v. Bass, 404 U.S. 336 (1971) — taxing power and narrow construction discussion
• William Wrigley, Jr. Co. v. Wisconsin Department of Revenue, Docket No. I-8591, and Multistate Tax Commission Resolution 1985-4 — personnel-supervision treatment cited in the ruling
• Clairol v. Kingsley, citations reported in the ruling — promotional activities beyond solicitation
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR88-19.pdf

Original ruling text

SC PRIVATE LETTER RULING #88-19

TO:

XYZ Corporation

SUBJECT:

Income Tax/Activities Exceeding Solicitation
Standard in P.L. 86-272

REFERENCE:

15 U.S.C. 381, P.L. 86-272
S.C. Code Ann. Section 12-7-230 (Supp. 1987)
S.C. Code Ann. Section 12-7-250 (Supp. 1987)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
S.C. Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
1.

Are the combined activities of both the Professional Division and Consumer Products
Division of XYZ within the P.L. 86-272 definition of "solicitation" as that term is
interpreted by the South Carolina Tax Commission?

2.

If the aforementioned activities of XYZ were deemed not to create nexus under South
Carolina law but XYZ was legally qualified to do business within the state, would XYZ
a. Not have to file a return?
b. Be required to file a return with only a minimum tax due?
c. Be required to file a return based only upon the apportioned net worth and/or net
income of XYZ?

Facts:
XYZ is a corporation organized and existing under the laws of the State of Delaware. Its main
offices are located in another state. XYZ is a pharmaceutical company which manufactures

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drugs and distributes them throughout the United States. As the result of a reorganization
pursuant to the requirements of Sections 351, 368(a)(1)(D) and 355 of the Internal Revenue
Code of 1954, as amended, XYZ transferred out of its corporate entity a division which
maintained inventory in several states. In reviewing the corporate structure as it now exists,
there is a question as to whether the new corporate structure (without the aforementioned
transferred division) would have nexus for state corporate income and/or franchise tax purposes.
XYZ is divided for marketing purposes into two segments, a Professional Division and a
Consumer Products Division. The Professional Division markets only ethical pharmaceuticals,
i.e., drugs dispensed solely on the prescription of a physician. The Consumer Products Division
markets only those drugs which are capable of being sold legally without a prescription or, as
they are more commonly known, over-the-counter drugs.
Each of the aforementioned divisions has personnel performing various solicitation activities
within South Carolina. With the exception of these personnel, XYZ has no other presence within
the State. The following describes the in-state activities of each respective division.
XYZ's Professional Division representatives visit physician's offices, hospitals, clinics and
nursing homes in their assigned area. The representatives explain the therapeutic value of XYZ's
products to physicians and pharmacists. They tell what the product is, what it will do, what
dosage is desirable and what its side effects might be. Literature is available and often left with
the doctors and pharmacists along with samples of XYZ's products.
On approximately a quarterly basis, area representatives visit local pharmacies to inform them of
special promotional deals normally received only by independent wholesalers. If a pharmacy
orders a certain amount of a XYZ product from the independent wholesaler, the representative
will write up the order, send it to the independent wholesaler and then give the pharmacy an
immediate rebate of a portion of the price charged by the independent wholesaler as authorized
and determined by written instructions received from corporate headquarters in New Jersey. To
pay this rebate, the representative will write a check from a XYZ New Jersey bank account made
out to the pharmacy. At all other times of the year, the pharmacies will only order directly from
the independent wholesaler with no contact from the area representatives.
The Professional Division representatives work out of their homes with no reimbursement for
rooms or space utilized. XYZ leases automobiles for the representatives and provides
reimbursement for certain incidental business expenses. The company may provide the
representative with a nominal sales aid such as a tape recorder. When visiting both potential and
prior customers, representatives carry only literature and samples. Samples are replenished
quarterly. The manner in which samples are stored until distributed is left to the discretion of the
individual representative. While they may be stored in the representative's residence, if the
representative chooses to rent self-storage space in his own name, XYZ will reimburse the
representative for expenses incurred to store the samples. XYZ asserts that representatives
solicit orders but do not have the power to accept or reject such orders. XYZ states that this
authority lies solely with corporate headquarters in New Jersey. The representatives do not
maintain any inventory and do not make "on the spot" sales with the samples. All South
Carolina shipments originate from inventory stored outside South Carolina. The representatives

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do not set up equipment, assist in promotions or arrange displays. Representatives do check
inventories in both hospitals and warehouses recommending a proper level of inventory to
maintain. Prices are set by corporate headquarters and are non-negotiable. Representatives
cannot grant credit. These activities can only be performed by employees at the corporate
headquarters. In addition, representatives do not accept customer payments. If there are
customer inquiries, delays in shipments or damaged goods, customers must call corporate
headquarters. All representative education, training and instructional services are performed at
the corporate headquarters in New Jersey.
The Consumer Products Division has four different types of representatives within South
Carolina: independent brokers, broker managers, national account managers and professional
sales representatives.
Brokers are fully independent contractors who represent XYZ and other companies. They solicit
orders for XYZ but lack the authority to accept or reject such orders. They are compensated only
on a commission basis. Broker managers are employees who direct the independent brokers.
Broker managers are provided with automobiles leased by XYZ and are reimbursed for certain
incidental business expenses. Managers will oversee the solicitation activities of the independent
brokers in the solicitation process when they are calling upon customers but they neither solicit
nor accept orders nor do they grant credit.
There are three national account managers who operate on a nationwide basis and who deal
solely with major drug/pharmaceutical houses. Each manager is responsible for approximately
three or four accounts. Their role is to set up and coordinate the specifics of promotional
programs with the major customers who are on a direct purchase program with XYZ corporate
headquarters in New Jersey. They direct the buyer in terms of nationwide marketing strategies
for XYZ products by the respective warehouse as opposed to writing orders for new business.
The last category of representative, the professional sales representative, operates in a manner
similar to that of the Professional Division representatives. It is their responsibility to call upon
both family practitioners and pediatricians to inform them of the various components of XYZ
Consumer Products Division product line. They do not solicit nor write up orders. They merely
encourage the use of XYZ products before a sale is made and leave both samples and literature
with the physician.
Discussion:
1.

Public Law 86-272, as codified at 15 U.S.C. Section 381, provides in pertinent part as
follows:
(a) No state or political subdivision thereof, shall have power to impose, for any taxable
year ending after September 14, 1959, 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:

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(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 out-side the state; ***.
The critical element in this case is whether XYZ's activities go beyond the term
"solicitation of orders." Although some courts have adopted a broad meaning to this term
and thus excluded the income from taxation, South Carolina has held that a narrow
construction is appropriate. (Tax Commission Finding dated 3-25-85)
Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959), found that
due process did not limit the state's right to tax a corporation where the corporation has
engaged in substantial income producing activities in the state. Section 381 is a
congressional limitation upon the broad reach of due process with such limitation
prohibiting taxation where the only activity is solicitation. Such a limitation in effect is a
federal restriction of the broad power of the state to tax. A restriction upon the state's
fundamental power to tax is a shift in Federal-State relations. Unless Congress "conveys
its purpose clearly it will not be deemed to have significantly changed the Federal-State
balance." United States v. Bass, 404 U.S. 336 (1971). Thus, solicitation is more properly
read narrowly so as not to infringe upon the state's ability to tax.
In this case, XYZ's presence in South Carolina exceeds solicitation in several instances.
It is well recognized that a representative's acceptance of orders exceeds the realm of
solicitation. (P.L. 86-272 Section 101(a)(1)). Here, XYZ's area representatives of the
Professional Division visit local pharmacies to inform them of special promotional deals
normally received only by independent wholesalers. If a pharmacy orders a certain
amount of a XYZ product from the independent wholesaler, the representative will write
up the order, send it to the independent wholesaler, then give the pharmacy an immediate
rebate of a portion of the price charged by the independent wholesaler. This rebate is
given in the form of a check written by the representative from a XYZ New Jersey bank
account. The procedure outlined here is tantamount to the acceptance of an order by the
representative on behalf of the wholesaler.
XYZ also utilizes broker managers who oversee and direct the activities of independent
brokers. William Wrigley, Jr. Co. v. Wisconsin Department of Revenue, Docket Number
I-8591, held that the hiring, training, or supervising of personnel exceeds solicitation. In
doing so, the Wisconsin Tax Appeals Commission adopted Multistate Tax Commission
Resolution 1985-4 defining the scope of solicitation into immune and non-immune
activities. This resolution specifically enumerates the hiring, training or supervising of
personnel as a non-immune activity and therefore taxable. This approach is consistent
with South Carolina's narrow interpretation of the term "solicitation."
The activities of the national account managers of the Consumer Products Division also
appear to be outside of the protected activities of P.L. 86-272. Their role is to set up and
coordinate the specifics of promotional programs with major customers on direct
purchase with New Jersey. They direct customers in terms of marketing strategies for
XYZ products as opposed to soliciting orders.

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P.L. 86-272 immunity was denied in Clairol v. Kingsley, 262 A. 7d 213, aff'd, 270 A. 2d
702 (1970), dismissed for want of substantial question, 91 S.Ct. 1337, 28 L.Ed. 2d 643
(1971). Clairol's representative whose primary function was "to promote the public's
purchase and use of its products," made regular visits to retail druggists, reviewing
displays, arranging promotions and suggesting optimum ways to merchandise Clairol
products. Clairols representatives also carried promotional material, business forms and
samples. On occasion, they also took inventory of a stores stock of Clariol products,
suggested orders based on their findings. Further Clairol employed technicians in New
Jersey to instruct its customers in how to use its products. Without deciding whether,
without the technicians, Clairol's activities went beyond solicitation, the New Jersey
Superior Court concluded that when taken as a whole, Clairol's activities went beyond
solicitation as defined by P.L. 86-272.
Likewise, the activities of XYZ within South Carolina go beyond solicitation as defined
by P.L. 86-272.
2.

Since XYZ has exceeded solicitation and is therefore deemed to have nexus in South
Carolina, the second question is moot. However, if the activities of XYZ did not exceed
mere solicitation and XYZ was legally qualified to do business in South Carolina, a
return would be required to allow XYZ to file an annual report and pay the corporate
license fee. Section 12-19-20 requires every corporation organized to do business in
another state and qualified to do business in South Carolina to file an annual report. The
license fee is imposed under Section 12-19-70 upon every corporation required to file an
annual report. XYZ's license fee base would be apportioned based upon the income tax
apportionment ratios although no income tax would be imposed.

Conclusion:
The combined activities of both the Professional Division and Consumer Products Division of
XYZ fall outside of the P.L. 86-272 definition of solicitation" as that term is interpreted by the
South Carolina Tax Commission.
However, if XYZ reduces its activities to mere solicitation, XYZ would be required to make an
annual report and pay the corporate license fee.
SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard Jr
S. Hunter Howard, Jr., Chairman
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
September 21
, 1988

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