Santa Fe Natural Tabacco Co. v. Dept. of Rev.

124 August 23, 2022 No. 7

IN THE OREGON TAX COURT

REGULAR DIVISION

SANTA FE NATURAL TOBACCO COMPANY,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

State of Oregon,

Defendant.

(TC 5372)

Plaintiff was an out-of-state manufacturer, marketer, and distributer of

tobacco products, and sold its products to wholesalers located in Oregon (whole-

salers), which then sold products to retailers located in Oregon (retailers).

Plaintiff had employees located in Oregon who solicited retailers to place orders

for Plaintiff’s products. These “Pre-Book Orders” were sent to the wholesaler by

Plaintiff’s employee on behalf of the retailer. As part of its Distributer Incentive

Program (DIP), wholesalers were required to accept all returns—for any rea-

son—of Plaintiff’s products by retailers. The Department of Revenue argued that

these activities fell outside of the protection provided by 15 USC section 381 (PL

86-272), destroying Plaintiff’s immunity from Oregon income tax. Under Wis.

Dep’t of Revenue v. William Wrigley, Jr., Co., 505 US 214, 112 S Ct 2447, 120

L Ed 2d 174 (1992) (Wrigley), the court concluded that Plaintiff’s requirement

that wholesalers accept all returns of Plaintiff’s products caused the wholesalers

to engage in an activity on Plaintiff’s behalf that was not ancillary to “making

sales” under 15 USC section 381(c), and therefore destroyed Plaintiff’s immunity.

Likewise, Plaintiff lost immunity because the “Pre-Book Orders” facilitated the

placement of orders, rather than the “solicitation” of orders. The court further con-

cluded that the Pre-Book and returns activities were not sufficiently de minimis

to avoid the loss of tax immunity. The court held that Plaintiff was not subject

to the substantial understatement penalty imposed by ORS 314.402(1) because

Plaintiff’s positions were reasonably based on PL 86-272 or Wrigley in compliance

with ORS 314.402(4)(b)(B).

Trial was held October 15, 2020, in the courtroom of the

Oregon Tax Court, Salem.

Mitchell A. Newmark, Blank Rome LLP, New York, argued

the cause for Plaintiff.

Darren Weirnick, Senior Assistant Attorney General,

Department of Justice, Salem, argued the cause for Defen-

dant.

Decision rendered August 23, 2022.

ROBERT T. MANICKE, Judge.

Cite as 25 OTR 124 (2022) 125

I. INTRODUCTION

The substantive issue in this case is whether 15 USC

section 3811 (PL 86-272) protected Plaintiff (taxpayer) from

Oregon’s net income tax for the tax years ending December

31, 2010 through 2013 (Years at Issue).2

II. FACTS

The parties submitted the case for trial on stipu-

lated facts, which are found in the parties’ 17-page narrative

stipulation and stipulated exhibits, all of which the court

admits into evidence. During the Years at Issue, taxpayer

was an out-of-state manufacturer, marketer, and distribu-

tor of cigarettes and certain other tobacco products (collec-

tively, Products), selling to customers throughout the United

States. Taxpayer had no offices in Oregon and had none of

its own inventory of Products in Oregon for sale or return.

Taxpayer sold its products to wholesalers, includ-

ing wholesalers located in Oregon (Oregon Wholesalers or

Wholesalers), which sold the products to retailers, including

retailers located in Oregon (Oregon Retailers or Retailers).3

A. Facts Related to Product Returns

1. “100% Product Guarantee”

Taxpayer “provided * * * Oregon Retailers[ ] a ‘100%

Product Guarantee’ on SFNTC Brand Cigarettes that

Oregon Retailers purchased from Oregon Wholesalers.” 4

1

Unless otherwise indicated, references to the United States Code (USC)

and the Oregon Revised Statutes (ORS) are to the 2013 editions.

2

The court previously decided certain evidentiary issues. See Santa Fe

Natural Tobacco Co. v. Dept of Rev. 24 OTR 549 (2021). The order invited sub-

mission of one or more amicus briefs under Tax Court Rule 48, and the court

granted the application of amicus Multistate Tax Commission (MTC) in support

of Defendant (the department). The court appreciates the discussion of historical

and policy issues in the MTC brief; however, the court today decides the case

solely on the basis of the authorities cited in this opinion.

3

During 2010, taxpayer also sold its products directly to some Oregon

Retailers, although many Oregon Retailers bought Taxpayer products from

wholesalers, including Oregon Wholesalers. After 2010, taxpayer no longer

accepted orders from Oregon Retailers.

4

As defined in the parties’ stipulation, “SFNTC” refers to Taxpayer, and

“SFNTC Brand Cigarettes” is synonymous with the Products as defined in this

opinion.

126 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

The “100% Product Guarantee” is a one-page document

that Taxpayer updated approximately annually. During

2010 and the first half of 2011, the 100% Product Guarantee

stated:

“SANTA FE NATURAL TOBACCO COMPANY

“100% PRODUCT GUARANTEE

“All products manufactured by Santa Fe Natural Tobacco

Company (Natural American Spirit) or represented by

SFNTC (Dunhill and State Express) (collectively, ‘Tobacco

Products’) are 100% guaranteed. Non-saleable Tobacco

Products may be returned, at our expense, for product

replacement or refund.

“Customers making returns directly to SFNTC must include

a Return Authorization Number issued by SFNTC with

the return shipment. To request a Return Authorization

Number, call 1 (866) [redacted] and ask for Returns.

“Retailers making returns to a distributor are not required

to obtain authorization from SFNTC. SFNTC’s represen-

tatives will not sticker or mark Tobacco Products at retail

or require paperwork authorizing a retailer to return such

Tobacco Products to its distributor.

“Distributors may accept returns from retailers for any

reason. Distributors are not required to obtain SFNTC

authorization in order to accept returns from retailers.

“Please inspect the contents of your shipment upon receipt

to ensure that any problems are discovered and reported as

soon as possible. Any problems should be reported immedi-

ately by calling us at 1 (866) [redacted].”

Effective through June 30, 2012, the “100% Product Guarantee”

stated:

“SANTA FE NATURAL TOBACCO COMPANY

“100% PRODUCT GUARANTEE

“‘All products manufactured by Santa Fe Natural Tobacco

Company (SFNTC) (Natural American Spirit cigarettes

and roll-your-own) or represented by SFNTC (Dunhill cig-

arettes; State Express 555 cigarettes) (collectively, ‘Tobacco

Products’) are 100% guaranteed.’

“Retail customers may return unintentionally damaged,

non-saleable and stamped Tobacco Products through their

Cite as 25 OTR 124 (2022) 127

Direct Supplier of SFNTC products. Retailers making

returns to a Direct Supplier are not required to obtain

authorization from SFNTC. SFNTC’s Representatives will

not sticker or mark Tobacco Products at retail or provide

paperwork authorizing a retailer to return such Tobacco

Products to their Direct Supplier. Return procedures

between retailers and Direct Suppliers are solely deter-

mined by the Direct Supplier.

“Direct Suppliers may accept Tobacco Product returns

from retailers for any reason and are not required to obtain

SFNTC authorization in order to accept returns from

retailers.

“All questions regarding our Retail Returned Goods Policy

should be directed to your local SFNTC Representative or

to our SFNTC Customer Care Center at (800) [redacted].

“Retailers should process Tobacco Product returns through

their Direct Supplier. In the event the Direct Supplier does

not process retail returns, retail customers may contact

the SFNTC Customer Care Center directly for assistance.

Retailers are responsible for processing and returning

product to SFNTC that will not be accepted through their

Direct Supplier and adhering to all requirements of the

SFNTC Retail Returned Goods Policy.”

Effective for the remainder of the subject years, the “100%

Product Guarantee” stated:

“SANTA FE NATURAL TOBACCO COMPANY

“100% PRODUCT GUARANTEE

“‘All products manufactured by Santa Fe Natural Tobacco

Company (SFNTC) (Natural American Spirit cigarettes

and roll-your-own) (collectively, ‘Tobacco Products’) are

100% guaranteed.’

“A retail customer may return unintentionally damaged,

non-saleable and stamped Tobacco Products through its

Direct Supplier of SFNTC products. A retailer making a

return to a Direct Supplier is not required to obtain autho-

rization from SFNTC. SFNTC’s Representatives will not

sticker or mark Tobacco Products at retail or provide

paperwork authorizing a retailer to return such Tobacco

Products to its Direct Supplier.

128 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

“A retailer should process Tobacco Products returns

through its Direct Supplier. Return procedures between a

retailer and Direct Supplier are solely determined by the

Direct Supplier. If a Direct Supplier does not have a pro-

cedure and/or form for processing returns, the chart below

shows the type of information a Direct Supplier may desire

for a return.

“Direct Suppliers may accept Tobacco Products returns

from retailers for any reason and are not required to obtain

SFNTC authorization in order to accept returns from

retailers.

“All questions regarding our Retail Returned Goods Policy

should be directed to your local SFNTC Representative or

to our SFNTC Customer Service Representative at (866)

[redacted].

“In the event the Direct Supplier does not process retail

returns, retail customers may contact SFNTC Customer

Service directly for assistance. A retailer is responsible for

processing and returning Tobacco Products to SFNTC that

will not be accepted through its Direct Supplier and adher-

ing to all requirements of the SFNTC Retail Returned

Goods Policy.

“Supplier Custom- Store Supplier Item Returned

er Name Phone/ Fax Number Qty.

Contact (Cartons)”

Taxpayer had employees (Representative Employees)

located in Oregon, who visited and solicited Oregon Retailers

to carry and sell Products to adult tobacco consumers.

Representative Employees were trained to, and did, inform

Retailers about taxpayer’s 100% Product Guarantee during

sales calls.

2. “Wholesale Returned Goods Policy”

Taxpayer had a Wholesale Returned Goods Policy

that was part of the terms and conditions of sale of taxpayer

products to Oregon Wholesalers. Relevant text, taken from

a representative policy, is reprinted as part of the analysis

below.

Cite as 25 OTR 124 (2022) 129

3. “DIP Agreements” with Oregon Wholesalers

Taxpayer entered into Distributor Incentive Program

(DIP) Agreements with Oregon Wholesalers. The Oregon

Wholesalers were not related to Taxpayer by ownership or

common control and did not solicit orders for, or sell, any

of the products at issue on behalf of taxpayer. Taxpayer

had no right to prohibit the Wholesalers from selling cig-

arettes that were manufactured by companies other than

taxpayer and competitive with taxpayer’s Products, or from

accepting returns of cigarettes of such other companies.

Taxpayer had DIP Agreements with six or seven Oregon

Wholesalers at various times. Certain relevant provisions of

DIP Agreements are reprinted below.

Starting July 1, 2011, the Oregon Wholesalers

could not purchase taxpayer Products unless the Oregon

Wholesalers entered into a DIP Agreement. The DIP

Agreements included a requirement that the Oregon

Wholesaler accept and process returns of Products from

Oregon Retailers who purchased from the Oregon Wholesaler

Products for the purpose of selling them at retail.

Taxpayer had no right to control the Oregon

Wholesalers’ employment or personnel decisions, the way

tasks (including those related to accepting Product returns)

were delegated among employees or others, or the hours

or days to conduct business (including accepting Product

returns). Except as allowed under the DIP Agreements and

the Wholesale Returned Goods Policy, taxpayer had no right

to monitor how the Oregon Wholesalers fulfilled orders

placed by Oregon Retailers or how the Oregon Wholesalers

performed the task of accepting returns of Products from

Oregon Retailers. As provided in the DIP Agreements, tax-

payer had the right to conduct physical counts of the Oregon

Wholesalers’ inventory of Products. However, taxpayer did

not send taxpayer employees to conduct such counts during

the subject years.

Pursuant to the DIP Agreements, the Oregon

Wholesalers reported data to a third party that included

the amount of Product that the Oregon Wholesalers sold to

Oregon Retailers and the amount of Product that Oregon

130 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

Retailers returned to the Oregon Wholesalers. Those data

indicate the following:

Subject Cartons 6 Sold Cartons accepted Cartons

Year5 by Oregon by Oregon Accepted by

Wholesalers to Wholesalers from Taxpayer

Oregon Retailers Oregon Retailers from Oregon

Wholesalers

2010 Period 586,041 1,825 503

2011 Period 668,062 1,769 503

2012 Period 704,772 2,289 503

2013 Period 764,464 1,993 503

In accepting returns of Products from Oregon Wholesalers,

taxpayer did not distinguish between Products that were

returned by an Oregon Retailer to an Oregon Wholesaler,

and those that were not.

B. Facts Related to “Pre-Book Orders”

Taxpayer’s Representative Employees did not

carry inventory for sale. They sometimes took “Pre-Book

Orders,” which were orders authorized by an Oregon

Retailer that a Representative Employee forwarded to an

Oregon Wholesaler. For example, if, during a visit to an

Oregon Retailer, a Representative Employee observed that

the Oregon Retailer’s stock of Products was low or depleted,

or if the Representative Employee made a cold call on a

new Oregon Retailer, the Representative Employee could

leave a “sell sheet order” with the Retailer as a sugges-

tion for the Retailer to use to purchase Products when the

Retailer next visited the Oregon Wholesaler. Alternatively,

the Representative Employee could take a Pre-Book Order

during the visit and forward it to an Oregon Wholesaler.

During the Years at Issue, Representative Employees pri-

marily forwarded Pre-Book Orders by fax, but they could do

so by phone or email, or by accessing the Oregon Retailer’s

electronic ordering system.

5

The “periods” shown correspond closely, although not precisely, with the

calendar year.

6

A “carton” contained 10 “packs” of cigarettes.

Cite as 25 OTR 124 (2022) 131

The DIP Agreements included a requirement that

the Oregon Wholesaler “accept and process” Pre-Book

Orders. During the Years at Issue, Representative Employ-

ees placed an average of 13.3 Pre-Book Orders a month for

Oregon Retailers.

The parties agree that Pre-Book Orders were not

sales by taxpayer to Oregon Retailers. The Oregon Whole-

saler, not taxpayer, fulfilled the order from the Wholesaler’s

own inventory and billed the Oregon Retailer for the Prod-

ucts after Representative Employees placed the Pre-Book

Orders by forwarding them to the Oregon Wholesaler.

C. Procedural Background

Taxpayer timely filed Oregon corporation excise

tax returns for each of the Years at Issue and paid only the

annual $150 minimum tax imposed under ORS 317.090.

Taxpayer reported no Oregon taxable income, based on

taxpayer’s determination that PL 86-272 immunized its

income from Oregon’s net income tax imposed under ORS

317.070. Taxpayer attached to each return a page contain-

ing a large-font statement: “The taxpayer’s activities in

this state are limited to the solicitation of sales and are

therefore protected by Public Law 86-272.” The department

audited taxpayer’s returns, concluded that PL 86-272 did

not protect taxpayer, and after an administrative confer-

ence, issued notices of assessment of tax and interest, as

well as penalties for substantial understatement of tax-

able income (ORS 314.402) and failure to pay tax when

due (ORS 314.400). Taxpayer appealed to the Magistrate

Division, which granted summary judgment in favor of the

department.

Taxpayer appealed to this division from the mag-

istrate’s decision. In the stipulation, filed before trial, each

party reserved the right to call an expert witness, and each

party did so at a one-day trial. The evidence in the case,

other than the stipulation and stipulated exhibits, consists

of those portions of expert witness testimony that the court

later admitted; neither party proffered exhibits at trial

other than previously stipulated exhibits.

132 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

III. ISSUES

A. Returns of goods: activities of independent contrac-

tors under 15 USC § 381(c). Did Taxpayer lose immu-

nity under 15 USC section 381(c) because Oregon

Wholesalers accepted returns from Oregon Retailers of

goods manufactured by Taxpayer, including returns of

salable goods that Oregon Wholesalers placed into their

own inventory and returns of nonsalable goods that

Oregon Wholesalers were allowed to send to Taxpayer

for credit, where DIP Agreements required the Oregon

Wholesalers to accept returns from Oregon Retailers

regardless of reason?

B. Pre-Book orders: “missionary” activities of Taxpayer

employees under 15 USC § 381(a)(2). Did Taxpayer

lose immunity under 15 USC section 381(a)(2) because

Representative Employees in Oregon placed “Pre-Book

Orders” with Wholesalers for shipment of Taxpayer

Products to Retailers, where DIP Agreements required

the Wholesalers to accept and process the Pre-Book

orders?

C. De Minimis activities. Did Taxpayer retain immunity

because it conducted both of the foregoing activities at

a de minimis level?

D. Penalties. Do the positions Taxpayer took on its Oregon

returns subject Taxpayer to the penalty under ORS

314.402(1) for “substantial understatement of taxable

income”?

IV. ANALYSIS

Taxpayer claims immunity from Oregon corpora-

tion excise tax under PL 86-272, which provides, in perti-

nent part:

“(a) No state, or political subdivision thereof, shall have

power to impose, for any taxable year 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:

Cite as 25 OTR 124 (2022) 133

“(1) the solicitation of orders by such person, or his repre-

sentative, in such State for sales of tangible personal prop-

erty, which orders are sent outside the State for approval or

rejection and, if approved, are filled by shipment or delivery

from a point outside the State; and

“(2) the solicitation of orders by such person, or his rep-

resentative, in such State in the name of or for the benefit

of a prospective customer of such person, if orders by such

customer to such person to enable such customer to fill

orders resulting from such solicitation are orders described

in paragraph (1).

“* * * * *

“(c) For purposes of subsection (a) of this section, a per-

son shall not be considered to have engaged in business

activities within a State during any taxable year merely by

reason of sales in such State, or the solicitation of orders for

sales in such State, of tangible personal property on behalf

of such person by one or more independent contractors, or

by reason of the maintenance of an office in such State by

one or more independent contractors whose activities on

behalf of such person in such State consist solely of mak-

ing sales, or soliciting orders for sales, of tangible personal

property.

“(d) For purposes of this section—(1) the term ‘indepen-

dent contractor’ means a commission agent, broker, or

other independent contractor who is engaged in selling, or

soliciting orders for the sale of, tangible personal property

for more than one principle and who holds himself out as

such in the regular course of his business activities; and

(2) the term ‘representative’ does not include an indepen-

dent contractor.”

15 USC § 381; see also id. § 383 (“For purposes of this chap-

ter, the term ‘net income tax’ means any tax imposed on, or

measured by, net income.”). Congress enacted PL 86-272 in

1959 and has never amended it.

In its pretrial memorandum, the department iden-

tifies the activities described in Issues A (return of goods)

and B (Pre-Book Orders) as the bases for its position that PL

86-272 does not protect taxpayer from Oregon’s net income

taxes. If the court agrees with the department regarding

134 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

either issue, the court must conclude that PL 86-272 does

not protect taxpayer and must uphold the assessments.

A. Returns of Goods

With respect to returns of goods, the parties dis-

agree whether, under 15 USC § 381(c), (1) the Wholesalers

acted “on behalf of” Taxpayer and if so, (2) the Wholesalers’

activity was within or outside the scope of “making sales, or

soliciting orders for sales.”7

1. Did Oregon Wholesalers accept returns “on behalf of”

Taxpayer?

The department asserts that the Wholesalers

acted on behalf of taxpayer because taxpayer “delegated” to

Wholesalers the activity of accepting returns from Retailers

in satisfaction of taxpayer’s “100% Product Guarantee”

to Retailers. Taxpayer disputes that the facts show the

Wholesalers acted on its behalf. Before addressing the facts,

the court seeks to understand the meaning of the statutory

term “on behalf of,” looking to the text, structure and leg-

islative history of PL 86-272. See Etter v. Dept. of Rev., 360

Or 46, 52, 377 P3d 561 (2016); Health Net Life Ins. Co. v.

Dept. of Rev., 24 OTR 514 (2021). When interpreting the text

of a federal statute, the job of a court “is to interpret the

words consistent with their ‘ordinary meaning . . . at the

time Congress enacted the statute.’ ” Wisconsin Central Ltd.

v. U.S., ___ US ___, 138 S Ct 2067, 2070-71, 201 L Ed 2d 490

(2018) (ellipses in original) (quoting Perrin v. United States,

444 US 37, 42, 100 S Ct 311, 62 L Ed 2d 199 (1979)).

For the ordinary meaning of a term, the court starts

with contemporaneous dictionary definitions. Cf. id. A lead-

ing dictionary included the following definition:

“be·half *** interest, benefit, support – used as the object

of in or on and with a possessive noun or pronoun < a good

word in a friend’s ~ > < the senator who is now stumping

the state on his own ~ > < intervening in her ~—Warren

Beck >—in behalf of or on behalf of prep : in the interest

7

The parties frame their positions under 15 USC section 381(c), which covers

“independent contractors.” In its post-trial brief, the department acknowledged

that the Oregon Wholesalers were “acting as independent contractors” under 15

USC section 381(c), rather than as “representatives” under 15 USC section 381(a).

Cite as 25 OTR 124 (2022) 135

of : as the representative of : for the benefit of < this letter

is written in behalf of my client >”

Webster’s Third New Int’l Dictionary 198 (una-bridged ed

1961) (typeface in original; archaic definition omitted). The

court finds nothing in contemporaneous legal dictionaries

suggesting a meaning different from that in Webster’s. See

James A. Ballentine, Self-Pronouncing Law Dictionary 88

(1948) (“The word is defined by Webster as meaning in the

name of; on account of; benefit; advantage; interest; profit;

defense; vindication.”); Black’s Law Dictionary 197 (4th ed

1957) (“Benefit, support, defence, or advantage.”). The court

concludes that the ordinary meaning of “on behalf of,” as of

1959, was “in the interest of,” “as representative for,” or “for

the benefit of.”

The parties have not argued that the structure or

legislative history of PL 86-272 suggests an understanding

of “on behalf of” that is different from the ordinary mean-

ing.8 For additional context, the court has examined the

cases that (according to Wis. Dep’t of Revenue v. William

Wrigley, Jr., Co., 505 US 214, 220-22, 112 S Ct 2447, 120

L Ed 2d 174 (1992) prompted Congress to enact PL 86-272.

See Northwestern States Portland Cement Co. v. Minnesota,

358 US 450, 454, 79 S Ct 357, 3 L Ed 2d 421 (1959); Brown-

Forman Distillers Corp. v. Collector of Revenue, 234 La 651,

101 So 2d 70 (1958), appeal dism’d, 359 US 28, 79 S Ct 602,

3 L Ed 2d 625 (1959); International Shoe v. Fontenot, 236

La 279, 280, 107 So 2d 640 (1958), cert den, 359 US 984,

79 S Ct 943, 3 L Ed 2d 933 (1959). However, none of these

opinions focus on whether an in-state nonemployee acted

“on behalf of” an out-of-state seller. Nor do the few cases

interpreting PL 86-272 that are binding on, or preceden-

tial for, this court. Wrigley involved the activities of sales-

persons who evidently were employees. See 505 US at 232-

33. In Herff Jones Co. v. Tax Com., 247 Or 404, 410, 430

8

The department discusses the structure and legislative history to the

extent of arguing that 15 USC section 381(c) should be read narrowly, such that

an independent contractor’s engaging in any in-state activity on behalf of the

out-of-state taxpayer other than making sales, or soliciting orders for sales as

allowed under 15 USC section 381(a), potentially jeopardizes the taxpayer’s

immunity under PL 86-272. Taxpayer does not contest that reading as a general

proposition, but rather argues that Wholesalers did not accept returns on taxpay-

er’s behalf.

136 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

P2d 998 (1967), the court concluded, upon analysis, that the

Oregon-resident sales personnel were not independent con-

tractors. In Ann Sacks Tile & Stone v. Dept. of Rev., 20 OTR

377, 382 (2011), appeal dismissed on procedural grounds, 352

Or 380, 287 P3d 1062 (2012), this court expressly assumed

that plumbers performing warranty work pursuant to con-

tracts with Kohler, Inc. (Kohler) were independent contrac-

tors. The court also implicitly concluded that the plumbers

performed their work on behalf of Kohler, but the court did

not discuss a basis for that conclusion. The court will apply

the plain meaning of “on behalf of.”

The court now examines the facts in greater detail,

to determine whether the Wholesalers’ activities with

respect to returns amounted to activities “on behalf of” tax-

payer. The department, asserting that taxpayer “delegated”

to Wholesalers the activity of accepting Retailer returns,

bases its position on the terms of taxpayer’s Wholesale

Returned Good Policy and taxpayer’s DIP Agreements

with Wholesalers. The Wholesale Returned Goods Policy

stated that the objective of the “Wholesale Returned Goods

Program” was to “establish reasonable policies regarding

returning unintentionally damaged and unsalable, stamped

product at the direct supplier level.” Among other topics, the

document instructed Wholesalers on handling goods dam-

aged at the time the Wholesaler received them from tax-

payer, and on handling goods received from Retailers:

“In the event a case is damaged during delivery from the

factory please follow the directions listed below:

“1. Direct supplier9 must accept the damaged case.

“2. Direct Supplier must clearly indicate the type of dam-

age as well as total damaged carton and/or packs on

the carrier manifest at time of acceptance.

“3. Return ONLY damaged cartons to SFNTC Product

Recovery Operations (PRO) per guidelines in this

manual.

“4. Place undamaged cartons in existing inventory.

9

In taxpayer’s documents, “Direct Supplier” is synonymous with “Oregon

Wholesaler” as defined in this order.

Cite as 25 OTR 124 (2022) 137

“In the event that direct supplier receives returned goods

from retail customers, please follow the directions listed

below:

“1. Direct supplier should accept the returned, stamped

product.

“2. Direct Supplier should clearly inspect the total

returned carton and/or packs returned at time of

acceptance.

“3. Direct Supplier must return ONLY damaged or

unsaleable, stamped (out dated) cartons to SFNTC

Product Recovery Operations (PRO) per guidelines in

this manual.

“4. Place undamaged and/or saleable stamped cartons in

existing inventory.”

The DIP Agreements provided, among other things:

“BY SIGNING THE DISTRIBUTOR AGREES:

“To accept and process returns for all SFNTC products.

Distributor will allow their Retailers to return any SFNTC

product to them regardless of reason. Saleable SFNTC

products should be returned to inventory and products

deemed unsalable can be returned to SFNTC for credit.”

Taxpayer argues that the activity of accepting

returns from Retailers is a “best practice[ ]” that “bene-

fits both [taxpayer] and the Oregon Wholesaler,” and that

this “best practice” does not support an inference that the

Wholesalers performed that activity on taxpayer’s behalf.

Taxpayer’s legal premise seems to be that only an activ-

ity that solely benefits the out-of-state seller fits within the

definition of an activity “on behalf of” the out-of-state seller.

However, the ordinary meaning of “on behalf of” does not

support that legal premise. An activity may be in the “inter-

est” of, or may “benefit,” more than one person, as when a

business donates goods or services to a charitable cause and

enjoys public goodwill for doing so. A person may “repre-

sent” the interests of another while also benefiting person-

ally from the result, as when a company lobbies on behalf

of the trade association of which it is a member. Even if the

court assumes that Wholesalers had their own interest in

138 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

accepting returns (presumably, to maintain long-term rela-

tionships with their Retailer customers), that proves noth-

ing about whether the Wholesalers accepted the returns on

behalf of taxpayer.

Turning to the facts, the record provides no evi-

dence to support taxpayer’s assertion. Even if, as a matter

of law, a finding that Wholesalers also acted in their own

interests could eliminate the possibility that they acted

“on behalf of” taxpayer, nothing in the record establishes

that wholesalers of goods in general followed a “best prac-

tice” of accepting all returns of goods, salable or unsalable,

and “for any reason.” Nor does anything in the record allow

the court to conclude that such a practice was the norm or

a standard among wholesalers of other cigarette brands

in Oregon during the years at issue. The only evidence of

policies and practices with respect to returns is in taxpay-

er’s own forms—the “Santa Fe Natural Tobacco Company

Wholesale Goods Return Policy” and taxpayer’s forms of DIP

Agreement. These documents, in the absence of anything

else, persuade the court that requiring the Wholesalers to

accept all returns served taxpayer’s interest and thus estab-

lish that the Wholesalers acted on taxpayer’s behalf in

accepting returns.

Finally, taxpayer argues that there is no evidence

that any Wholesalers actually accepted any returns on tax-

payer’s behalf. Taxpayer starts by seeking to reduce the

field of transactions in question, arguing that only returns

of nonsalable Products arguably could have counted as

returns accepted “on behalf of” taxpayer, because when

Retailers returned salable Products to Wholesalers, the

Wholesalers placed them back into their own inven-

tory, in their own interests and for their own benefit. The

court rejects this premise for the reasons discussed above:

just because accepting salable Products may have bene-

fited the Wholesalers themselves does not mean that the

Wholesalers were not also benefiting, and therefore act-

ing on behalf of, taxpayer. Taxpayer required Wholesalers

to accept all returns, and there is no evidence they would

have accepted all returns if taxpayer had not required them

to.

Cite as 25 OTR 124 (2022) 139

Even if the court were to agree that only returns of

nonsalable Products should count, taxpayer’s argument still

fails on evidentiary grounds. Taxpayer asserts that there is

no evidence that any of the approximately 5,000 packs the

Wholesalers returned to taxpayer each year as unsalable

had been sold to Retailers and returned to the Wholesalers;

for example, they might have been damaged when first

received from taxpayer, or they might have become stale

in a Wholesaler’s warehouse, before the Wholesaler could

manage to sell them to any Retailer. Therefore, according to

taxpayer, the court cannot find that the Wholesalers acted

as “conduits” for the return of unsalable products from

Retailers to taxpayer.

Taxpayer is correct that there is no evidence in

the record that tracks the progress of packs of cigarettes

from Retailers, back to Wholesalers, and finally back to

taxpayer; however, that lack of evidence harms taxpayer’s

position rather than aiding it. The parties have stipulated

only that two streams of returns existed, without specify-

ing any relation between them: Retailers returned approxi-

mately 20,000 packs of cigarettes to Wholesalers annually,

and Wholesalers returned approximately 5,000 packs to

taxpayer annually. Based on the stipulations, any amount,

from zero to all 5,000 of the packs taxpayer received, might

have been returned by Retailers. On this point, however,

taxpayer bears the burden of going forward with evidence

to persuade the court, and taxpayer has not carried that

burden. Taxpayer contests an income tax assessment and

therefore is the “party seeking affirmative relief” from that

assessment. ORS 305.427. It falls to taxpayer to persuade

the court of its factual position by “a preponderance of the

evidence.” Id. If the court were to accept taxpayer’s legal

premise that the Wholesalers acted on taxpayer’s behalf only

to the extent that they served as a “conduit” for returns of

nonsalable products from Retailers, and if taxpayer wished

to rely on the absence of any such returns to support its

argument, then taxpayer would have to persuade the court

of the absence of the returns, not just the absence of data

going either way. If, as taxpayer asserts, Wholesalers had no

interest in, or benefit from, tracking returns of nonsalable

products from Retailers because they accepted all returns

140 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

solely in order to benefit their independent wholesaling busi-

nesses, then taxpayer would have to try to marshal evidence

elsewhere, for example from witnesses working for Retailers,

Wholesalers, or both, or possibly from statistical sampling.

Taxpayer has made no such effort and has therefore failed

to carry its burden of persuasion.

Taxpayer also misses the mark when it explains at

some length that it did not control the manner or means by

which Wholesalers accepted returns. Here, taxpayer seems

to conflate the relationship of acting “on behalf of” another

with the relationship of agency. The absence of a right to

control might negate an agency relationship, but it does not

negate the possibility of action on behalf of another. As a

matter of federal statutory interpretation, the court may

look to the contemporaneous common law as a source of rel-

evant context. See, e.g., Standefer v. U.S., 447 US 10, 19, 100

S Ct 1999, 64 L Ed 2d 689 (1980) (construing “principal” in

criminal provision of Internal Revenue Code by reference

to term’s “common-law background”); Burlington Industries,

Inc. v. Ellerth, 524 US 742, 754-55, 118 S Ct 2257, 141 L Ed

2d 633 (1998) (looking to “general common law,” as summa-

rized in restatements, for meaning of “agents” in Civil Rights

Act of 1964). Congress in 1959 would have understood that

the elements of an agency relationship are action on behalf

of the principal, control by the principal, and consent by

the principal. See Restatement (Second) of Agency § 1 (1958)

(defining “agency” as “the fiduciary relation which results

from the manifestation of consent by one person to another

that the other shall act on his behalf and subject to his con-

trol, and consent by the other so to act” (emphasis added)).

Acting on another’s behalf is a separate type of relationship

that does not require that the other person control the actor;

therefore, taxpayer’s evidence that it lacked control over the

Wholesalers does not prove that the Wholesalers were not

acting on taxpayer’s behalf.10

10

Commentary in the Restatement explains that the relationship is some-

thing other than an agency if the element of control is lacking:

“The agency relation results if, but only if, there is an understanding between

the parties which, as interpreted by the court, creates a fiduciary relation in

which the fiduciary is subject to the directions of the one on whose account

he acts. It is the element of continuous subjection to the will of the principal

Cite as 25 OTR 124 (2022) 141

The court concludes that, by requiring the Oregon

Wholesalers to accept and process returns of all Products

regardless of reason, as a condition of buying any Products

from taxpayer, taxpayer obligated the Wholesalers to

accept the returns on its behalf. The record is clear that

Wholesalers accepted and processed approximately 20,000

packs (2,000 cartons) of Products per year returned by

Retailers. Taxpayer asserts that Wholesalers would have

accepted and processed some or all of these returns even if

the DIP Agreement had not required them to do so, but tax-

payer has not carried its burden to substantiate that asser-

tion. The court concludes that all of the returns counted as

part of the Wholesalers’ activity on taxpayer’s behalf.

2. Did the Oregon Wholesalers’ acceptance of returns on

taxpayer’s behalf exceed “making sales, or soliciting

orders for sales”?

Taxpayer argues that, even if the Wholesalers acted

on its behalf in accepting returns, their conduct remained

within the bounds of “making sales,” as that term is used in

15 USC section 381(c).11 Taxpayer argues that, because sec-

tion 381(c) allows independent contractors to actually make

sales on behalf of the out-of-state taxpayer without jeopar-

dizing the taxpayer’s immunity, Congress logically must

have intended to also allow those contractors to “reverse”

those sales by accepting returns and providing refunds.

And if independent contractors actually making sales on

behalf of a taxpayer can accept returns, surely the Oregon

Wholesalers, as independent contractors that were not

making sales on behalf of taxpayer, can accept returns as

which distinguishes the agent from other fiduciaries and the agency agree-

ment from other agreements.”

Restatement (Second) of Agency § 1 (1958) at 8 (Comment on Section 1).

11

Subsection (c) of 15 USC section 381 “expands the immunity of subsection

(a) when the out-of-state seller does its marketing through independent contrac-

tors, to include not only solicitation of orders for sales, but also actual sales, and

in addition ‘the maintenance . . . of an office . . . by one or more independent con-

tractors whose activities . . . consist solely of making sales, or soliciting orders for

sales . . . .” Wrigley, 505 US at 224-25 (emphasis omitted). In this case, there is

no issue regarding “maintenance of an office,” and taxpayer does not argue that

accepting the returns was within the scope of “soliciting orders” under 15 USC

section 381(c).

142 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

well.12 A contrary conclusion would, according to taxpayer,

read into section 381(c) an extraordinary requirement that

“all sales must be final.”

Although taxpayer frames this point as a matter

of pure logic, the court must deal with the facts at hand.

In this case, the DIP Agreement does not merely allow

Wholesalers to accept returns, it requires them to accept all

returns for any reason, in effect specifying that “no sales are

final.” As recounted above, taxpayer offers no evidence that

the Wholesalers would have adopted that return policy on

their own. This additional fact differs from the hypotheti-

cal scenario taxpayer proffers.13 Therefore, the court must

consider whether the Wholesalers’ contractual obligation to

accept all returns for any reason has significance under 15

USC section 381(c).

Neither the United States Supreme Court nor the

Oregon Supreme Court has had occasion to determine a test

for whether an independent contractor’s activity exceeds the

scope of “making sales” under 15 USC section 381(c). This

court considered the issue in Ann Sacks and concluded that

performing warranty repairs was an activity that destroyed

immunity; however, that case was not heard by the Oregon

Supreme Court because of a procedural flaw in the filing

of the appeal. The court today will analyze this case under

Ann Sacks but will also consider whether the activity of the

Oregon Wholesalers would be “ancillary” to “making sales,”

by extension of the United States Supreme Court’s reason-

ing in Wrigley as to activities ancillary to “soliciting orders”

under 15 USC section 381(a)(2).

In Ann Sacks, this court considered repair work on

Kohler plumbing products that was performed by plumbers

referred to as “authorized service representatives” (ASRs), as

well as repair work on Kohler engine and electrical generator

12

Neither party argues that the Wholesalers in this case made sales on

behalf of taxpayer; the parties proceed on the assumption that the Wholesalers

made sales solely on their own behalf.

13

The court expresses no view on whether an independent contractor (mak-

ing or not making sales on behalf of an out-of-state taxpayer) may accept returns

on its own terms and solely for its own benefit without destroying immunity for

the out-of-state seller under 15 USC section 381(c).

Cite as 25 OTR 124 (2022) 143

products that was performed by distributors. 20 OTR at 378.

Kohler, based outside Oregon, was the corporate parent of

a federal affiliated group that included Oregon subsidiary

Ann Sacks Tile & Stone, Inc. At issue was whether the

repair work was protected under PL 86-272 such that the

in-state property, payroll and sales of Kohler were properly

excluded from the numerator of the apportionment factors

for the affiliated group. Id. at 393; see ORS 314.650 (2003)

(three-factor apportionment); ORS 317.715(3)(b) (2003)

(members of affiliated group not treated as single taxpayer

regarding taxability or composition of apportionment fac-

tors). Kohler contracted with the plumbers and distributors

to make the repairs, in order to satisfy Kohler’s warranty

obligations under sales contracts or under federal law. Id. at

378-79. The court had no occasion to fashion a test to deter-

mine whether an activity is within the definition of “mak-

ing sales,” because the court concluded early in its analysis,

based on its reading of Wrigley, that performing the repair

work was “activity beyond the protections of PL 86-272.”

Id. at 382 (also stating that “activities such as warranty work,

that serve an independent business purpose apart from the

solicitation of orders for sales, do not qualify for immunity

under PL 86-272.”). The court found that the taxpayer in

Ann Sacks “d[id] not appear to contest” that point. Id. The

court went on to address Kohler’s argument that the mere

use of an in-state independent contractor to perform certain

discrete functions should not destroy immunity, ultimately

returning to the conclusion that “the statute cannot protect

Kohler in this case, for the reason that the activities of the

distributors and ASRs extend beyond activities allowed by

the statute.” Id. at 385-88.14

14

This latter portion of the Ann Sacks decision has prompted debate regard-

ing whether the United States Constitution imposes limitations on attributing

the acts of in-state independent contractors to out-of-state taxpayers. See Walter

Hellerstein, 1 State Taxation (3d ed 2022) ¶ 6.26[2][b]-[c]. Professor Hellerstein

asserts that the Constitution prohibits imposition of tax “when the relation-

ship between the [contractor and the taxpayer] is so attenuated that asserting

jurisdiction over the out-of-state taxpayer on the basis of the acts of its in-state

contractor would exceed even the most expansive view of ‘attributional nexus.’ ”

Id. at ¶ 6.26[2][b]; see also id. at ¶ 6.26[2][c] (applying such limitations, court

would focus on “fact-sensitive inquiry into whether the ‘independent contractor’

is really carrying on its own business or that of its out-of-state principal” and

“ ‘whether the activities performed in the state on behalf of the taxpayer are

significantly associated with the taxpayer’s ability to establish and maintain a

144 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

In the absence of a test under the court’s own case

law for what constitutes “making sales,” the court now

turns to Wrigley for guidance based on the U.S. Supreme

Court’s test for the “solicitation of orders.” The taxpayer in

Wrigley was an Illinois-based chewing gum manufacturer

whose employees made in-person sales calls on retailers in

Wisconsin. Wrigley, 505 US 214. The issue was whether cer-

tain of the employees’ activities during these visits exceeded

the scope of 15 USC section 381(a), which immunizes a tax-

payer whose in-state activities are limited to the “solicita-

tion of orders” to be approved and filled from outside the

state.

The Court considered various approaches to the

interpretation of PL 86-272, rejecting a “narrow[ ]” read-

ing proffered by Wisconsin and amici consisting of other

states and the Multistate Tax Commission, rejecting as well

the taxpayer’s “broad” interpretation as “toothless,” and

describing the Court’s task as “simply to ascertain the fair

meaning” of “solicitation of orders.” Id. at 223-28. The Court

began with dictionary definitions of “solicitation” in order

to understand how the term was “commonly understood.”

Id. at 223. The Court added its conclusion that “solicitation”

must include implicit proposals to sell, not merely explicit

ones. Id. As to activities that neither explicitly nor implicitly

propose a sale, the Court looked to the context supplied by

the statute’s opening text, which refers to the solicitation

of orders, the making of sales, and the maintenance of an

office as “business activities.” Id. at 225-26. The Court found

Congress’s use of that term significant, because “activities”

connotes “courses of conduct” rather than isolated acts.

Id. From there, the Court reasoned that “solicitation of

orders” must include “some accompanying action,” such as

driving to the customer’s location, and even non“essential”

actions such as spending the night at an in-state hotel. Id.

at 226.

market in the state for sales.’ ”) (quoting Tyler Pipe Indus., Inc. v. Washington

State Dep’t of Revenue, 483 US 232, 250, 107 S Ct 2810, 97 L Ed 2d 199 (1987)

(internal citation to Washington Supreme Court decision omitted)). The court

need not consider in this case whether any constitutional limitation exists or has

been exceeded, as taxpayer does not argue the constitutionality of the assess-

ment of tax.

Cite as 25 OTR 124 (2022) 145

Having examined the term “solicitation” in its com-

mon understanding and in the context of the rest of the stat-

utory text, the Court announced that a fair reading of the

term includes activities “entirely ancillary” to the solicita-

tion of orders. Id. at 228-29. The Court stated that the

“clear line is the one 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. (emphasis in original). The Court went on to state:

“Providing a car and a stock of free samples to salesmen is

part of the ‘solicitation of orders,’ because the only reason

to do it is to facilitate requests for purchases. Contrariwise,

employing salesmen to repair or service the company’s

products is not part of the ‘solicitation of orders,’ since there

is good reason to get that done whether or not the company

has a sales force. 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.”

Id. at 229.

The Court, applying this test, decided that the fol-

lowing activities by taxpayer employees were ancillary to

the solicitation of orders:

• Providing a car and a stock of free samples to the

sales employees. Id.15

• The district manager’s “in-state recruitment, train-

ing and evaluation of sales representatives” and

the “use of hotels and homes for sales-related meet-

ings,” because these activities “served no purpose

apart from their role in facilitating solicitation.”

Id. at 234.

• Sales employees’ contacting the taxpayer’s head-

quarters to mediate credit disputes between custom-

ers and the taxpayer’s credit department, because

15

Although stated in a separate portion of the opinion (see Wrigley, 505 US

at 229), this court regards the Supreme Court’s statement about providing a car

and free samples as part of the holding.

146 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

if an on-site salesperson had not done this, no other

employee of the taxpayer would have performed this

task. Id. at 235 (“It hardly appears likely that this

mediating function between the customer and the

central office would have been performed by some

other employee—some company ombudsman, so to

speak—if the on-location sales staff did not exist.”).

The only purpose of this conduct was to ingratiate

the sales employee with the customer, thereby facil-

itating requests for purchases. Id. at 234-35.

By contrast, the Court determined16 that the following activ-

ities were not ancillary to the solicitation of orders:

• Replacing stale gum at no cost to the retailer. See

id. at 233. The court concluded that the taxpayer

“would wish to attend to the replacement of spoiled

product whether or not it employed a sales force.” Id.

The Court rejected the taxpayer’s argument that

gum replacement was a “ ‘promotional necessity’

designed to ensure continued sales,” stating that

“it is not enough that the activity facilitate sales;

it must facilitate the requesting of sales, which this

did not.” Id. (internal quotations omitted; emphasis

in original).

• Providing 15 to 20 dollars’ worth of gum to a retailer

occasionally,17 in order to fill new display racks the

sales employee provided and set up for the retailer.

See id. at 218. The sales employee gave the retailer

a receipt known as an “agency stock check” and

arranged for the local wholesaler to bill the retailer

for the amount provided. Id. The fact that “Wrigley

made the retailers pay for the gum” gave this activity

16

The Court also stated that using sales employees to repair or service the

taxpayer’s products is not part of the solicitation of orders, and the Court cited

with approval the Oregon Supreme Court’s conclusion in Herff Jones Co. v. State

Tax Commission, 247 Or 404, 412, 430 P2d 998 (1967) that sales representatives’

collection activities exceeded the protection of PL 86-272. See Wrigley, 505 at 229-

30. However, this court regards these statements as dicta because neither repairs

or servicing of products, nor collection activities, were at issue in Wrigley.

17

Any one sales representative might do this once a month in total in the

course of calling on multiple retailers.

Cite as 25 OTR 124 (2022) 147

a purpose independent of soliciting orders. Id. at

234 (emphasis in original).

• The storage of fresh gum, and of stale, swapped-out

gum awaiting disposal, primarily at the homes of

the sales representatives, in connection with gum

replacement and “agency stock check” activities.

See id.

The first conclusion this court draws from Wrigley

is that the Supreme Court expressly limited its holding to

the “solicitation of orders,” which was the only activity per-

mitted under the portion of PL 86-272 that was at issue in

the case, 15 USC section 381(a). The Court distinguished

activities that “facilitate the requesting of sales” (a protected

category of activities) from “activit[ies that] facilitate sales,”

(an unprotected category when conducted by employees), Id.

at 233 (emphasis in original); see also id. at 227 (rejecting

a taxpayer-proffered “customarily-performed-by-salesmen”

standard because such a standard would embrace more than

the “particular activity (‘solicitation’)”). For that reason, this

court does not automatically conclude that an activity that

the Court characterized as ancillary (or not ancillary) to the

solicitation or requesting of orders must likewise be ancil-

lary (or not ancillary) to the making of sales.

Second, this court concludes that the appropriate

approach to resolve the issue of Product returns in this case

is to follow the analytical path laid out in Wrigley. As rele-

vant to this case, the common understanding of “sale,” when

Congress enacted PL 86-272 in 1959, was

“the act of selling : a contract transferring the absolute or

general ownership of property from one person or corporate

body to another for a price (as a sum of money or any other

consideration) specif : a present transfer of such ownership

of and title to all of or a part interest in personal property

(as existing identifiable movable and tangible or fungible

goods) under a contract by the seller to the buyer for a price

paid or payable in money or other personal property—

distinguished from gift “<arranged the sale of a large estate

to a syndicate of home builders>”

148 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

Webster’s Third New Int’l Dictionary 2003 (unabridged ed

1961).18 As of that time, state legislatures were beginning to

adopt the Uniform Commercial Code, which similarly defined

a “sale” of goods as “the passing of title from the seller to the

buyer for a price * * *.” Uniform Laws Annotated, Uniform

Commercial Code § 2-106; see also, e.g., Conn Pub Act No.

133, § 2-106, 1959 Public Acts at 237. The court concludes

that the common understanding of “sale” was entering into

a contract to transfer ownership of property for a price.

Turning to the context supplied by the statute’s

remaining text, the court follows Wrigley in concluding that

18

The full definition at that time read:

“1: the act of selling : a contract transferring the absolute or general own-

ership of property from one person or corporate body to another for a price

(as a sum of money or any other consideration) specif : a present transfer of

such ownership of and title to all of or a part interest in personal property (as

existing identifiable movable and tangible or fungible goods) under a contract

by the seller to the buyer for a price paid or payable in money or other per-

sonal property —distinguished from gift <arranged the sale of a large estate

to a syndicate of home builders>.

“2: exhibition for selling : the status of being purchasable—usu. used in the

phrases for sale and on sale <put a house up for sale> <on sale at most statio-

nery stores>

“3a: opportunity of selling or being sold : demand, market <counting on a

large sale for their latest publication>

“b: distribution (as of goods or services) by selling <the average total sale for

books in this category — Saturday Rev.>

“4: public disposal to the highest bidder : auction <art dealers flocking to

the sale of a famous collection of early Renaissance masters>

“5a: a selling off of goods (as surplus or shopworn stock) at bargain prices <a

clearance sale> <rummage sale>

“b: an advertised disposal of marked-down goods <a dress bought at a

department-store sale>

“6 sales pl

“a: operations and activities involved in promoting and selling goods or ser-

vices <a sales department> <vice-president in charge of sales>

“b: gross receipts <sales were over five million dollars>”

Webster’s Third New Int’l Dictionary 2003 (unabridged ed 1961).

A contemporaneous legal dictionary defined “sale” in pertinent part

“as a transfer of the property in a chattel for a consideration. To constitute

a sale in its broader sense, the price need not necessarily be money, but if

the property is sold for a fixed money price, whether it be paid in cash or in

goods, it is a sale. In its more strict sense, a sale is a transfer of the absolute

or general property in a thing for a price in money, which the buyer pays or

promises to pay for the thing bought and sold.”

James A. Ballentine, Self-Pronouncing Law Dictionary 754 (1948).

Cite as 25 OTR 124 (2022) 149

Congress intended “making sales” as an “activit[y].” Wrigley,

505 US at 225-26.19 This means that “making sales,” like

“solicitation,” must be viewed as part of a course of conduct

that includes more than simply giving the oral or written

statement of assent to an offer required to enter into a con-

tract. See Wrigley, 505 US at 227. Continuing the focus on

Wrigley, the court observes that most of the in-state activ-

ities that the Supreme Court treated as ancillary to solic-

itation helped to prepare the employee representatives for

solicitation: providing them with cars, free samples, and a

temporary location at a hotel to be hired and trained. The

other ancillary activity was the representatives’ interven-

tion in credit disputes, which the Court found was a task

that Wrigley would not have bothered to assign to anyone

else if the sales representative had not done it. By con-

trast, replacing stale gum for free, and making small-

dollar, on-the-spot sales to fill out a display (and the storage

of the gum used to do these things) were not ancillary to

solicitation.

In this case, requiring Wholesalers to accept all

returns for any reason is not a behind-the-scenes, prepara-

tory activity like providing basic tools (a car, or free sam-

ples) and training. And the evidence in this case shows that

Taxpayer had a keen interest in its methodically publicized

100% Product Guarantee, which announced the same return

policy found in the DIP Agreement. In contrast to mediating

one-off credit disputes, which Wrigley apparently found too

insignificant to delegate to “some company ombudsman,” the

court finds it likely that taxpayer would have found another

19

The court notes that the majority in Wrigley did not comment on the legis-

lative history of PL 86-272. This court has reviewed the committee reports and

the statements on the Senate floor leading up to the enactment of PL 86-272.

In those materials, members of Congress or their staff used the term “making

sales” to mean concluding or consummating a contract, in contrast to “soliciting

orders,” which stopped short of concluding a contract. See, e.g., S Rep No 86-658

at 2554 (Aug 11, 1959) (immunity preserved even if independent contractor “also

accepts the orders on behalf of that company and thereby binds the company to

the contracts of sale”); 105 Cong Rec (Senate) 17834 (Sept 3, 1959) (statements of

Sens. Javitz and Byrd) (independent contractor may “conclude the contract” in

the state, need not have “orders accepted” outside the state); see also 105 Cong

Rec 16354 (Aug 19, 1959) (statement of Sen. Byrd) (salesman “could not consum-

mate a sale within the State”); Conf Rep 86-1103 (1st Sess Sept 1, 1959). However,

the court has found nothing suggesting an intention to treat an activity that is

“entirely ancillary” to making sales as one that destroys immunity.

150 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

way to fulfill its return policy if the Wholesalers had been

unwilling or unable to do so.20

3. Conclusion as to returns of goods

Applying Wrigley’s analytical approach to 15 USC

section 381(c), and in the absence of evidence that the

Wholesalers would have accepted all returns for any reason

if the DIP Agreement had not required them to do so, the

court concludes that the Wholesalers’ acceptance of returns

was not ancillary to “making sales” and thus destroyed tax-

payer’s immunity from Oregon corporation excise tax.

B. Pre-Book Orders

Independent of the return of goods issue, the depart-

ment asserts that, by taking Pre-Book Orders from Oregon

Retailers and forwarding them to Oregon Wholesalers for

fulfillment, the Representative Employees engaged in an

activity that exceeded the protection of PL 86-272. Taxpayer

argues that this activity was protected “missionary”21 activ-

ity under paragraph (2) of 15 USC section 381(a), and that it

was “ancillary” to the solicitation of orders as allowed under

Wrigley.

1. Department’s argument: Placing Pre-Book Orders

amounted to making sales

The department relies heavily on the position that

Pre-Book Orders constituted actual sales on behalf of the

Oregon Wholesalers because the DIP Agreements required

Oregon Wholesalers to “accept and process” Pre-Book Orders.

20

The court notes its understanding of the following passage from Wrigley:

“Although Wrigley argues that gum replacement was a ‘promotional neces-

sity’ designed to ensure continued sales, Brief for Respondent 31, it is not

enough that the activity facilitate sales; it must facilitate the requesting of

sales, which this did not.”

505 US at 233. This court does not read the foregoing as an affirmative state-

ment that replacing stale gum facilitates sales, and therefore would have been

“ancillary” to “making sales” under 15 USC section 381(c) if independent contrac-

tors had been involved. The Court merely rejected the taxpayer’s argument as to

“solicitation” under 15 USC section 381(a).

21

The parties ultimately agree that 15 USC section 381(a)(2) would protect

taxpayer’s use of representatives to solicit orders from Retailers on behalf of

Wholesalers, and that those activities commonly are referred to as “missionary

activities.” The disagreement is over whether the activities of taxpayer’s repre-

sentatives exceeded the “solicitation of orders.”

Cite as 25 OTR 124 (2022) 151

From this premise, the department argues that the taking

and placement of Pre-Book Orders went beyond the “solici-

tation of orders” under the plain language of PL 86-272; was

not a protected “ancillary” activity under Wrigley; and con-

stituted “intrastate” or “domestic” commerce under case law

predating PL 86-272, which the legislative history shows

Congress intended to leave undisturbed. As discussed

below, the court concludes that the record does not establish

the department’s premise; therefore, the court expresses no

view on the department’s follow-on arguments.

The department seems to interpret the undefined

term “accept” in the DIP Agreements in a particular legal

sense, namely that the Pre-Book Order constituted an offer

by the Retailer (assisted by the Representative Employee)

to the Wholesaler to purchase Products, and a contract was

formed automatically because the DIP Agreement prohib-

ited the Wholesaler from doing anything other than accept-

ing that offer. See Black’s Legal Dictionary 12 (8th ed 2004)

(defining “acceptance” as “assent * * * to the terms of an offer

in a manner authorized or requested by the offeror, so that a

binding contract is formed”). The court agrees that this is one

possible meaning of “accept”; however, the DIP Agreement

admits other possible interpretations of that term. The DIP

Agreements were governed by North Carolina law, which,

like Oregon law, looks to the plain meaning of terms as

the starting point to interpret a contract. See Singleton v.

Haywood Elec. Membership Corp., 357 NC 623, 629, 588

SE2d 871 (2003) (“Where a [contract] defines a term, that

definition is to be used. If no definition is given, non-techni-

cal words are to be given their meaning in ordinary speech,

unless the context clearly indicates another meaning was

intended. The various terms of the [contract] are to be har-

moniously construed, and if possible, every word and every

provision is to be given effect.”) (internal quotation omitted).

Under North Carolina case law, “[d]ictionaries can be used

to determine the common and ordinary meaning of words

and phrases.” Marcuson v. Clifton, 154 NC App 202, 204,

571 SE2d 599 (2002) (internal quotation omitted). The ordi-

nary meaning of “accept” does include a sense similar to

the Black’s definition: “to make an affirmative or favorable

response to (as an invitation or offer).” Webster’s Third New

152 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

Int’l Dictionary 11 (unabridged ed 2002). However, other

senses include “to regard as proper, suitable, or normal” and

“to receive with consent * * *.” Id. at 10-11.22 If one of the

latter two senses were to apply, “acceptance” would merely

require the Wholesaler to “receive” Pre-Book Orders and to

treat them as “properly” submitted.

Such an alternative reading seems consistent with

the full text of the DIP Agreement’s provision on Pre-Book

Orders, which states that the Wholesaler:

“agrees to * * * [a]ccept and process pre-book orders initi-

ated by SFNTC on behalf of their retail accounts. These

pre-books will be in the form of hard copy, fax, and/or

email.”

The court finds it reasonable to read the first sentence as

requiring the Wholesaler to treat a Pre-Book Order the

same as any other order from the Retailer, even though a

22

The full definition, omitting obsolete senses, reads:

“2a: to receive with consent (something given or offered) <accepted the

medal> : assent to the receipt of <accepted lower wages>

“b: to be able to take or hold or be designed to take or hold (something applied,

affixed, or impressed) <a glazed surface that will not accept ink>

“3: to give admittance to (as into one’s company or into a particular group)

<the town’s best families accepted her> : give approval to<those people will

never accept abstract sculpture>

“4a: to take without protest : endure or tolerate with patience <queueing is

one aspect of English life he will never wholly accept —London Calling>

“b: to regard as proper, suitable, or normal <it came to be accepted that there

should be universal education> : acknowledge or recognize as appropriate,

permissible, or inevitable : agree to <refused to accept the dangerous work-

ing conditions —P. E. James>

“c: to regard and hold as true : believe in <by accepting the proposition that

all humans are created equal>

“d: to receive into the mind : understand <words mean . . . what we accept them

as meaning —J. L. Lowes>

“5a: to make an affirmative or favorable response to (as an invitation or offer)

<accepting an invitation to speak> : undertake the responsibility of (as a task

or employment) <if he accepts a junior partnership in the firm>

“b: to allow (a train) onto the particular section of a line under local control —

used of a block operator in the manual block-signal system

“6: to assume orally, in writing, or by conduct an obligation to pay <accept-

ing a bill of exchange> also : to take (something) in payment <a store that

doesn’t accept credit cards>”

Webster’s Third New Int’l Dictionary 10-11 (unabridged ed 2002).

Cite as 25 OTR 124 (2022) 153

Pre-Book Order comes from a person not employed by the

Retailer. The second sentence can reasonably be read to

override any requirement Wholesalers otherwise might

impose on Retailers to use specific software or other proce-

dures for ordering, allowing the Representative Employee

to place Pre-Book Orders by hard copy, fax or email.23

Finally, the fact that the provision specifically requires the

Wholesaler to “process” Pre-Book Orders supports a fair

reading that the placing of an order did not, by itself, oblige

the Wholesaler to fulfill the order; if it did, there would be

no need to specify that the Wholesaler must undertake the

intermediate step of “process[ing]” the order.

The court does not here determine any specific mean-

ing of “accept,” as that term is used in the DIP Agreement.

The court concludes only that the term may be ambiguous

and that the parties did not necessarily intend it to have the

meaning on which the department relies for its position that

Representative Employees were “making sales” for Oregon

Wholesalers.24 Accordingly, the court rejects as unpersua-

sive the department’s argument that any immunity tax-

payer enjoyed under PL 86-272 was destroyed by the actual

making of sales by Representative Employees on behalf of

Oregon Wholesalers.

2. Did Placing Pre-Book Orders exceed “solicitation of

orders”?

The court proceeds to analyze whether the tak-

ing and forwarding of Pre-Book Orders by Representative

Employees nevertheless exceeded the protection of PL

86-272, even if those activities did not amount to the actual

making of sales. The court applies the test in Wrigley, asking

whether the activities are “entirely ancillary” to the solici-

tation of orders because they “serve no independent busi-

ness function apart from their connection to the soliciting of

23

As described in taxpayer’s training materials: “Many accounts use some

form of cigarette ordering system.”

24

The court also notes that the DIP Agreement purports to give taxpayer

wide latitude to interpret terms. In addition to an integration clause and a prohi-

bition against parol evidence, the agreement states: “All issues arising from the

DIP including, but not limited to, interpretation or application of the DIP Rules

and Procedures and Reporting Requirements will be resolved by SFNTC in its

sole discretion.”

154 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

orders,” or whether instead they constitute “activities that

the company would have reason to engage in anyway but

chooses to allocate to its in-state sales force.” Wrigley, 505

US at 228-30.

The court starts by focusing on what Representative

Employees actually did when they placed Pre-Book

Orders, and what legal significance their actions had.

The DIP Agreement contemplates that the Representative

Employees “initiate[ ]” orders “on behalf of” a Retailer.

The parties have stipulated that the Retailer “authorized”

the orders, and that the Representative Employee “for-

warded” them to the Wholesaler. A “Prebook Order Form”

that taxpayer produced to the department in response to

a discovery request for training materials shows a line for

“Buyer Signature,” in addition to a line for the name and

phone number of the Representative Employee. Although

Representative Employees could place PreBook Orders by

phone, they primarily did so by fax. There is no disagree-

ment that the Retailer “signed and authorized” Pre-Book

Orders. Therefore, the court finds that the activity of

Representative Employees consisted of reducing to writing

the Retailer’s oral shopping list during a sales call, obtain-

ing the Retailer’s signature, and delivering that list to the

Wholesaler.

Taxpayer characterizes its Representative Employees’

forwarding of PreBook Orders as a “ministerial” act, which

taxpayer claims is “ancillary” to soliciting orders. The court

agrees that the activity is clerical, as the Retailer’s signature

leaves no room to conclude that the Retailer had delegated

any authority to the Representative Employee to decide

what Products to order. But the fact that the Representative

Employees had no special authority does not necessarily

make their activity ancillary to the solicitation of orders.

The question is whether the activity is something that tax-

payer would have had reason to engage in anyway, apart

from soliciting orders.

The record shows that Retailers sometimes failed to

follow through on their stated intentions to buy Products.25

25

Taxpayer’s “Account Executive Guide” distinguishes a Pre-Book Order

from a “sell sheet order,” which the Retailer had to send to a Wholesaler on its

Cite as 25 OTR 124 (2022) 155

Taxpayer trained its Representative Employees to use

Pre-Book Orders to overcome this problem, and taxpayer

assigned a “specific prebook goal” to each account executive,

specifying in its training materials that

“only valid prebooks can be counted towards that goal.

“All of the following are considered valid prebooks:

“• You fill out a prebook form and fax / e-mail it to the

wholesaler.

“• You (or the store manager) enter the order into the

order book or electronic ordering system (e.g., Telxon).

“• You call the wholesaler and place the order over the

telephone.

“• You see in APEX that the retailer placed the order you

recommended the last time you were in the account.

(Only actual orders can be counted.)

“A verbal agreement from the retailer is not a prebook!”

The court finds that addressing Retailers’ failure

to follow through was something taxpayer had reason to

do apart from soliciting orders. The Supreme Court has

defined “soliciting” an order as “[a]sking * * *, enticing * * *,

request[ing] or plea[ding] * * * or begging” the Retailer for

an order. Wrigley, 505 US at 223 (quoting dictionary defini-

tions of “solicit”; internal quotations omitted). Yet the record

strongly implies that even seemingly successful solicitation

could be in vain if a Retailer who agreed to an order later

turned out to be forgetful, distracted, or insincere. Writing

down and forwarding the order for the Retailer on the spot

made the difference between a potentially meaningless oral

“yes” and an actual order that was more likely to result in

own, using a form that the Representative Employee would leave behind at the

end of the sales call:

“A sell sheet order is not a guaranteed order like a prebook—it is a sugges-

tion left by you for the retailer. It is up to the retailer to follow through and

purchase the product. You should only use a sell sheet order if you are 100%

sure that the retailer will purchase the product on his / her next visit to the

wholesaler. Prebooks are always preferable, as they ensure the order will be

placed.”

156 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

a sale. The court thus disagrees with taxpayer’s argument

that “the ministerial act of sending a fax is ancillary to

solicitation because there is no independent business reason

to send a Pre-Book Order to an Oregon Wholesaler other

than because the Pre-Book Order was just requested.”

3. Conclusion as to Pre-Book Orders

The record shows that taxpayer “allocated” to the

representatives the task of facilitating the placement of

orders by means of the Pre-Book Order process. This task

served an independent business purpose for taxpayer and

thus destroyed taxpayer’s immunity from Oregon corpora-

tion excise tax.26

C. De minimis Analysis

The Court in Wrigley recognized that “a particu-

lar in-state activity” other than solicitation of orders may

be sufficiently de minimis to avoid loss of the tax immunity

conferred by PL 86-272, depending on whether that activ-

ity “establishes a nontrivial additional connection with

the taxing State.” Wrigley, 505 US at 232. Although the

Court framed the test in the singular, it applied the test

to all of Wrigley’s nonimmune activities “taken together.”

Id. at 235. The combination of circumstances that destroyed

immunity for that taxpayer consisted of (1) maintaining an

in-state stock of fresh gum “worth several thousand dollars”

26

The court does not rely on the temporal relationship between soliciting an

order and placing it. At one point, Taxpayer cites a discussion in Wrigley in which

the Court rejected a pre- vs. post-sale distinction, at least as a blanket test for all

activities, on the grounds that merchants typically have ongoing relationships

that make it difficult to tell when an activity facilitates an order already agreed

to or the solicitation of the next one. See Wrigley, 505 US at 230-31 (stating in

dicta that “[a]ctivities that take place after a sale will ordinarily not be entirely

ancillary” but finding a blanket pre- vs. post-sale test “hopelessly unworkable”).

Here, the basis for the court’s conclusion is not that forwarding the order occurs

after solicitation; rather, the court concludes that placing the order is a separate,

necessary step on the path to a sale. It might not take long to execute, and a

Representative Employee might make it happen casually as part of a routine

sales call, but if it does not happen the Representative Employee (and indirectly,

taxpayer) risks missing out on the order. Thus, even if placing an order for a

Retailer during one sales call helps to ingratiate the Representative Employee

with the Retailer for a future round of solicitation during the next sales call, it

also serves the immediate and independent purpose of making an order much

more likely to pan out.

Cite as 25 OTR 124 (2022) 157

to swap out for stale gum on retailers’ shelves, “several

hundred dollars” of which Wrigley transferred to retailers

through orders memorialized by “agency stock checks”; and

(2) exchanging the gum “deliberately,” on a “regular and

systematic” basis. Id. at 233 n 8, 235; see id. at 234 (“[T]he

vast majority of the gum stored by Wrigley in Wisconsin

was used in connection with stale gum swaps and agency

stock checks * * *.”). Apart from rather famously noting that

“several thousand dollars per year * * * is a lot of chewing

gum,” the Court did not announce a bright-line quantitative

test in terms of the value or number of in-state goods that

might exceed a de minimis threshold in future cases. Id. at

233 n 8.

In this case, the court readily concludes that each of

taxpayer’s activities at issue was “regular and systematic,”

as in Wrigley. Taxpayer enshrined both the acceptance of

returns and the acceptance of Pre-Book Orders in the DIP

Agreements with which Wholesalers were obligated to com-

ply. Furthermore, taxpayer’s training materials make clear

that taxpayer set Pre-Book Order performance goals for its

representatives and specified the types of orders that did

and did not “count” toward those goals.

As to the numeric part of the Wrigley standard, tax-

payer has not carried its burden of proof. The court reit-

erates that taxpayer has not shown the number of packs

or cartons of cigarettes that Oregon Wholesalers accepted

on taxpayer’s behalf—the number may have been as high

as 5,000 packs (500 cartons) per year or even 20,000 packs

(2,000 cartons) per year. Taxpayer argues that these num-

bers constitute only a tiny fraction of the Wholesalers’ sales

during the Years at Issue, but the Wrigley Court expressly

rejected similar comparisons in favor of relying on an abso-

lute (if unspecified) number. See Wrigley, 505 US at 235

(rejecting taxpayer’s argument that “ ‘agency stock checks’

accounted for only 0.00007% of Wrigley’s annual Wisconsin

sales”). On this record, the court finds that the number of

returns that Oregon Wholesalers accepted was more than

de minimis. With respect to the number of PreBook Orders,

the record states only that the average was 13.3 orders

per month, which taxpayer argues was trivial. However,

taxpayer has the burden to show triviality in terms of the

158 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

absolute numbers of packs or dollar amounts, as determined

in Wrigley, but taxpayer has not done so.27 On this record,

the court concludes that the number of Pre-Book Orders,

of an undetermined quantity of Products, was more than

de minimis. The court concludes that neither the acceptance

of returns nor the making of Pre-Book Orders occurred at

a de minimis level; therefore, each of those activities inde-

pendently destroyed Taxpayer’s immunity from Oregon cor-

poration excise tax.

D. Penalties

The department assessed penalties for each Subject

Year, including the 20-percent penalty for “substantial under-

statement of taxable income” pursuant to ORS 314.402(2).

Taxpayer seeks relief from the substantial understatement

penalty, claiming that it satisfied the requirements for each

of three alternative statutory exceptions:

(1) Under ORS 314.402(4)(b)(A) “there is or was sub-

stantial authority” for taxpayer’s position of immu-

nity under PL 86-272;

(2) Under ORS 314.402(4)(b)(B) taxpayer

a. “adequately disclosed in the return” the rele-

vant facts regarding its position of immunity,

and

b. “there is a reasonable basis” for taxpayer’s

position; or

(3) Under ORS 314.402(6) the Department improperly

failed to waive the penalty based on taxpayer’s

showing that it acted with “reasonable cause” and

“in good faith.”

27

The court rejects taxpayer’s additional argument that the ministerial

nature of the act of forwarding Pre-Book Orders necessarily makes that activity

de minimis. The court has already concluded that the activity had an indepen-

dent business purpose that made sales more likely. It was important enough that

taxpayer created specific forms and procedures for Representative Employees

to use, referred to it numerous times in training materials, and even created a

specific role-play training session that culminated with the scripted line: “How

about if I pre-book these styles through your wholesaler for you today, and make

a small upward adjustment in your order book to the few styles of NAS to ensure

that you are not losing out on business and revenue. What do you think?”

Cite as 25 OTR 124 (2022) 159

The department has promulgated an administrative rule

that defines key terms in these exceptions. See OAR 150-

314.402(4)(b) (2013) (currently codified, without substantive

amendment, as OAR 150-314-0209). The department’s rule,

in turn, adopts by reference certain definitions in Treasury

regulations. OAR 150-314.402(4)(b)(1) (2013) (“ ‘Substantial

authority’ has the same meaning as used in Treasury

Regulation 1.6662-4(d). * * * ‘Reasonable basis’ has the same

meaning as used in Treasury Regulation 1.6662-3(b)(3).”).

The referenced federal regulations were last amended in

2003 and thus are the same today as during the Years at

Issue.

Treas Reg § 1.6662-4(d) discusses “substantial author-

ity,” stating, in part:

“The substantial authority standard is an objective stan-

dard involving an analysis of the law and application of the

law to relevant facts. The substantial authority standard

is less stringent than the more likely than not standard

(the standard that is met when there is a greater than 50–

percent likelihood of the position being upheld), but more

stringent than the reasonable basis standard as defined in

§ 1.6662–3(b)(3).

“* * * * *

“There is substantial authority for the tax treatment of an

item only if the weight of the authorities supporting the

treatment is substantial in relation to the weight of author-

ities supporting contrary treatment.

“* * * * *

“The weight accorded an authority depends on its relevance

and persuasiveness, and the type of document providing

the authority. For example, a case or revenue ruling hav-

ing some facts in common with the tax treatment at issue

is not particularly relevant if the authority is materially

distinguishable on its facts, or is otherwise inapplicable to

the tax treatment at issue. An authority that merely states

a conclusion ordinarily is less persuasive than one that

reaches its conclusion by cogently relating the applicable

law to pertinent facts. * * * The type of document also must

be considered. For example, a revenue ruling is accorded

greater weight than a private letter ruling addressing the

same issue. An older private letter ruling, technical advice

160 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

memorandum, general counsel memorandum or action on

decision generally must be accorded less weight than a more

recent one. Any document described in the preceding sen-

tence that is more than 10 years old generally is accorded

very little weight. However, the persuasiveness and rele-

vance of a document, viewed in light of subsequent devel-

opments, should be taken into account along with the age

of the document. There may be substantial authority for

the tax treatment of an item despite the absence of certain

types of authority. Thus, a taxpayer may have substantial

authority for a position that is supported only by a well-

reasoned construction of the applicable statutory provision.

“* * * * *

“[O]nly the following are authority for purposes of deter-

mining whether there is substantial authority for the tax

treatment of an item: Applicable provisions of the Internal

Revenue Code and other statutory provisions; proposed,

temporary and final regulations construing such statutes;

revenue rulings and revenue procedures; tax treaties and

regulations thereunder, and Treasury Department and

other official explanations of such treaties; court cases; con-

gressional intent as reflected in committee reports, joint

explanatory statements of managers included in confer-

ence committee reports, and floor statements made prior to

enactment by one of a bill’s managers; General Explanations

of tax legislation prepared by the Joint Committee on

Taxation (the Blue Book); private letter rulings and techni-

cal advice memoranda issued after October 31, 1976; actions

on decisions and general counsel memoranda issued after

March 12, 1981 (as well as general counsel memoranda

published in pre–1955 volumes of the Cumulative Bulletin);

Internal Revenue Service information or press releases;

and notices, announcements and other administrative

pronouncements published by the Service in the Internal

Revenue Bulletin. Conclusions reached in treatises, legal

periodicals, legal opinions or opinions rendered by tax pro-

fessionals are not authority. The authorities underlying

such expressions of opinion where applicable to the facts

of a particular case, however, may give rise to substantial

authority for the tax treatment of an item. Notwithstanding

the preceding list of authorities, an authority does not con-

tinue to be an authority to the extent it is overruled or mod-

ified, implicitly or explicitly, by a body with the power to

overrule or modify the earlier authority. In the case of court

Cite as 25 OTR 124 (2022) 161

decisions, for example, a district court opinion on an issue

is not an authority if overruled or reversed by the United

States Court of Appeals for such district. However, a Tax

Court opinion is not considered to be overruled or modified

by a court of appeals to which a taxpayer does not have a

right of appeal, unless the Tax Court adopts the holding of

the court of appeals.

“Similarly, a private letter ruling is not authority if revoked

or if inconsistent with a subsequent proposed regulation,

revenue ruling or other administrative pronouncement

published in the Internal Revenue Bulletin.”

Treas Reg § 1.6662-3(b)(3) addresses “reasonable basis”:

“Reasonable basis is a relatively high standard of tax

reporting, that is, significantly higher than not frivolous

or not patently improper. The reasonable basis standard is

not satisfied by a return position that is merely arguable or

that is merely a colorable claim. If a return position is rea-

sonably based on one or more of the authorities set forth in

§ 1.6662–4(d)(3)(iii) (taking into account the relevance and

persuasiveness of the authorities, and subsequent devel-

opments), the return position will generally satisfy the

reasonable basis standard even though it may not satisfy

the substantial authority standard as defined in § 1.6662–

4(d)(2). (See § 1.6662–4(d)(3)(ii) for rules with respect to rel-

evance, persuasiveness, subsequent developments, and use

of a well-reasoned construction of an applicable statutory

provision for purposes of the substantial understatement

penalty.) In addition, the reasonable cause and good faith

exception in § 1.6664–4 may provide relief from the pen-

alty for negligence or disregard of rules or regulations, even

if a return position does not satisfy the reasonable basis

standard.”

The court starts its analysis with the second of tax-

payer’s three arguments. ORS 314.402(4)(b)(B) provides that

no “understatement” exists, and the penalty therefore does

not apply, if the relevant facts are adequately disclosed and

there is a reasonable basis for the taxpayer’s tax treatment

of the item. The court begins here because the department

states in briefing that it “does not dispute that SFNTC ade-

quately disclosed on its returns that it relied on PL 86-272,”

thus eliminating the need for the court to adjudicate one of

the two elements of ORS 314.402(4)(b)(B). Furthermore, the

162 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

plain text of the federal regulations shows that the “reason-

able basis” standard is a lower standard than the “substan-

tial authority” test, because a position taken on a tax return

may satisfy the “reasonable basis” standard “even though it

may not” satisfy the “substantial authority” standard. Treas

Reg § 1.6662-3(b)(3); see Treas Reg § 1.6662-4(d)(2) (“The

substantial authority standard is less stringent than the

more likely than not standard * * * but more stringent than

the reasonable basis standard.”). Therefore, if taxpayer’s

position were to satisfy the “reasonable basis” test, the sub-

stantial underpayment penalty would not apply, and there

would be no need to consider whether taxpayer’s position

also satisfies the higher “substantial authority” standard

under taxpayer’s first argument. In addition, a decision in

taxpayer’s favor on the second argument would obviate the

need to decide taxpayer’s third argument, which assumes

that the penalty applies but asks the court to decide that the

department should have exercised its discretion to waive the

penalty.

As quoted above, “reasonable basis” means some-

thing less than “substantial authority,” but still a “rela-

tively high standard of tax reporting,” which is significantly

higher than “not frivolous or not patently improper,” and is

“not satisfied by a return position that is merely arguable

or that is merely a colorable claim.” Treas Reg § 1.6662-

3(b)(3).28 The court sees its task as determining whether

28

The adequacy of support required by a particular federal tax standard

sometimes is expressed in percentage terms. The more-likely-than-not standard

(required for certain tax shelter positions) is met “when there is a greater than

50-percent likelihood of the position being upheld.” Treas Reg § 1.6662-4(d)(2).

Regulations under former IRC § 6694 (2006) governing return preparers required

that a return position have a “one in three” likelihood of success on the merits.

Treas Reg § 1.6694-2(b)(1) (2006). Congress’s Joint Committee on Taxation has

reported a “general consensus of scholars and practitioners” that the substan-

tial authority standard requires an approximately 40-percent likelihood of suc-

cess and that the reasonable basis standard requires an approximately 20-per-

cent likelihood of success. Joint Comm. on Tax’n, Study of Present-Law Penalty

and Interest Provisions as Required by Section 3801 of the Internal Revenue

Service Restructuring and Reform Act of 1998 (Including Provisions Relating

to Corporate Tax Shelters) at 160 (Table 7) (July 22, 1999). A leading commenta-

tor on federal tax procedure states: “The cases are notoriously fact specific, but

courts have found that a taxpayer has not acted negligently (and implicitly had

reasonable basis) if there are unsettled areas of the law or if the issue is suscep-

tible to honest differences of opinion. On the other hand, where the authorities

are ‘overwhelmingly’ in the nature of the Service’s position as contrasted with the

Cite as 25 OTR 124 (2022) 163

taxpayer’s “return position[s are] reasonably based on one or

more of the authorities” listed in Treas Reg § 1.6662-(4)(d).

The department contends that taxpayer lacked a rea-

sonable basis for its positions that PL 86-272 immunizes the

Wholesalers’ acceptance of returns and the Representative

Employees’ placement of Pre-Book Orders. The depart-

ment asserts that “no cases or administrative decisions

from Oregon or other jurisdictions” offer a reasonable basis

for either position, and the department cites Wrigley, Ann

Sacks, and Miles Laboratories v. Dept. of Rev., 274 Or 395,

546 P2d 1081 (1976) as authorities contrary to taxpayer’s

positions. The court finds the absence of case law neither

surprising nor fatal to taxpayer’s argument. The Treasury

Department (including the Internal Revenue Service) does

not administer PL 86-272 and thus has neither litigated the

statute nor created the numerous kinds of federal adminis-

trative guidance referred to in Treas Reg section 1.6662-4.

It is up to each state that imposes an income tax to enforce

PL 86-272, and resource constraints on both sides doubt-

less limit the number of disputes in which both parties

are incented to litigate to the point of a reported decision.

Apparently recognizing the possibility that an issue might

not have attracted the attention of courts and tax adminis-

trators, the regulations provide that “authority” on which

a taxpayer may rely includes “[a]pplicable provisions of the

Internal Revenue Code and other statutory provisions.” Treas

Reg § 1.6662-4(d)(3)(iii) (emphasis added). In fact, “despite

the absence of certain types of authority,” a “well-reasoned

construction of the applicable statutory provision” may

even suffice as “substantial” authority. Treas Reg § 1.6662-

4(d)(3)(ii).

Regarding the Wholesalers’ acceptance of returns,

no case (including the three that the department cites)

addresses in what circumstances an independent contractor

is acting “on behalf of” an out-of-state taxpayer, and whether

accepting returns may be ancillary to “making sales”

for purposes of 15 USC section 381(c). Wrigley and Miles

Laboratories involved activities of employees; therefore, the

taxpayer’s position, a court will find no reasonable basis.” Saltzman & Book, IRS

Practice & Procedure, ¶ 7B.03.

164 Santa Fe Natural Tabacco Co. v. Dept. of Rev.

courts had no occasion to apply 15 USC section 381(c). Ann

Sacks involved activities of independent contractors, but

the court had no occasion to determine a test for “making

sales” because the court concluded that the taxpayer did

not appear to contest that its warranty repair activities

exceeded the protection of PL 86-272. Taxpayer’s argument

in this case rested on the proposition that an independent

contractor, which according to the definition in 15 USC sec-

tion 381(d) can sell for “more than one principal,” must, as

a matter of logic, possess sufficient autonomy to choose to

accept returns. Taxpayer also argued that an independent

contractor that does so is not acting “on behalf” of the out-

of-state manufacturer because the independent contractor

has its own business reason to satisfy customers wishing

to return products. The court rejected these arguments, in

part because the court determined that taxpayer had mis-

interpreted the statutory phrase “on behalf of” and had

failed to analyze whether acceptance of the returns might be

“ancillary” to “making sales” under an extension of Wrigley.

Those are legal points that might fairly be described as mat-

ters of first impression. The court concludes that taxpayer’s

position regarding the returns was sufficiently grounded in

the statutory text that it had a reasonable basis under ORS

314.402(4)(b)(B)(ii).

Regarding the Representative Employees’ place-

ment of Pre-Book Orders, after rejecting the department’s

argument that the Representative Employees engaged

in the unprotected activity of “making sales,” this court

decided the issue under Wrigley. But the fact that the court

did not interpret Wrigley in taxpayer’s favor does not mean

that taxpayer’s position lacked a reasonable basis. Taxpayer

asserted that placing Pre-Book Orders amounted to nothing

more than the ministerial act of sending a fax for a Retailer,

behavior that was “entirely ancillary” to solicitation because

it merely “ingratiated” the Representative Employee with

the Retailer. And as taxpayer pointed out, language in

Wrigley cautions against treating an activity as nonancil-

lary merely because it occurs after a sale. The court agreed

that the act was likely quick, casual, and potentially ingra-

tiating, but the court concluded that it was not ancillary to

solicitation because it had the independent business purpose

Cite as 25 OTR 124 (2022) 165

of ensuring that an order the Retailer agreed to would actu-

ally be placed. Although incorrect, taxpayer’s position had

sufficient basis in Wrigley to avoid imposition of the penalty

under ORS 314.402(4)(b)(B).

Because each of taxpayer’s positions was reasonably

based on PL 86-272 or Wrigley, and the department acknowl-

edges that taxpayer satisfied the disclosure requirement, no

“understatement” existed under ORS 314.402(4)(b)(B), and

no penalty applies under ORS 314.402(1). The court need not

address taxpayer’s arguments based on “substantial author-

ity” under ORS 314.402(4)(b)(A) or failure to waive the pen-

alty under ORS 314.402(6).

V. CONCLUSION

Now, therefore,

IT IS THE OPINION OF THIS COURT that

Plaintiff was not immune from Oregon corporation excise

tax under 15 USC section 381 for the tax years ending

December 31, 2010 through 2013; and

IT IS THE FURTHER OPINION OF THIS COURT

that Plaintiff is not subject to the penalty under ORS

314.402(1).