Oregon: Wholesalers Accepting Returns on Behalf of Taxpayer Caused Loss of Public Law 86-272 Protection

The Oregon Tax Court recently addressed whether a taxpayer was protected from Oregon taxation under Public Law 86-272.  The taxpayer, a cigarette company based in New Mexico, generally sold cigarettes directly to unrelated Oregon wholesalers. The wholesalers sold the products to in-state retailers after which they were sold to consumers. All orders received by the taxpayer were approved and fulfilled outside Oregon. Although the taxpayer’s sales were mainly to Oregon wholesalers, the taxpayer promoted sales directly to retailers in a couple different ways through agreements with its wholesalers. First, these agreements required wholesalers to accept returns of non-saleable products from retailers. Second, when the taxpayer’s trade representatives visited Oregon retailers trying to convince them to carry and sell the taxpayer’s products, the wholesalers were required to fulfill any “pre-book” orders that were made during these visits.  Wholesalers that complied with these terms of the agreements received cash payments and credits. The taxpayer filed returns for the tax years at issue claiming that it was protected under P.L. 86-272. The Department of Revenue disagreed and the matter ultimately came before the tax court.

Before the tax court, the Department argued that the acceptance of retailer returns by Oregon wholesalers and forwarding of pre-book orders to wholesalers required under their agreements with the taxpayer to accept such orders caused the loss of P.L. 86-272 protection.  The court first noted that there was no dispute that there is a business reason for accepting returns independent of soliciting orders. Thus, the Oregon wholesalers’ acts of accepting retailer returns would cause the loss of P.L. 86-272 protection if it was done “on behalf of” the taxpayer. The court noted that under P.L. 86-272 both representatives and independent contractors perform activities on “behalf of” taxpayers. Thus, the first step was for the court to determine whether the wholesalers were the taxpayer’s “independent contractors” (it was recognized that the wholesalers were not the taxpayer’s representatives).  Although the wholesalers were not “independent contractors” under P.L. 86-272, the court determined that the wholesalers were independent contractors under Oregon state law because they performed services (accepting returns) and in turn received remuneration (cash payments and credits under the agreements). The taxpayer argued that the returns were done for the wholesalers’ own benefit, but the court found that this argument was undercut by the fact that the taxpayer paid the wholesalers, in part, to accept such returns. If the returns were equally beneficial to the wholesalers, in the court’s view the taxpayer would not have to pay them.  The court concluded that the wholesalers were independent contractors acting on behalf of the taxpayer when they accepted returns. The taxpayer next argued that the wholesaler returns were de minimus because they represented only 0.261 percent of the Oregon wholesalers’ sales during the audit period. In the court’s view, in terms of magnitude, the proportion of in-state returns was not high, although it was over a thousand times the proportion of in-state sales in Wrigley. However, the procedure of retailers being able to make returns to wholesalers was integral to taxpayer's marketing strategy and the court concluded the returns were not de minimus. Having determined that the taxpayer lost P.L. 86-272 protection due to the wholesalers accepting returns, the court did not address the pre-book order issue. Please contact Rob Passmore at 503-820-6844 with questions on Santa Fe Natural Tobacco Company v. Department of Revenue.