Appendix — Kennametal, Inc. v. Commissioner of Revenue of Massachusetts

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COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

KENNAMETAL, INC.

V.

COMMISSIONER OF REVENUE

Docket Nos. 170029, 183527, 186703

Promulgated: November 1, 1996

These appeals under the formal procedure pursuant to

G.L. c. 62C, § 39, as amended, from the refusal of the appellee

to abate corporate excise taxes assessed under G.L. c. 63, § 38.

Commissioner Scharaffa heard the appeals and was

joined in the decision for the appellee by Commissioners

O’Brien and Wall.

These findings of fact and report are made pursuant to

a request by the appellant under G.L. c. 58A, § 13, as

amended, and 831 CMR 1.32.

William E.Halmkin, Esq., and Donald W. Parker, Esq..,

for the appellant.

Edward J. Liptak, Esq., and Philip S. Olsen, Esq., for

the appellee.

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FINDINGS OF FACT AND REPORT

Introduction

On the basis of the parties’ Agreed Statement of Facts,

testimony, and exhibits, the Board made the following

findings of fact.

Kennametal, Inc. (“Kennametal”) is a multi-national

corporation organized under the laws of Pennsylvania with

a principal place of business at Route 981 South, Latrobe,

Pennsylvania. Kennametal is engaged in the development,

manufacture, marketing and application of cemented carbides,

ceramics and other materials used in machining, cutting,

shaping and forming of alloys, pure metals, coal, concrete and

other substances.

On August 20, 1943, Kennametal registered with the

Secretary of State’s Office to do business in the

Commonwealth of Massachusetts. From November 1, 1943

through March 31, 1960, Kennametal maintained a customer

service center in Springfield, Massachusetts. Since April 1,

1960, Kennametal has not owned or rented office space within

the Commonwealth.

Asa foreign corporation, Kennametal filed Form 355B

and paid the tax due as shown on its returns for each tax year

from 1943 until 1963. On January 17, 1963, Kennametal filed

Form 355F, Statement of Facts Relative to Business, seeking

permission to discontinue filing Massachusetts foreign

corporation excise returns.

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On or about February 13, 1963, the Commissioner of

Revenue (“Commissioner”) responded to Kennametal’s

request and indicated that Kennametal was not subject to

excise under Chapter 63 of the Massachusetts General Laws.

In March 1984, the Commissioner issued a Letter

Ruling indicating that use of company cars within the

Commonwealth was sufficient to establish nexus for purposes

of imposing the corporate excise tax.

Jurisdiction

Kennametal timely filed its corporate excise returns

for tax periods beginning July 1, 1984 and ending August 30,

1989. Kennametal also timely filed, in response to the

Commissioner’s audit, all tax returns for tax periods

beginning July 1, 1975, and ending August 30, 1984.

Kennametal timely filed all Applications for Abatements, and

Formal Petitions with the Board, for tax periods beginning

July 1, 1975 and ending August 30, 1989. Based on the

foregoing, the Board finds that it has jurisdiction over the

subject appeals.

Activities

The primary products sold by Kennametal are cutting

bits which are mounted into various types of machine tools

for the purpose of cutting and shaping a metal workpiece. In

most machining operations, the metal workpiece which is to

be cut is rotated at different angles against the stationary

cutting tool. Metal cutting tools have short lives of anywhere

from several minutes to a day. Choosing the proper cutting

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tool for a particular application is essential to purchaser

satisfaction and Kennametal’s overall profitability.

Kennametal’s business activities in Massachusetts for

the years in question included sales to Massachusetts

customers through a direct field sales force. Kennametal’s

sales force was comprised of Tooling Systems Engineers

(“TSEs”), assisted by Service Engineers (“SEs”) and

Engineered Productivity Personnel (“EP”), all of whom either

lived in or traveled to Massachusetts. The record is not clear

as to exactly how many employees Kennametal had in

Massachusetts in any one given year, but the record supports

the conclusion, and the Board finds, that there were at least 4

TSEs and 7 SEs visiting hundreds of clients located within the

Commonwealth at all relevant times.

The TSE’s primary responsibility was management of

the total sales and promotional efforts for the complete line

of Kennametal metalworking products within a prescribed

geographic area. Pursuant to Kennametal’s field sales manual,

SEs were entry level trainees whose primary responsibility

was to assist the TSE in increasing and maximizing sales

volume and customer satisfaction. SEs had no direct account

responsibility, and did very little, if any order taking, but

would travel with the TSE and perform what Kennametal has

termed “sales-related” functions. The field personnel would

visit existing and prospective customers on a regular basis.

Kennametal’s products are highly sophisticated and

technical. The products could not simply be installed and be

expected to operate at peak efficiency without technical

advice and assistance. As such, the TSE and SE would often

perform the following functions, among others:

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1) Coordinate and present “Training Programs”/In-Plant

Presentations;

2) Provide samples of a particular tool so that customers

could do test runs;

3) Coordinate a “Standardization Program,” including

inventory analysis and performance tests at customers’

facilities;

4) Assist customers’ engineering staff in custom-

designing machine cutting tools;

5) Assist customers’ in properly applying a cutting tool;

and,

6) Report customers’ complaints and/or unresolved

problems.

Due to the highly technical nature of Kennametal

products, Kennametal believed it was necessary to provide

customers with detailed technical information so that they

could assess the value of Kennametal products. In addition,

many of Kennametal’s customers changed markets on a

regular basis, requiring a new approach to grades, tooling and

machining processes.

Throughout the years in question, Kennametal’s

customers were under a great deal of pressure, due to foreign

competition and inflation, to control their operating costs and

improve productivity. Kennametal recognized the high cost

of their products, in comparison to their competitors, and

undertook a number of programs to demonstrate to their

customers why their products were superior.

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These programs were not only limited to new

customers, but would also be performed on behalf of existing

customers, in an attempt to maximize customer satisfaction

and to potentially expand Kennametal’s market share. For

example, Kennametal had their field personnel conduct

tooling-product-application studies, called “Tool Performance

Reports,” on behalf of their customers, to demonstrate to

their customers the superiority of Kennametal products.

These studies involved the application of Kennametal

products in actual work situations at a customer’s plant.

During the test-run, the TSE or SE would note the

parameters of operation. Although the Kennametal employee

in charge of the study would not actually run the machine,

due to liability concerns, he or she would be present at the

customer’s plant to advise the operators on how to properly

use the Kennametal products and what parameters should be

applied.

As the product was in use, the SE would make

recommendations to the customer’s employees concerning,

among other technical suggestions, different parameters to be

used which could affect the machining process. Upon

completion of the study, the results obtained from using a

Kennametal product would be compared to those obtained in

using a competitor’s product. Results from one Kennametal

product would also be compared to the results of another

Kennametal product of a different grade. The ultimate goal

of the study was “to determine the cost effectiveness of given

machining operations” and to reduce a customer’s overall

machining costs.

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Kennametal sought to have their customers place

“blanket orders,” which reflected a customer’s estimated

annual usage of a particular Kennametal product. Kennametal

would set aside inventory to satisfy this “blanket order.”

During the course of the year, the customer would place

“releases or individual purchases” so as to release the product

from Kennametal's inventory to the customer. At times,

after the “blanket order” had been placed, the Kennametal

employee would conduct another tool performance report to

demonstrate that there was in fact an economic justification

for purchasing Kennametal products and that the customer

was getting the results it anticipated. In the instances where

the tool performance report indicated that the Kennametal

product was not the better choice, the Kennametal employee

would work with the customer’s employee in suggesting

different parameters so as to improve the output of the

Kennametal product.

Another mechanism for convincing customers of the

superiority of Kennametal products was the “Tool

Standardization/Consultative Program.” This program

involved two phases. The first phase was referred to as the

“survey.” The survey required the TSE to gain access to the

customer’s “floor? and gather information about the

customer’s current inventory. In many cases, the customer

did not have a complete compilation of its inventory, and

thus the process could be very time consuming, lasting

anywhere from a few hours to several days. The information

obtained would then allow the TSE to determine exactly

what competitor products the customer had, and to

recommend different styles and sizes of Kennametal products.

After analyzing all of this information, the TSE would make

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specific recommendations of items which the customer could

purchase from Kennametal.

The second phase of the “Tool Standardization/

Consultative Program” was called the “implementation.” The

implementation would begin after the customer determined

that it would be cost effective to transfer to a complete line of

Kennametal products. In this phase, the customer would

place a “blanket order,” locking into a set price for a

particular tool or set of tooling products for a specific

machine. The items would remain in Kennametal’s

Connecticut warehouse until the customer called them down

for delivery. After the customer called down a small amount,

either the TSE or the SE would observe a head-to-head

demonstration of a Kennametal product and the competitor’s

product.

This demonstration would then allow the TSE or SE

to complete a Tool Performance Report. This report was

then used to show the purchaser that the Kennametal product

did in fact out-perform the competitor’s product. If,

however, the tool did not measure up to the Tool

Standardization Report, the SE and/or TSE would assist the

machine operator by suggesting certain changes to the

applications, allowing the Kennametal tool to perform at peak

efficiency. To quote Keith Lamontagne, employed by

Kennametal for 13 years, as both a TSE and an SE, “We

certainly prefer the customer do that [work with the

Kennametal employee] rather than risk losing that insert

business to someone else.”

Another program offered to Kennametal customers

were “in-plant presentations.” These presentations ranged

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anywhere from two to six hours in duration, and attendance

ranged from as low as eight people to as many as two

hundred. Presentations were given to employees of potential

as well as current customers. The subject matter of the

sessions typically involved an overview of basic machining

practices and techniques, as well as the proper use and

application of Kennametal products. Kennametal strove to

have each TSE conduct at least one such program per month.

Throughout their many visits to a customer’s plant,

Kennametal sales staff would often speak directly with the

technical staff, in addition to the individual in charge of

purchasing, allowing them to assess specific needs. Through

these discussions the TSE would, at times, help a customer

design a particular tooling system around the capabilities of

Kennametal products. In addition, the sales force would often

find themselves giving advice concerning set-up of a particular

Kennametal product.

Lastly, field personnel were also responsible for

responding to and resolving customer complaints. When a

customer had a problem with a product it purchased from

Kennametal, the TSE or the SE was there to correct it.

Kennametal was well aware of the high cost of its product.

As such, they acknowledged the importance of having a local

representative who could quickly and efficiently respond to

the problems and concerns of customers.

The activities performed by both the TSEs and the SEs

were not limited to only potential customers. In many

situations, the in-plant training programs, as well as providing

technical advice and problem shooting, were provided to

existing customers. Although Kennametal maintained that in

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such cases, the sales force would be trying to increase sales

and/or educate the customers about new products, its

employees were also performing a function beyond mere

“solicitation of orders.” They were providing technical advice

on the proper use of the product, and performing detailed

studies of alternative products and procedures.

To the extent it is a finding of fact, the Board finds

that the activities of Kennametal employees served an

independent business function and were not entirely ancillary

to the solicitation of orders. Although such technical advice

and studies may help to increase purchases, they are not

ancillary to requesting purchases since there is an independent

business reason to provide advice on the proper use of its

product regardless of whether Kennametal had a sales force.

The fact that such activities were assigned to the sales force

does not convert the activities into these entirely ancillary to

solicitation. Accordingly, the Board issued a decision for the

Commissioner of Revenue in these appeals.

OPINION

Massachusetts General Laws requires “every foreign

corporation . . . qualified to do business or actually doing

business in the Commonwealth, or owning or using any part

or all of its capital . . . in the Commonwealth . . .” to pay a

corporate excise. G.L. c. 63, § 39. The appellant in the

present appeals neither owned nor rented any real property

situated within the Commonwealth for the taxable years in

question. As such, the issue to be determined is whether or

not Kennametal was “doing business in the Commonwealth”

thereby subjecting it to Massachusetts corporate excise tax.

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The right to tax is an inherent power of sovereignty

that must be found within the letter of the law and may not

be implied. Commissioner of Corporations and Taxation v.

Tousant, 309 Mass. 84, 85 (1941). A foreign corporation

entering a state subjects itself to the jurisdiction of that state

including its local tax laws. Norton Company v. Department

of Revenue of Illinois, 340 U.S. 534, 537 (1950).

This inherent power to tax, however, is not without

limit. Congress has prohibited the states from imposing taxes

on income derived from “business activities” in interstate

commerce which are limited to the “solicitation of orders.”

15 U.S.C. § 381. Section 381, also known as Public Law 86-

272 provides, in pertinent part:

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

power to impose, for any taxable year ending after September

14, 1959, a net income tax on the income derived within such

State by any person from interstate commerce if the only

business activities within such State by or on behalf of such

person during such taxable year are either, or both of the

following: (emphasis added)

1) the solicitation of orders by such person, or his

representative, in such State for sales of tangible

personal property, which orders are sent outside the

State for approval or rejection, and, if approved, are

filled by shipment or delivery from a point outside

this State; and

2) the solicitation of orders by such person, or his

representative, in such State in the name of or for the

benefit of a prospective customer of such person, if

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orders by such customer to such person to enable such

customer to fill orders resulting from such solicitation

are orders described in paragraph (1).

15 U.S.C. § 381 (1988) (codifying § 101 of Pub. L. 86-273

[73 Stat. 555 (1959))).

In 1994, the Massachusetts Supreme Judicial Court

ruled that the mere “qualification to do business” was not

enough to remove a corporation from the immunities of §

381. Commissioner of Revenue v. The Kelly-Springfield Tire

Company, 419 Mass. 262 (1994). The Court did not entertain

the issues presented in this appeal of what activities are

encompassed within the term “solicitation of orders” and

when has a corporation’s activities exceeded those protected

by § 381.

While § 381 was designed to define a lower limit for

the exercise of a state’s power to tax (Heublein, Inc., 409 U.S.

277, 280 (1972)), the statute does not define what is

encompassed within “solicitation of orders.” As a result, states

have been left to determine, on a case-by-case basis, whether

the activities of a particular corporation exceed “solicitation

of sales.” As might be expected, there has been a split

between those states which have interpreted “solicitation of

orders” narrowly and those which have allowed an expanded

interpretation.

In 1970, the New Jersey Superior Court decided the

case of Clairol, Inc. v. Kingsley, 109 N.J. Super 22; 262 A.2d

213 (1970). In that case, the court observed that Clairol

employed “detailmen and other representatives” to visit retail

drugstores “to promote the public’s purchase and use of its

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products.” Jd. at 29. As part of their duties, the detailmen

would occasionally review the display of Clairol products and

assist the retailer in rearranging the display. In addition, with

the retailer’s permission, the detailman would take an

inventory of the store’s stock of Clairol products, would

discuss the inventory with the retailer, and from there would

write up a suggested order.

Besides the detailmen, Clairol also employed

representatives who called on beauty salons. Like

Kennametal’s SEs, the representatives who called on the

beauty salons had a technical background and would do very

little order taking. A major part of their function was going

into the local beauty salons to instruct the staff on how to use

Clairol products. The Court rejected Clairol’s argument that

the term “solicitation of orders” should be interpreted to

include all of their activities within the state. Even though

the Court acknowledged that the activities of Clairol’s

representatives would promote purchase of Clairol products:

That increased public favor of Clairol’s products will

eventually result in increased orders from retail

druggists to wholesalers and from wholesalers to

Clairol, or as in the case of its hair products from

beauty salons to “beauty jobbers” and from the latter

to Clairol, does not blanket all Clairol’s activities with

the protection afforded by the federal act to cases

where the only business activity of the taxpayer is the

solicitation of orders.

Id. The Court concluded that the activities of Clairol

exceeded the “solicitation of orders” and therefore they were

exempt from the immunities of § 381. Application of the

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analysis used by the Clairol Court would result in a ruling in

this appeal that the activities of Kennametal field personnel,

primarily the providing of technical assistance and guidance

as to how to use a particular product, went beyond

“solicitation of orders.”

The Oregon Supreme Court had the opportunity to

address “solicitation of orders” in Miles Laboratories, Inc. v.

Department of Revenue, 274 Or. 395, 546 P.2d 1081 (1976).

The issue in Miles Laboratories, was whether or not Miles

Laboratories had sufficient activities in Washington to subject

them to taxation in that state. The plaintiff marketed

proprietary medicines, nutritional and hygienic products and

pharmaceuticals through distribution warehouses.

The company employed salesmen in the state of

Washington. Each salesman maintained a stock of samples

sufficient for a calendar quarter. These samples would be

used for “account presentations,” “samples for account

personnel,” “exchanging damaged merchandise,” and

“personal family samples.” The Court concluded that the

salesmen’s activity of replacing damaged merchandise

exceeded “solicitation” thereby giving Washington the power

and jurisdiction to tax Miles Laboratories. Id. at 397, 546 P.2d

at 1082.

In its decision, the Miles Laboratories Court adopted

the reasoning of the Tax Court in Olympia Brewing v. Dept.

of Rev., 266 Or. 309, 511 P.2d 837 (1973), cert. denied, 415

U.S. 976, 94 S.Ct. 1561 (1974), that:

“ ... ‘solicitation’ should be limited to those generally

accepted or customary acts in the industry which lead

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to the placing of orders, not those which follow as a

natural result of the transaction, such as collections,

servicing complaints, technical assistance and

training...”

Miles at 399, 546 P.2d at 1082 (emphasis supplied). Since

much of the activities of Kennametal’s TSEs and SEs involved

technical assistance and training, the Miles Laboratories and

Olympia Brewing decisions also suggest that Kennametal’s

activities exceed mere solicitation.

In National Tires, Inc. v. Lindley, 68 Ohio App.2d 71,

426 N.E.2d 793 (1980), appellant’s business activities in Ohio

“involved ‘something more than solicitation.” Jd. at 79.

National Tires sold “Modac” brand automotive parts to

NAPA distribution centers in Ohio, through two levels: a

zone manager and district managers. The district manager’s

function was to “call upon and give service to distribution

centers, “jobbers,” and “dealers.” Jd. at 74. The district and

zone managers constantly checked inventory levels and

records, removed old, defective products and ensured proper

credit for them, replaced worn packaging, advised retailers on

methods to improve their inventory, and checked to “see if

there [were] any particular problems [he or she] can handle

right now.” Jd. 74-75. In short, the court ruled that

“[a]ppellant’s zone and district managers performed functions

more commonly related to maintaining an on-going business

operation.” Id. at 78-79.

Through their Standardization Program, Kennametal

field personnel helped the purchaser, in some instances, by

Creating an inventory of products or bringing an existing

inventory up to date. This information would then be used

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to suggest potential items for purchase. As stated by

Kennametal employees, this program was primarily designed

to justify the high cost of Kennametal products and prove the

cost effectiveness of switching to a full line of Kennametal

products. Similar to the facts in National Tires, Kennametal’s

personnel were “maintaining an on-going business operation,”

venturing into business decisions with which a salesman

would not normally be involved.

At the opposite end of the spectrum are the cases

which apply a broad interpretation of “solicitation of orders”

so as to include more activities within the protection offered

by § 381. In Gillette Company v. State Tax Commission, 56

A.D.2d 475, 393 N.Y.S.2d 186 (3d Dep’t 1977) affd 45

N.Y.2d 846 (1978), the New York Court of Appeals

concluded that advising on display techniques did not go

beyond those activities protected by § 381. Jd. at 191. The

Court concluded that where, “the taxpayer owns no real or

personal property ... in the State and makes no repairs on its

goods after sales, the purpose of P.L. 86-272 would be

frustrated by permitting the tax.” Jd. (emphasis added).

Gillette, however, can be distinguished from the

present appeal. Although Kennametal did not make physical

repairs after the sale, by providing technical assistance as to

the proper application of the product after the sale, and

completing tool performance reports and tool standardization

programs in which Kennametal employees suggested

operational and/or product changes, Kennametal’s activities

are akin to post-sale “repairs.”

In Indiana Dept. of Revenue v. Kimberly-Clark Corp.,

375 N.E.2d 1146 (Ind. Ct. App. 1978) (Kimberly-Clark 1),

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salesmen operating in Indiana would discuss with their direct

customers ways to increase sales of the Kimberly Clark

products. Occasionally, the salesmen called on indirect

customers and did “missionary work” which included

checking inventories, checking shelf facings and explaining

products.

The Indiana Appeals Court agreed with the Supreme

Court of Oregon that “‘solicitation’ must be limited to the

acts which lead to the placing of an order.” Kimberly-Clark I

at 1149. The court concluded that checking customer

inventories, pricing products and stocking shelves, and

erecting displays may “reasonably be regarded as activities

leading to the placing of orders...” Jd. at 1150. However, the

court concluded that conveying information to customers

concerning out-of-stock conditions or delays in shipments,

verifying destruction of damaged merchandise, and

coordinating delivery of merchandise for special promotions

could not be classified as “solicitation.” Jd.

On further appeal, the Indiana Supreme Court

concluded that Kimberly-Clark’s activities did not exceed

those protected by § 381. Indiana Department of Revenue v.

Kimberly-Clark Corporation, 416 N.E.2d 1264. The Indiana

Supreme Court focused on those functions which the Appeals

Court deemed not to be solicitation. In their decision, the

court concluded that “Congress perceived ‘solicitation’ as

embodying ‘sundry activities so long as those activities [are]

closely related to the eventual sale of a product.” Jd. at 1268.

It was not until 1992 that the United States Supreme

Court decided the case of Wisconsin Department of Revenue v.

William Wrigley, Jr.,Co., 112 S.Ct. 2447 (1992). Wrigley was

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the Court’s first statement as to what was encompassed by the

term “solicitation of orders,” and thus provided the first

guidance as to what activities were protected under § 381.

The Wrigley Court concluded that the term

“solicitation of sales” should not be construed as narrowly as

suggested by Clairol, Miles Laboratories, and National Tires, so

that only “actual requests for purchases or, at most, the

actions absolutely essential to making those requests” were

protected. Wrigley at 2455. The Court ruled that limiting the

protected activities to the “actual request for purchases would

reduce § 381 to a nullity” and limiting it to acts “essential for

making requests would engender endless uncertainty.” Jd. at

2455.

The Court also, however, declined to broadly

interpret, as suggested in Gillette and Kimberly-Clark, the

term “solicitation of sales,” rejecting the “‘routinely-

associated-with-solicitation’ or ‘customarily-performed-by-

salesmen’ approach.” Jd. Such an interpretation would

render the limitations of § 381 “toothless.” Jd. at 2456.

In describing the proper standard to be applied, the

Court also rejected the pre-sale/post-sale distinction. Jd. at

2457. Acknowledging that “solicitation of orders” entails

more than what is strictly essential to the requesting of

purchases, the Court concluded that the next clear line must

be drawn 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. at 2456 (emphasis added) citing National

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Tires, Inc. v. Lindley, 68 Ohio App.2d 71, 78-79, 22 Ohio Op.

3d 69, 73-74, 426 N.E.2d 793, 798 (1980) (company’s activities

went beyond solicitation to “functions more commonly

related to maintaining an on-going business”).

The Court in Wrigley specifically stated that

employing salesmen to repair or service the company’s

products is not part of the “solicitation of orders.” “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.” Wrigley at

2457 (emphasis added). This was the only particular activity

which the Court stated would remove a company from the

immunity provided by § 381.

In its analysis, however, the Court cited the Clairol

case. Although the Court noted that it did not agree with the

New Jersey Court’s application of a narrow interpretation of

“solicitation of orders,” the Court did agree with the ultimate

decision based on the facts of the case. The Court reasoned

that even applying a broad interpretation of “solicitation,”

“sending non-sales representatives to provide customers

technical assistance in the use of Clairol products” would have

resulted in the same judgment. Wrigley at 186, n.2.

In the present appeals, Kennametal’s employees

typically offered technical assistance to the customer’s

machinists both on an individual basis and through group

presentations. Due to the highly technical nature of the

Kennametal products, TSEs customarily offered “in-plant

training programs.” The subject matter of the sessions

typically concerned the proper use and application of

Kennametal products, as well as an overview of basic

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machining practices and techniques. TSEs would also speak

directly with the customer’s employees to discuss problems

with a particular product.

More in line with Clairol is the fact that SEs who

admittedly had “no direct sales accounts” quite regularly, as

part of their functions, offered technical assistance to a

customer’s employees as to the proper application and usage

of Kennametal’s products.

In conclusion, the Board ruled that Kennametal’s

activities within the Commonwealth, including inventory

analysis and recommendations, product application studies;

performance testing, providing technical assistance and

guidance, and conducting in-plant training programs,

exceeded “solicitation of orders.” The Board also ruled that

these activities, when taken as a whole, were not de minimis.

Although Kennametal’s activities may have had the effect of

helping to enhance future sales and ultimately increase its

market share, they were not entirely ancillary to the

solicitation of orders. The activities obviously ingratiated the

salesmen, but quite clearly had an “independent business

function.”

Kennametal urges, in the alternative, that even if any

one particular function exceeds “solicitation of orders,” there

is a de minimis standard adopted in Wrigley. Although this

may be accurate, the Court in Wrigley states that the proper

inquiry is to look at the sum of all activities and not at

individual activities in isolation.

The TSEs aimed to perform at least one in-plant

training program per month. When conducting a

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Standardization Program, the SE or TSE would be occupied

anywhere from several hours to several days for one

particular customer. Kennametal had many hundreds of

clients situated within the Commonwealth. All of these

customers had TSEs and SEs who visited them on a regular

and frequent visit. During any one of these visits, the field

personnel would offer technical assistance.

On this basis, the Board concludes that, taken as a

whole, Kennametal’s activities exceed any which would be

allowed applying a de minimis standard.

Kennametal also suggests that the sales factor, used in

determining Massachusetts taxable income, was miscalculated

by the Commissioner. The party seeking an abatement

generally has the burden of proof. State Tax Comm'n. v.

Holn H. Breck, Inc. 336 Mass. 277, 289 (1957); A. W. Chesteron

Company v. Commissioner of Rev., 37 Mass. App. Ct. 936

(1994); Blakely v. Commissioner of Rev., 28 Mass. App. Ct.

499, 501 (1990). Thus, Kennametal bore the burden of

proving that sales from the Canadian branch were

inappropriately excluded from the denominator of the sales

factor. Kennametal offered no evidence at trial on this point,

nor did it offer more than a passing remark in any of its

numerous briefs.

Based on the foregoing this Board concludes that

Kennametal’s activities within the Commonwealth exceeded

the “solicitation of orders” protected by 15 U.S.C. § 381, and

therefore was subject to the Massachusetts corporate excise

tax for the years in question. In addition, Kennametal has

failed to meet its burden of proof regarding the

23a

Commissioner’s determination of Massachusetts taxable

income.

The decision for the appellee was promulgated on

November 8, 1995.

APPELLATE TAX BOARD

/s/ Kenneth W. Gurge, Chairman

24a

SJC-07448

KENNAMETAL, INC. vs. COMMISSIONER OF

REVENUE.

Suffolk. | September 5, 1997. - October 29, 1997.

Present: Wilkins, C.J., Abrams, Lynch, Greaney,

Fried, Marshall, & Ireland, JJ.

Taxation, Corporate excise, Excise, Corporation.

Administrative Law, Substantial evidence.

Appeal from a decision of the Appellate Tax Board.

The Supreme Judicial Court granted an application for

direct appellate review.

William E.Halmkin (Donald W. Parker with him) for

the plaintiff.

Thomas A.Barnico, Assistant Attorney General, for the

defendant.

IRELAND, J. We granted an application from the

Commissioner of Revenue (commissioner) for direct appellate

review on this appeal by Kennametal, Inc. (Kennametal),

ere

a

25a

from a decision of the Appellate Tax Board (board). The

board ruled that Kennametal, a Pennsylvania corporation,

conducted activities within the Commonwealth between 1979

and 1989 that exceeded those protected by Pub. L. 86-272,

codified at 15 U.S.C. § 381 (1994), thus subjecting Kennametal

for those years to the Massachusetts excise on foreign

corporations provided in G.L. c. 63, § 39. We affirm the

board’s decision.

1. Background.

Kennametal is a multinational corporation, organized

under the laws of Pennsylvania and headquartered in that

Commonwealth. Kennametal is engaged in the development,

manufacture, and sale of cutting bits' and related products for

the machining of metals, alloys, and plastics. The total

product line consists of approximately 20,000 types of cutting

bits and accessories.

Kennametal has been registered to do business in

Massachusetts since 1943. During the ten-year period in

question, from 1979 to 1989, Kennametal conducted business

* Cutting bits are small pieces of tungsten carbide. The bit is

inserted into a tool holder which is then inserted into a larger

machine tool. In most machining operations, the piece to be cut or

shaped is rotated at different angles and at high speeds against the

stationary cutting bit. The life of the cutting bit depends on such

factors as the type of material and speed of rotation of the piece

being machined, the angle of the cut, the shape of the cutting bit,

and the age and condition of the machine tool itself. The cutting

bit’s life typically ranges from a few minutes to no more than a

day.

Ml

26a

in Massachusetts through the use of a direct field sales force.

The sales force consisted primarily of tooling systems

engineers (TSEs) and service engineers (SEs). TSEs were

experienced personnel responsible for maintaining customer

accounts. TSEs regularly visited current and prospective

customers to solicit orders, conduct presentations, and give

technical advice. SEs were less experienced personnel who

did not have responsibility for customer accounts and whose

primary function was to assist the TSEs. During the period

in question, Kennametal held no property in Massachusetts

other than its sales catalogs, automobiles that it leased for use

by its sales force, and samples of cutting bits which the sales

force used in connection with customer visits.

Kennametal paid the Massachusetts corporate excise

for the tax years 1943 through 1963. In 1963, the

commissioner ruled that Kennametal’s activities in the

Commonwealth at that time did not subject it to the

corporate excise. Accordingly, Kennametal ceased filing

corporate excise returns in Massachusetts.

In March, 1984, the commissioner issued a letter ruling

holding that the use of company cars within the

Commonwealth by employees of a foreign corporation

constituted a level of business activity sufficient to subject the

corporation to the Massachusetts excise. Consequently,

Kennametal resumed filing Massachusetts corporate excise

returns for the 1985 tax year and timely filed corporate excise

returns thereafter for each tax year over the remainder of the

? See LR 84-1, revoked by LR 88-7, 3 Mass Tax Guide at 567, 615

(West 1997).

27a

period in question. In 1987, the commissioner commenced an

audit of Kennametal that resulted in the assessment of

additional taxes and penalties for the tax years 1976 through

1984. Kennametal timely filed requests for abatement for all

relevant tax years. The commissioner abated penalties for the

tax years 1976 through 1985, but denied the remainder of the

abatement requests. Kennametal appealed to the board,

which affirmed the commissioner’s determination.

2. Discussion.

General Laws c. 63, § 39, imposes an excise on “every

foreign corporation . - actually doing business in the

commonwealth . . . in a corporate form.” The

Commonwealth’s broad taxing authority over foreign

corporations, however, is limited by the Federal

government’s plenary power to regulate interstate commerce

pursuant to the commerce clause of the United States

Constitution. Acting under its constitutional powers,

Congress in 1959 enacted Pub. L. 86-272, which expressly

restricts the authority of a State to impose an income tax on

foreign corporations whose business within the State consists

solely of “the solicitation of orders. . . for sales of tangible

personal property, which orders are [then] sent outside the

State for approval or rejection, and, if approved, are filled by

shipment or delivery from a point outside the State.”

Public Law 86-272 does not define “solicitation of

orders.” A number of State courts have attempted to define

28a

this term more precisely.’ However, there was no Federal

case law dealing directly with this definition prior to 1992.‘

In that year, the United States Supreme Court in Wisconsin

Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214

(1992) (Wrigley), concluded that solicitation of orders “covers

more than what is strictly essential to making requests for

purchases” (emphasis in original) Jd. at 228. As such, some

activities within the State involve something more than a

direct request for purchase but, nevertheless, are still

protected from State taxation under Pub. L. 86-272.5

> See, e.g., Hervey v. AMMMF Beaird, Inc., 250 Ark. 1971); Coors

Porcelain Co. v. State, 183 Colo. 325 (1973), cert. denied, 419 U.S.

874 (1974); Indiana Dep’t of Revenue v. Kimberly-Clark Corp., 275

Ind. 378 (1981); Indiana Dep’t of State Revenue v. Continental Steel

Conp., 399 N.E.2d 754 (Ind. Ct. App. 1980); Clairol, Inc. v. Kingsley,

109 N.J. Super. 22 aff'd, 57 N.J. 199 (1970), appeal dismissed, 402

U.S. 902 (1971); Gillette Co. v. State Tax Comm'n, 56 A.D.2d 475

(N.Y. 1977); affd, 45 N.Y.2d 846 (1978); National Tires, Inc. v.

Lindley, 68 Ohio App. 2d 71 (1980); Miles Lab., Inc. v. Department

of Revenue, 274 Or. 395 (1976); Iron Fireman Mfg. Co. v. State Tax

Comm’r, 251 Or. 227 (1968).

*In Heublein, Inc. v. South Carolina Tax Comm’n, 409 U.S. 275,

278-282 (1972), the United States Supreme Court reviewed the

history of Pub. L. 86-272. However, the Court stated that it did

not need to decide “whether . . . the actions of Heublein’s

representative . . . [fell] within the term ‘solicitation’” and thus did

not define the term. /d. at 278.

* Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S.

214, 231-232 (1992), also held that Pub. L. 86-272 could protect an

activity from State taxation if the activity qualified under a de

(continued...)

29a

{

However, Wrigley drew a “clear line . . . between those

activities that are entirely ancillary to requests for purchases —

those that serve no independent business function apart from

their connection to the solicitating 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”

(emphasis in original). Jd. at 228-229. Hence, the solicitation

of orders may include the provision of an automobile and a

stock of free samples to a salesman, as these activities serve no

purpose other than “to facilitate requests for purchases.” Id.

at 229. By contrast, the Court stated that:

“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” (emphasis in original). Jd.

(...continued)

minimis exception. To qualify for a de minimis exception, a court

must consider the activities of the taxpayer within the State as a

whole. Jd. In Wrigley, the taxpayer’s sales force made direct sales

to customers amounting to 0.00007% of the taxpayer’s total sales

within the State. The Court stated that this activity exceeded the

permissible scope of solicitation of orders and also did not qualify

for the de minimis exception because of the sales force’s other

activities within the State. Jd. at 235. Kennametal does not argue

here that its activities qualify under the de minimis exception.

30a

The Wrigley Court expressly rejected as overly broad the

taxpayer’s argument that “solicitation of orders” included any

activities “routinely-associated-with” or “customarily-

performed-by salesmen.” Jd. at 227.

Kennametal does not dispute that it “actually [does]

business in the commonwealth” as set out in G.L. c. 63, § 39.

Kennametal also does not dispute the dollar amount that is

due if any amount is due at all. Rather, Kennametal claims

that its activities within the Commonwealth during the tax

years in question consisted solely of the solicitation of orders

as described in Pub. L. 86-272, and that it is therefore not

subject to the Massachusetts corporate excise at all.

A decision of the board will not be reversed or

modified if it is based on a correct application of the law and

if it is based on substantial evidence. See Koch v.

Commissioner of Revenue, 416 Mass. 540, 555 (1993);

Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass.

661, 663 (1990) ; Tenneco Inc. v. Commissioner of Revenue, 401

Mass. 380, 383 (1987). The board’s decision is final as to

findings of fact.6 G.L. c. 58A, § 13. But the court may

consider whether the evidence in the case is sufficient to

support the board’s conclusion of law. Assessors of Weymouth

v. Curtis, 375 Mass. 493, 499 (1978); Boston Edison Co. v.

Selectmen of Concord, 355 Mass. 79, 92 (1968). Our review of

the sufficiency of evidence, however, is limited to “whether

* “The credibility of witnesses, the weight of the evidence, and

inferences to be drawn from the evidence are matters for the

board.” Cummington School of the Arts, Inc. v. Assessors of

Cummington, 373 Mass. 597, 605 (1977).

31a

a contrary conclusion is not merely a possible but a necessary

inference from the findings.” Commissioner of Revenue v.

Houghton Mifflin Co., 423 Mass. 42, 43 (1996), quoting First

Data Corp. v. State Tax Comm’n, 371 Mass. 444, 446 (1976).

We conclude first that the Board applied the correct

legal standard. The board stated that:

“the activities of Kennametal employees served an

independent business function and were not entirely

ancillary to the solicitation of orders. Although such

[activities] may help to increase purchases, they are

not ancillary to requesting purchases since there is an

independent business reason to provide advice on the

proper use of its product regardless of whether

Kennametal had a sales force. The fact that such

activities were assigned to the sales force does not

convert the activities into those entirely ancillary to

. solicitation.”

The board’s exposition of the legal standard it used in

reaching its decision comes directly from Wrigley, supra at

228-229, almost to the extent of direct quotation.

Kennametal’s argument here focuses on what it refers

to as the board’s “reliance” on Clairol, Inc. v. Kingsley, 109

N.J. Super. 22, aff'd, 57 N.J. 199 (1970), appeal dismissed, 402

U.S. 902 (1971), decided twenty-one years before the Wrigley

case. In Clairol, the court held that the taxpayer’s activities

within the State exceeded those protected by Pub. L. 86-272,

thus subjecting the taxpayer to the state’s corporate income

tax. Id. at 30. The Wrigley Court, supra at 224-226, expressly

rejected the analysis used in Clairol. However, the Court

32a

concluded that the result in Clairol would remain unchanged

even under the Wrigley analysis. Jd. at 224 n.2. Here, the

board used the Clairol result as one of a series of cases it

analyzed to determine the permissible scope of “solicitation

of orders.” Nowhere does the board’s reference to Clairol

implicate a standard of legal review. Accordingly, the board’s

use of Clairol is appropriate, and Kennametal’s argument that

the Board relied on Clairol as an incorrect legal standard is

without merit.’ The board’s decision is also supported by

” Kennametal also argues that the legal standard for determining the

scope of permissible activities was determined by the Appeals

Court in A. W. Chesterton Co. v. Commissioner of Revenue, 37 Mass.

App. Ct. 936 (1994). In Chesterton, the board determined that the

out-of-State activities of the sales force of a domestic corporation

(Chesterton) were entirely ancillary to the solicitation of orders and

thus fell under the protection of Pub. L. 86-272 in the foreign

States. The Appeals Court affirmed the Board. The Appeals Court

stated that the out-of-State activities of the sales force included

“handling consumer complaints and providing consumer and

distributor training in the field.” Jd. at 938. Kennametal cites this

language as standing for the proposition that the Appeals Court

determined that such activities were within the permissible scope

of solicitation of orders. However, the case is inapposite. The

issue in this part of the Appeals Court’s decision did not concern

the standard for solicitation of orders, but rather the burden of

proof. The Appeals Court simply held that Chesterton had not

met its burden of proving that the activities of the sales force did in

fact exceed the permissible scope of solicitation of orders because

Chesterton’s proof was “suggested only vaguely by the evidence it

presented.” Jd. As such, the Appeals Court did not rule on the

(continued...)

er -

33a

substantial evidence. The Administrative Procedure Act

defines “[sJubstantial evidence” as “such evidence as a

reasonable mind might accept as adequate to support a

conclusion.” G.L. c. 30A, § 1 (6). According to the board, a

number of Kennametal’s activities within the Commonwealth

exceeded the permissible scope of the solicitation of orders

under Pub. L. 86-272. Those activities included (1) using

samples for testing the performance of Kennametal’s products

and preparing reports based on the test results, (2) preparing

inventory analyses as part of a broader tool standardization

program,’ and (3) making frequent in-plant presentations (up

to six hours in length and involving as many as 200 employees

of current and prospective customers) on the use of

Kennametal’s products.

There exists no bright line to distinguish those

activities that are entirely ancillary to the solicitation of

orders from those that also serve an independent business

function. See Wrigley, supra at 228-29. Activities such as

those cited by the board occur along a continuum. Wrigley

guides our analysis merely with examples at each end of that

continuum. In the end, business activities conducted within

a State must be considered on an individual basis.

” (...continued)

merits of the permissible scope of solicitation of orders and

Kennametal’s reading of Chesterton is incorrect.

* The tool standardization program involved surveying every

machine at a customer’s plant and preparing an analysis of how

Kennametal’s products could be used exclusively for each machine.

The surveys lasted from a few hours to several days.

34a

The activities here in question were designed not only

to solicit orders, but to ingratiate customers and to assist

buyers in knowing what to order. Those activities fall outside

of the protection afforded by Pub. L. 86-272. Under Wrigley,

the activities must facilitate the actual solicitation of orders;

they may not merely serve to increase general sales. Id. at

233.

Kennametal had reasons independent of soliciting

orders that motivated it to provide the activities in question,

even if no sales force operated in the Commonwealth. For

example, the proper use of Kennametal’s products improves

performance and enhances the company’s reputation among

buyers. This can be especially important for companies such

as Kennametal that attempt to promote their products as

being of higher quality than those of competitors. Similarly,

such activities on the part of Kennametal’s sales force could

relieve Kennametal from having to produce lengthy and

detailed product manuals for customers. In short, the

activities in question cannot be viewed as entirely ancillary to

requests for purchase, but rather as serving an independent

business function as well.’

° The Board also determined that Kennametal exceeded the

permissible scope of the solicitation of orders under Pub. L. 86-272

with respect to resolving customer complaints. Wrigley, supra at

234-235, held that the resolution of customer complaints was

entirely ancillary to the solicitation of orders and thus protected by

Pub. L. 86-272. The case at hand is distinguishable. In Wrigley, the

customer complaints in question involved credit disputes with the

main office. The activities of the in-State sales force primarily

involved acting as an intermediary between customers and the main

(continued...)

35a

As such, Kennametal is not protected under Pub. L.

86-272.

Kennametal’s own interpretation of its activities as

merely part of an order solicitation process stretches Pub. L.

86-272 too far. Indeed, it is difficult to imagine where

Kennametal’s interpretation draws the line on impermissible

activities. The Wrigley Court, supra at 226, explicitly noted

that broad, open-ended interpretations of Pub. L. 86-272

would reduce that law to a nullity.

® (...continued)

office; the actual resolution of the problem did not come from the

sales force itself. (Such disputes arose only two to three times a

year within the entire State. Jd at 217). As such, the Court

concluded that the mediation activities were entirely ancillary to

the solicitation of orders because it was unlikely “that this

mediating function . . . would have been performed by some other

employee . . . if the on-location sales staff did not exist.” Jd. at 235.

By contrast, Kennametal’s customer disputes primarily involved

problems with the use of the product itself. Kennametal’s sales

force typically called or visited the customer to resolve the

problems directly. Also, these disputes arose far more frequently

than the credit disputes in Wrigley. One Kennametal salesperson

testified to having encountered approximately eighteen such

incidents within the previous year among his customers alone. It

thus appears highly likely that some employee would have

performed the dispute resolution function in the absence of an in-

State sales force. As such, the activity cannot be considered as

entirely ancillary to the solicitation of orders; it simply represents

the transfer of an impermissible activity to the sales force. As

noted in Wrigley, such a transfer does not make the impermissible

activity permissible. Jd. at 229.

36a

The board reasonably could conclude as it did that

presentations in front of 200 employees were primarily

intended, generally, to increase sales rather than directly to

facilitate the solicitation of orders. Similarly, the board could

reasonably conclude that lengthy surveys of all the machines

in a particular customer’s plant were intended primarily to

increase over-all sales rather than merely to solicit orders.

The board might have reached contrary conclusions, but such

conclusions are not necessarily inferred from the facts. See

Commissioner of Revenue v. Houghton Mifflin Co., 423 Mass.

42, 43 (1996).

Finally, Kennametal warns of the potential chilling

effect of the board’s conclusion on companies like

Kennametal whose products (or the applications of those

products) are technically oriented. Kennametal maintains

that the board’s decision would prevent any foreign company

with an in-State sales force from communicating to customers

even the slightest technical information through its sales

force, lest the Massachusetts corporate excise apply. Nothing

in this opinion creates such a Draconian standard. Consistent

with Wrigley, supra at 229, the standard merely prevents tax-

generating activities from ceasing to be tax-generating simply

because they are performed by an in-state sales force.

The board’s decision is affirmed.

so ordered.

37a

15 U.S.C. § 381 (1994)

(PUBLIC LAW 86-272)

§ 381. Imposition of net income tax

(a) Minimum standards

No State, or political subdivision thereof, shall have

power to impose, for any taxable year ending after September

14, 1959, a net income tax on the income derived within such

State by any person from interstate commerce if the only

business activities within such State by or on behalf of such

person during such taxable year are either, or both, of the

following:

(1) the solicitation of orders by such

person, or his representative, in such State for sales of

tangible personal property, which orders are sent

outside the State for approval or rejection, and, if

approved, are filled by shipment or delivery from a

point outside the State; and

(2) the solicitation of orders by such

person, or his representative, 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).

38a

(b) Domestic corporations; persons domiciled in or

residents of a State

The provisions of subsection (a) of this section shall

not apply to the imposition of a net income tax by any State,

or political subdivision thereof, with respect to -

(1) any corporation which is incorporated

under the laws of such State; or

(2) any individual who, under the laws of

such State, is domiciled in, or a resident of, such’State.

(c) Sales or solicitation of orders for sales by

independent contractors

For purposes of subsection (a) of this section, a person

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 making sales, or

soliciting orders for sales, of tangible personal property.

(d) Definitions

For purposes of this section -

(1) the term “independent contractor”

means a commission agent, broker, or other

39a

independent contractor who is engaged in selling, or

soliciting orders for the sale of, tangible personal

property for more than one principal and who holds

himself out as such in the regular course of his

business activities; and

(2) the term “representative” does not

include an independent contractor.

40a

MASSACHUSETTS GENERAL LAWS,

CHAPTER 63, SECTION 39

63:39. Foreign corporations; tax rate.

Section 39. | Except as otherwise provided herein,

every foreign corporation, exercising its charter, or qualified

to do business or actually doing business or actually doing

business in the commonwealth, or owning or using any part

or all of its capital, plant or any other property in the

commonwealth, shall pay, on account of each taxable year,

the excise provided in subsection (a) or (b) of this section,

whichever is greater.

The excise levied herein is due and payable on any one

or all of the following alternative incidents:

(1) | The qualification to carry on or do

business in this state or the actual doing of business

within the commonwealth in a corporate form. The

term “doing business” as used herein shall mean and

include each and every act, power, right, privilege, or

immunity exercised or enjoyed i in the commonwealth,

as an incident to or by virtue of the powers and

privileges acquired by the nature of such

Organizations, as well as, the buying, selling or

procuring of services or property.

4la

(2) The exercising of a corporation’s

charter or the continuance of its charter within the

commonwealth.

(3) | The owning or using any part or all of

its capital, plant or other property in the

commonwealth in a corporate capacity.

It is the purpose of this section to require the payment

of this excise to the commonwealth by foreign corporations

for the enjoyment under the protection of the laws of the

commonwealth, of the powers, rights, privileges and

immunities derived by reason of the corporate form of

existence and operation.

In the case of a corporation whose taxable year is a

period of less than twelve calendar months, the portion of the

amount determined under clause (1) of subsection (a) shall be

multiplied by a fraction whose numerator is the number of

months included in the taxable year and whose denominator

is twelve.

(a) | an amount equal to the sum of:

(1) Seven dollars per thousand upon the value of -

(i) its tangible property as determined to be

taxable under paragraph 7 of section thirty if a tangible

property corporation, or

(ii) its net worth as determined to be taxable under

paragraph 9 of section thirty if an intangible property

corporation; and

42a

(2) Eight and thirty-three one hundredths per cent

of its net income determined to be taxable in accordance with

the provisions of this chapter.

(b) Four hundred dollars.

A foreign corporation shall not be subject to tax under

this chapter if the foreign corporation is engaged in the

business of selling tangible personal property and taxation of

that foreign corporation under this chapter is precluded by

the Constitution or laws of the United States, or would be so

precluded except for the fact that the foreign corporation

stored tangible personal property in a licensed public storage

warehouse, provided, that no portion of any warehouse

which is owned or leased by a consignor or consignee of the

tangible personal property shall be deemed a licensed public

warehouse.

2643241