Does an out-of-state company create Utah income tax nexus just by sending traveling sales reps to solicit advertising, sign contracts, and collect deposits in Utah?

Plain-English summary

An out-of-state company that distributes a free advertising publication asked Utah whether it would owe Utah corporate income (franchise) tax just because it sends three traveling sales representatives into the state to solicit advertising. The reps didn't sell products, manage anyone, handle complaints, or maintain an office — but they did sign contracts that bound the company and collect deposits on those contracts.

The Commission found that was enough. Regularly and systematically sending employees into Utah to solicit ad orders, sign binding contracts, and distribute the resulting free publication to Utah residents "significantly associated with the Company's ability to establish and maintain a market in Utah" — the legal test for nexus. That makes the company subject to Utah's franchise tax under § 59-7-104(1).

The company hoped Public Law 86-272, the federal law that bars a state from taxing income when a company's only in-state activity is soliciting orders (sent out of state for approval, then filled by shipment from outside the state), would protect it. It doesn't, for two independent reasons: (1) signing contracts and taking deposits go beyond mere solicitation, which alone forfeits the protection, and (2) P.L. 86-272 only covers solicitation of sales of tangible personal property — advertising is not tangible personal property, so the law never applied in the first place.

As a bonus flag the company hadn't even asked about: the Commission noted that giving away the publication for free could trigger Utah sales/use tax on the cost of producing or acquiring it, unless the publication qualifies as a "newspaper" under Utah Admin. Rule R865-19S-65.

What this means for you

Out-of-state publishers and advertising-sales companies

If your reps do anything beyond pure solicitation while in Utah — signing contracts, taking payments/deposits, managing local operations — you risk losing P.L. 86-272 protection even if you'd otherwise qualify. And if what you're selling isn't tangible personal property (advertising, services, digital products), P.L. 86-272 was never available to you regardless of how limited your activities are.

Free-publication distributors

Distributing something for free doesn't mean it's tax-free to produce. Utah can tax you on your own production/acquisition cost of a freely distributed publication unless it meets the specific newspaper exemption — worth checking Rule R865-19S-65 against your publication's format and content.

Accountants and tax professionals

This is a clean two-track nexus analysis: the general "significant association with establishing a market" test for whether nexus exists at all, followed by a separate P.L. 86-272 analysis (which only ever matters if nexus is otherwise established, and only ever protects TPP solicitation). Useful template for any client selling services or advertising with light in-state sales presence.

Common questions

Q: If my reps only solicit and never sign anything, would P.L. 86-272 protect us?
A: Not necessarily — P.L. 86-272 protection is available only for soliciting the sale of tangible personal property. If you're selling advertising, services, or anything else that isn't tangible personal property, the law doesn't apply regardless of how limited your in-state activity is.

Q: What in-state activities cost this company its P.L. 86-272 argument?
A: Signing contracts that bind the company and securing deposits on those contracts. Either one alone exceeds "mere solicitation."

Q: We give our publication away for free — how could that be taxable?
A: Utah taxes the producer/distributor on the cost of production or acquisition when a publication is distributed free of charge, unless it qualifies as an exempt "newspaper" under Utah Admin. Rule R865-19S-65.

Q: Does this ruling apply to my company's specific facts?
A: No — it's an advisory opinion issued to one company based on the 13 specific facts it disclosed. A different mix of activities (say, reps who never sign contracts) could come out differently. Consult a Utah tax professional for your situation.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-7-104(1) (corporate franchise tax on the privilege of doing business in Utah)
• Utah Admin. Rule R865-19S-65 (newspaper exemption from sales/use tax)
• Public Law 86-272 (15 U.S.C. §§ 381-384) (federal limit on state income tax over mere TPP-sale solicitation)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/00-034.htm

Original ruling text

REQUEST LETTER

00-034

Response March 5, 2001

Subject: COMPANY

Nexus Issue

Dear NAME,

We were referred to you by NAME to request an advisory opinion from the State of Utah as to whether or not the NAME will be subject to income tax within the Sate of Utah because of Nexus.

The facts and circumstances are as follows:

1) Company Name: COMPANY

State of Incorporation: NAME

Date of Incorporation: DATE

EIN: ######

Fiscal Year End: DATE

Address: ADDRESS

ADDRESS

STATE

Contact Person: NAME

PHONE

2) The company is not a parent or subsidiary of any other corporation.

3) The company has not had any income previously within the State of Utah.

4) The principal business activities of the Company to be conducted within the State of Utah is to solicit advertising from Utah businesses to be displayed in a free advertising publication distributed within the state.

5) The company has not and does not plan on participating in trade shows or seminars in Utah.

6) The company will have employees on the Company's payroll that normally perform services in a state other than Utah , but will occasionally or temporarily work in Utah.

7) The company will have 3 traveling sales representatives soliciting advertising within Utah, as well as other states.

8) While in Utah, the Company's employees/representatives will:

a) Not sell products and/or services.

b) Not supervise or manage activities or employees and/or other company representation.

c) Not engage in any collection activity of any kind.

d) Not handle complaints of Utah customers.

e) Not conduct lectures or offer training.

f) Not investigate, recommend or appoint potential Utah dealers, agents or distributors to the company.

g) Not use their Utah homes for any business activities.

h) Not perform any engineering functions.

I) Only solicit orders for the sale of advertising.

j) Secure deposits on the advertising contracts.

k) Not personally deliver company products or move company products between points in Utah.

l) Sign contracts that bind the Company.

9) The Company will advertise in publications within Utah.

10) The Company will not have a Utah telephone number.

11) The Company does not hold title to any property or placed a lien on any property located in Utah.

12) The Company will not conduct any banking activities in Utah.

13) The Company does not engage in any franchise operations in Utah.

Please review the information above. Should you require any further information in your conclusion as to whether or not the COMPANY would be subject to Utah income taxes, please contact either NAME or myself.

Yours very truly,

NAME

RESPONSE LETTER

DATE

RE: Income Tax Nexus - Sale of Advertising in and Distribution of Free Publications in Utah

Dear Mr. NAME,

You have requested an advisory opinion on whether the COMPANY. (the ACompany@) has nexus with Utah for income tax purposes. Specifically, you inquire whether nexus exists if the Company solicits the sale of advertising in Utah to be displayed in a free publication distributed in Utah.

You have listed a number of facts and circumstances surrounding the Company=s activities in Utah. To establish nexus with Utah, these activities must be significantly associated with the Company=s ability to establish and maintain a market in Utah for its product. As the Company will regularly or systematically send employees into Utah to solicit advertising orders, enter into contracts with Utah advertisers, and distribute its free publication in Utah to Utah residents, we find that the contacts with Utah are sufficient to establish nexus. Accordingly, the Company is subject to Utah=s franchise tax for the privilege of doing business in Utah. See Utah Ann. Code '59-7-104(1).

As many of the Company=s activities in Utah involve soliciting, we should address why Public Law 86-272 (AP.L. 86-272) does not afford the Company immunity from income tax nexus under these circumstances. P.L. 86-272 is a federal law restricting a state from imposing income tax on a company whose only business activity in that state is to solicit orders for sales of tangible personal property, where the orders are sent outside the state for approval or rejection and are filled by shipment or delivery from a point outside the state. While in Utah, the Company=s representatives sign contracts that bind the Company and secure deposits on these contracts. Either of these activities negates any immunity that would otherwise be provided under P.L. 86-272. In addition, P.L. 86-272 protection is limited to soliciting the sale of tangible personal property. As the Company is engaged in Utah in soliciting the sale of advertising, not tangible personal property, P.L. 86-272 immunity does not apply.

Although you did not inquire about sales and use tax, we point out that distributing your publication free of charge in Utah may result in sales and use tax liability. Tax is due on either the production or acquisition cost of any publication that is freely distributed, unless that publication is a newspaper as defined in Utah Admin. Rule R865-19S-65 (copy enclosed).

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

00-034