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

> Oregon Tax Court · August 23, 2022 · 25 Or. Tax 124

URL: https://www.frixlaw.com/law-library/cases/10607424

## Case

- **Court:** Oregon Tax Court
- **Decided:** August 23, 2022
- **Citations:** 25 Or. Tax 124
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Manicke
- **Cited by:** 3 later opinions in the Frix Law Library

## Citator (automated)

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## Opinion text

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 —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 ”
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 “”
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 .
“2: exhibition for selling : the status of being purchasable—usu. used in the
phrases for sale and on sale
“3a: opportunity of selling or being sold : demand, market
“b: distribution (as of goods or services) by selling
“4: public disposal to the highest bidder : auction
“5a: a selling off of goods (as surplus or shopworn stock) at bargain prices
“b: an advertised disposal of marked-down goods
“6 sales pl
“a: operations and activities involved in promoting and selling goods or ser-
vices
“b: gross receipts ”
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) : assent to the receipt of
“b: to be able to take or hold or be designed to take or hold (something applied,
affixed, or impressed)
“3: to give admittance to (as into one’s company or into a particular group)
: give approval to
“4a: to take without protest : endure or tolerate with patience
“b: to regard as proper, suitable, or normal : acknowledge or recognize as appropriate,
permissible, or inevitable : agree to
“c: to regard and hold as true : believe in
“d: to receive into the mind : understand
“5a: to make an affirmative or favorable response to (as an invitation or offer)
: undertake the responsibility of (as a task
or employment)
“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 also : to take (something) in payment ”
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).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10607424. Public record. Not legal advice.