Appellate Tax Board Commonwealth of Massachusetts
*1
Colgate-Palmolive COMPANY v. COMMISSIONER
OF REVENUE Docket No. C255116 April 3, 2003
This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and
G.L. c. 62C, § 39 from the refusal of the appellee to abate corporate excise
assessed against the appellant under G.L. c. 62C, § 26 and G.L. c. 63, § 38
for tax year 1988.
Commissioner Scharaffa heard the appeal and was joined in the decision for the
appellant by Chairman Burns and Commissioner Rose.
These findings of fact and report are made at the request of the appellee
pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
John S. Brown, Esq., Joseph L. Kociubes, Esq., George P.
Mair, Esq., Donald- Bruce Abrams, Esq., Darcy A. Ryding, Esq., and Matthew D.
Schnall, Esq.
for the appellant.
Lisa S. Mediano, Esq., Lutof G. Awdeh, Esq. and Thomas W. Hammond, Esq.
for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts and testimony and exhibits
introduced at the hearing of this appeal, the Appellate Tax Board
("Board") made the following findings of fact. The appellant, Colgate-Palmolive
Company ("Colgate") is a Delaware corporation. Colgate, as the
principal reporting corporation, timely filed a combined corporate excise return
for tax year 1988 ("the tax year at issue"). One of the subsidiaries
included on this return was The Kendall Company ("Kendall"). Colgate
had owned Kendall until October 31, 1988, when it sold all of its Kendall stock
in a leveraged buyout. At all material times, Kendall was a Delaware corporation
engaged in the business of manufacturing and selling medical and surgical
supplies, including urological, incontinence, anesthesia, physical care,
orthopedic, and vascular products and surgical dressings, for the health care
industry. During 1988, Kendall's principal place of business
was in Mansfield, Massachusetts. [FN1]
Following an audit for the 1988 through 1990 calendar years, the Commissioner
issued a Notice of Intent to Assess ("NIA") dated November 11, 1995,
which indicated the Commissioner's intent to assess additional corporate excise
for 1988. The Commissioner notified Colgate of an additional corporate excise
assessment for 1988 by a Notice of Assessment ("NOA") dated February
3, 1998. On March 4, 1998, Colgate paid in full the amount shown to be due in a
February 7, 1998 NOA. [FN2] On March 13, 1998, Colgate timely filed an
application for abatement with the Commissioner, requesting abatement in the
amount of $1,091,587 of tax plus interest. On August 13, 1999, Colgate withdrew
its consent to extend the time for the Commissioner's consideration of its
application for abatement, and on August 17, 1999, Colgate timely filed its
petition with the Board. On the basis of the above facts, the Board found it had
jurisdiction over the appeal.
During the course of the audit, the contested issue was whether the Commissioner
should have applied the "throwback" rule to the sales from thirty-
three jurisdictions, thereby including those sales revenues in the numerator of
Kendall's sales factor. [FN3] When Colgate originally filed its petition with
the Board, it specified $79,971,542 in sales attributed to twenty-two of the
thirty-three disputed jurisdictions, which resulted in $758,937 of additional
corporate excise tax with the Commissioner's application of the
"throwback" rule to those sales. [FN4] However,
Colgate's petition also referred to a second issue when it claimed that
"some of the sales at issue were made to purchasers in states in which
Kendall was taxable during 1988." More generally, the petition also
included language seeking "an abatement of the corporate excise tax and
interest assessed against Colgate for the 1988 calendar year; and... for such
other relief as may be fitting and proper." At the close of the hearing,
Colgate moved to amend its petition, arguing that the testimony of two former
sales employees of Kendall supported a ruling that none of the sales from the
thirty-three jurisdictions at issue should have been "thrown back" to
Massachusetts, because Kendall employees participated in activities that
exceeded the solicitation of sales in all of the jurisdictions where it sold
Kendall products and accordingly, Kendall had created a taxable nexus in all
thirty-three jurisdictions at issue. The Board denied Colgate's motion to amend
its petition at the close of the hearing. However, for reasons which will be
explained in the Opinion, the Board found that the "throwback" sales
from all thirty-three jurisdictions were properly before the Board for its
consideration.
*2
The primary issue in this appeal was whether Kendall's activities in the
disputed jurisdictions were sufficient to subject Kendall to state taxation in
those jurisdictions, thereby preventing the Commissioner from treating sales in
these jurisdictions as Massachusetts sales under the "throwback" rule.
Accordingly, the appellant had the burden of proving that
its activities in the disputed jurisdictions exceeded the protection offered by
Public Law 86-272, which prohibits state taxation of a corporation whose only
presence in a taxing jurisdiction is the solicitation of orders. A secondary
issue in this appeal was whether Kendall's sales in twenty-three of the disputed
jurisdictions were made by agents who were connected with offices located
outside of the Commonwealth, thereby preventing the Commissioner from treating
sales in these jurisdictions as Massachusetts sales under the
"throwback" rule. The appellant also had the burden to prove that
sales in question were made by Kendall sales representatives connected with an
office located outside of the Commonwealth.
During the year at issue, Kendall employed various sales representatives who
were responsible for regions throughout the country. During the hearing of this
appeal, former Kendall representatives testified to and documented the placement
and responsibilities of these many employees. The Board made the following
findings with respect to these employees and their responsibilities.
1. Organization of Kendall's sales force and distribution of Kendall's products.
Cal H. Jones, an employee with Kendall from 1960 until his retirement in 1997,
testified to the general organization of Kendall's sales staff and the distribution
of Kendall's products during the tax year at issue. During 1984 and 1985, Mr.
Jones served as a national sales manager involved in organizing, planning, and
recruiting the Kendall sales staff nationwide. Mr. Jones then became the
national hospital group's contract manager from 1986 to 1987, responsible for
negotiating contracts between Kendall and hospital buying groups for the sale of
Kendall products. In 1987, Mr. Jones "went into the field" as an
account manager, where he remained until his retirement in 1997. The Board found
Mr. Jones to be a credible source of information on the organization of
Kendall's sales staff and the distribution of Kendall's products.
Mr. Jones testified that during the tax year at issue, Kendall employed
nationwide approximately two hundred sales representatives -- about a hundred
account managers, and about eighty-eight or ninety product specialists. Account
managers were responsible for selling the complete line of Kendall products,
while product specialists were responsible for selling only certain of Kendall's
products for which they had developed a specialized knowledge through their
training and experience with Kendall. Account managers and product specialists
covered a specific territory and each reported to one of Kendall's approximately
twenty-five regional managers, who each covered a separate region of the
country. Account managers, product specialists, and regional managers worked out
of their homes.
*3
Mr. Jones testified that product specialists were active in all of the
regions throughout the country. Bobby Don Calvert, a former operating room
specialist and eventually a district manager for Kendall, testified that, while
Kendall may not have specifically assigned product specialists in a few
"remote" areas of the country, "[s]omebody would always be
ultimately responsible for" providing sales services in those geographical
areas "all the way up to the zone director and the national sales
manager...." He testified that, as a market leader in sales of hospital
products, it was "absolutely" Kendall's intent to provide sales
coverage throughout the entire country. He also testified that Kendall sold its
hospital products to all of the hospitals nationwide, about 6,000 or 7,000
during the tax year at issue.
The Board found the testimony of both Mr. Jones and Mr. Calvert, a witness
called by the Commissioner, to be credible. Considering that Kendall was a
market leader in hospital products, the Board found it logical that Kendall
would in fact assign its account managers and product specialists to specific
territories throughout the country to facilitate sales in each of the thirty-
three disputed jurisdictions. The Board also found that Colgate met its burden
of proving that Kendall's company policy was to provide sales coverage
throughout the entire nation so that, even in those few "remote"
areas, at least one sales manager was responsible for ensuring that someone was
available to perform the same activities that Kendall routinely employed to sell
its products.
Moreover, their testimonies were confirmed by a sales personnel directory
produced at trial by Mr. Jones. According to this directory, as of July 1, 1988,
at least twenty-one of the thirty-three jurisdictions in dispute had account
managers who were directly based in the state, [FN5] and at least twelve of
those thirty-three jurisdictions also had product specialists who were directly
based in the state. [FN6] The Board found that the geographical placement of
these sales representatives in various states throughout the country strongly
confirmed Kendall's intent to sell its products to hospitals nationwide.
In determining whether the activities of Kendall sales representatives in these
jurisdictions were sufficient to create a taxable nexus, the Board considered
testimony regarding the role of the sales representatives in the distribution of
Kendall's products. Mr. Jones explained that the distribution of Kendall's
products involved Kendall entering into contracts negotiated with hospitals or
groups of hospitals organized as buying groups. These contracts gave Kendall a
license to sell its products to the hospitals and fixed the prices for those
products. However, the contracts did not commit the hospitals to purchase
Kendall products over the products of any of its competitors, including Johnson
& Johnson and C.R. Bard Company, which also entered into contracts with the
same hospitals.
*4
Approximately eighty percent of Kendall's sales were accomplished by means
of independent distributors, [FN7] who purchased the products from Kendall and
its competitors and sold them to the hospitals, which were the ultimate
consumers of the products. Essentially, the independent distributors served a
warehouse-like function for the hospital to store certain medical products.
However, the contracts negotiated between Kendall and the hospitals did not
guarantee that the hospitals would actually purchase Kendall products, nor did
they prevent Kendall's competitors from soliciting the same hospitals. Moreover,
the independent distributors had no particular incentive to sell Kendall's
products over those of Kendall's various competitors. As explained by Mr.
Calvert, a witness for the Commissioner, "if you relied on the distributor
to [sell Kendall's product to the hospitals], they would be selling anything and
everything that would give them the best margin."
Therefore, because the prices of Kendall's products were fixed by contract and
independent distributors had no particular incentive to sell Kendall's products,
it was Kendall's sales force that, as explained by Mr. Calvert, "generate[d]
the pull" for its company's products by visiting hospitals, promoting the
value of their products over those of its competitors, and requesting that the
customers fill out purchase orders with the independent distributors for
Kendall's products. [FN8]
The Board found credible the testimony of Mr. Jones and Mr. Calvert that, as part
of Kendall's regular company policy, Kendall sales employees engaged in several
activities at the hospitals in each of the disputed jurisdictions in order to
promote the sale of their products. These activities included: (1)
demonstrations to doctors, nurses and purchasing agents of the benefits of
Kendall's products; (2) "in-service" advice regarding the proper use
of Kendall products already purchased and in use at the hospitals; and (3)
troubleshooting activities, which included investigating products in use when
they malfunctioned. Additionally, sales personnel occasionally intervened in
credit disputes with certain distributors. Each of these activities and their
impact on Kendall's taxability in the disputed jurisdictions are analyzed below.
a. Product demonstrations
Account managers and product specialists consistently and frequently visited
individual hospitals in their sales territories in an effort to sell Kendall's
products. As explained by Mr. Jones, account managers and product specialists
would regularly demonstrate the product to the nurses, doctors, or purchasing
agents of the hospital and give free samples and informative brochures
explaining the product in detail, which the hospital representatives could bring
to the various purchasing committees. Mr. Calvert explained the activities
involved in a typical product demonstration:
Well, if you were trying to get, say, the skin scrub tray business, what you
would try to do is you would arrange with the operating room supervisor to maybe
set up a station in the coffee room, bring donuts, and you would basically
demonstrate the product to the surgeons and the nurses as they came in and out
of surgery, and hopefully get them to order a trial order.
*5
The Board found that one of the purposes of these on-site product
demonstrations was for Kendall's sales employees to offer technical assistance
to the customer's doctors and nurses on the proper use of Kendall's highly
specialized medical products. The Board further found that the rendering of
technical advice on these products to the hospital employees responsible for
using the products exceeded the act of merely requesting the hospital's
purchasing agents to make an order for the products. The Board thus found that
the activities related to product demonstrations were not entirely ancillary to
solicitation and accordingly that these activities were sufficient to subject
Kendall to taxation in each of the disputed jurisdictions.
b. "In-service" advice
Mr. Calvert testified that Kendall sales personnel were encouraged to develop
working relationships with key surgeons and key hospitals as a means of reaching
their sales quotas. Mr. Jones and Mr. Calvert both testified that account
managers and product specialists regularly accompanied doctors and nurses into
the operating rooms and rendered "in-service" advice regarding the
proper use of Kendall products that had already been purchased and were being
used in the operating rooms. As explained by Mr. Jones and Mr. Calvert, product
specialists and account managers would actually "scrub in," enter the
operating room, and actively demonstrate to the physicians how to use a Kendall
product, for example, how to open a package of a surgical item and "present
it into the sterile field" during a surgical procedure. Mr. Calvert
testified that product specialists were specifically trained to render this
technical advice and were expected to enter operating rooms routinely "to
make sure that they use your product properly."
The Board found that giving "in-service" advice on Kendall products
already purchased and being used by the hospitals had an independent business
purpose of rendering technical advice and therefore that they were not entirely
ancillary to the solicitation of sales. Moreover, these activities were intended
to facilitate sales in general rather than the solicitation of sales.
Accordingly, the Board found that the activities related to
"in-service" advice were sufficient to subject Kendall to taxation in
each of the disputed jurisdictions.
c. Troubleshooting activities
Mr. Jones and Mr. Calvert also testified about Kendall sales personnel
performing certain troubleshooting activities. For example, Kendall account
managers and product specialists would call on hospitals to investigate claims
of product malfunction and to follow-through on these claims by filling out
forms for the customers and submitting them to Kendall's quality assurance
department. Mr. Jones explained how the nature of the relationship between the
hospital and a Kendall sales representative created an understanding that the
Kendall representative would be on-call and available to the hospital in the
event that a product malfunctioned during a procedure:
*6
Well, I mean, if we had a catheter that they inserted in the patient and the
catheter couldn't come out, who do you think they called?They called me and the
specialist, and we had to get in there and find out why that catheter hasn't
deflated and what was the problem, was it defective, and we had to make out
reports and replace it if necessary. (emphasis added).
Mr. Calvert echoed this testimony and further explained that the sales personnel
were responsible for "mak[ing] sure that the offending product was pulled
off the shelves" and following through with quality assurance procedures by
filling out a product complaint form, collecting samples of the defective
product and remitting the form and samples to Kendall's product complaint
department. He also explained that troubleshooting activities were considered to
be part of the sales representatives' job description, as Kendall managers
believed this activity further enabled the sales representatives to meet their
sales quotas.
The Board found that the performance of troubleshooting activities for Kendall
products already purchased and being used by the hospitals was not entirely
ancillary to the solicitation of sales. Instead, these activities were intended
to improve Kendall's relationship with its customers, thereby increasing sales
in general. Moreover, the Board found that Kendall employed sales personnel to
perform these activities, which could have been performed by quality assurance
personnel apart from the sales force. The Board thus found that the activities
related to troubleshooting were not entirely ancillary to solicitation and
accordingly that these activities were sufficient to subject Kendall to taxation
in each of the disputed jurisdictions.
d. Intervention in credit disputes
Kendall's intended customers were the hospitals which ultimately used its
products. However, pursuant to the arrangement of the hospitals with the
independent distributors, Kendall supplied its products to these independent
distributors, which in turn paid Kendall for the products.
Occasionally, Kendall would encounter problems with independent distributors not
paying their invoices timely. Some evidence was offered suggesting that Kendall
sales representatives assisted in the resolution of these credit claims. Mr.
Calvert testified that for certain less-prominent distributors, such as "a
small distributor in Louisiana," a sales representative or the regional or
district manager would be called upon to "get these people to pay or we're
going to shut them off." However, the appellant offered no specific
evidence regarding the extent to which sales representatives were involved in
this dispute resolution process. Accordingly, the Board declined to make a
finding regarding whether this activity was ancillary to the solicitation of
sales or whether it subjected Kendall to taxation in the jurisdictions where the
activities may have occurred. Because the Board found that the activities
related to product demonstrations, "in-service" advice, and
troubleshooting were sufficient to subject Kendall to taxation in each of the
thirty-three disputed jurisdictions, a finding on this issue was not necessary
to the outcome of this appeal.
2. Organization and operation of Kendall's zone offices.
*7
Colgate presented evidence to establish that Kendall conducted business
through the operation of zone offices, a total of four during the tax period at
issue with only one of those offices located in the Commonwealth. Mr. Jones testified
that account managers and product specialists were assigned to specific, defined
territories to provide sales coverage in each of the geographic sales locations.
The account managers and product specialists each reported to one of
approximately twenty-five regional managers, who were responsible for overseeing
the sales activities of their specific geographical territories. Likewise, each
regional manager reported to a zone manager who was responsible for an entire
zone of sales territory. Mr. Jones explained that zone managers were responsible
for managing the sales force in their respective zones, and they conducted their
business in office buildings which were leased by Kendall.
Colgate presented evidence to establish that Kendall leased and operated four
zone offices during the tax year at issue in the following locations: Mansfield,
Massachusetts; Atlanta, Georgia; Barrington, Illinois; and Irvine, California.
Mr. Jones testified that he was familiar with the zone offices and their
functions during the tax year at issue, because his job at the time involved
sales planning and recruiting to establish the zones. He testified that the zone
offices each contained a suite of rooms, including an office for the zone
manager, a separate, larger office space for the secretaries and the computers,
copy machines and file cabinets, a board room for conferences, and a smaller
room for more private meetings.
Zone managers operated from these leased zone offices and used them to conduct zone
meetings of the entire sales team covering the territory within that zone. Mr.
Jones explained that zone office meetings were held to focus on "how to
increase our sales by utilizing the specialists and account managers as a team
and individually to go out to the hospitals and get the business." Mr.
Jones testified that the frequency of the zone meetings varied, but he recalled
attending at least four zone meetings during 1988. Mr. Jones also explained that
regional meetings, which were held every few months and attended by a regional
manager and the product specialists and account managers in that region, were
sometimes held in the zone offices covering their region.
Colgate submitted into evidence a sales directory that Mr. Jones had retained
from 1988, which Colgate's counsel had just received within a week of the
hearing before the Board. According to the sales directory, twenty-three of the
thirty-three disputed jurisdictions were assigned to one of the three zone
offices operating outside of the Commonwealth. [FN9]
The Commissioner disputed the existence during the tax year at issue of the
fourth zone office in Atlanta and attempted to discredit the sales directory
presented by Mr. Jones during the hearing. The Commissioner cited conflicting
documents collected from the appellant during the audit phase of the appeal,
particularly a document that had been prepared by John Henry, Kendall's vice
president of sales and no longer an employee of Colgate, which indicated that
Kendall had operated only three zone offices during 1988, omitting the Atlanta zone
office. However, Mr. Henry had prepared the document at the request of Colgate
in 1995, about seven years after Colgate had sold its interests in Kendall.
Moreover, Kendall closed the Atlanta office shortly after the close of 1988.
Accordingly, Colgate explained that the discrepancy was a result of Colgate not
having been involved in Kendall's business for seven years and Mr. Henry being
mistaken as to the closing date of the Atlanta zone office when he prepared the
memorandum seven years after the tax year at issue.
*8
Based on the testimony and evidence presented, including the sales directory
from 1988, the Board found that Kendall operated the four zone offices in
question during the tax year at issue. The Board also found that Colgate
substantiated the assignment of territories to these zone offices.
3. Summary of the Board's findings.
On the basis of all the evidence, the Board found that the activities of
Kendall's product specialists and account managers in the thirty-three disputed
jurisdictions were not merely ancillary to the solicitation of sales. Instead,
these activities were intended to provide technical training on the use of
Kendall's products, or to advance Kendall's reputation vis->-vis its
competitors in order to increase its sales in general. The Board therefore found
that Kendall had created taxable nexus in each of the thirty-three disputed
jurisdictions and that the Commissioner thus had improperly calculated Kendall's
sales factor by employing the "throwback" rule to the sales made in
these jurisdictions, which resulted in an additional tax of $1,085,282. [FN10]
The Board additionally found that Kendall met its burden of proving that Kendall
had operated four zone offices during the tax year at issue, and that
twenty-three of the disputed jurisdictions were assigned to one of three zone
offices located outside the Commonwealth.
The Board also found that Kendall's products were actually "sold" by
Kendall's sales representatives and not by the independent distributors. The
Board therefore found that the Commissioner had improperly applied the
"throwback" rule to $92,396,624 of sales from twenty-three of the
disputed jurisdictions, which resulted in a second ground of abatement for
$823,091 [FN11] of the $1,085,282 in additional tax at issue in this appeal.
Because the Board found that the sales from all thirty-three jurisdictions were
improperly "thrown back" in Colgate's sales factor, the Board
accordingly issued a decision for the appellant granting an abatement of the
entire $1,085,282 of tax at issue.
OPINION
The issue in this appeal is whether the Commissioner properly treated certain sales
made by Kendall as "throwback" sales includable in the numerator of
Kendall's sales factor calculated under G.L. c. 63, § 38(f) for purposes of
Colgate's 1988 combined corporate excise return. G.L. c. 63, § 39 imposes an
excise on the taxable net income of "every foreign corporation... doing
business in the commonwealth...." However, the taxable net income of a
corporation that has income from business activity that is taxable both within
and without the commonwealth must be apportioned. G.L. c. 63, § 39(b). The
specific allocation and apportionment of net income of a corporation to the
commonwealth is achieved by means of "multiplying its taxable net income,
determined under the provisions of subsection (a), by a fraction, the numerator
of which is the property factor plus the payroll factor plus twice the sales
factor, and the denominator of which is four." G.L. c. 63, § 38(c).
*9
The parties to this appeal disputed the Commissioner's calculation of
Kendall's sales factor. G.L. c. 63, § 38(f) provides that the sales factor
"is a fraction, the numerator of which is the total sales of the
corporation in this commonwealth, during the taxable year, and the denominator
of which is the total sales of the corporation everywhere during the taxable
year." A sale of tangible personal property is "in this
commonwealth" if either of these two conditions applies:
1. the property is delivered or shipped to a purchaser within this commonwealth
regardless of the f. o. b. point or other conditions of the sale;
or
2. the corporation is not taxable in the state of the purchaser and the property
was not sold by an agent or agencies chiefly situated at, connected with or sent
out from the premises for the transaction of business owned or rented by the
corporation outside this commonwealth....
G.L. c. 63, § 38(f). The first condition is referred to as the
"destination" rule, and the second condition is referred to as the
"throwback" rule. See LR 00-4. The Commissioner included the sales by
Kendall in the thirty-three disputed jurisdictions in Kendall's sales factor
numerator pursuant to the "throwback" rule. The Board found that the
Commissioner improperly included those sales in Kendall's sales factor, because
Kendall was taxable in each of the disputed jurisdictions during the tax year at
issue. [FN12]
1. Public Law 86-272 and the solicitation of sales.
The taxability of Kendall in each of the disputed jurisdictions has its root in
Public Law 86-272 ("Pub. L. 86-272"). Pursuant to its plenary powers
granted under the Commerce Clause of the United States Constitution to regulate
interstate commerce, Congress enacted Pub. L. 86-272, which prohibits individual
states from taxing the income earned by an out-of-state person or entity, if the
person or entity's only business activities within the state consist
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).
15 U.S.C. § 381(a). The converse of this rule, however, is that activities
other than "solicitation of orders" performed by an individual or
entity in the taxing jurisdiction in question create a nexus sufficient to
subject the person or entity to tax in that jurisdiction. See generally,
Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214
(1992) ("Wrigley").
*10
The difficulty in implementing Pub. L. 86-272 lies in the interpretation of
the phrase "solicitation of orders." SeeWrigley, 505 U.S. at 223. In
Wrigley, the Supreme Court addressed the activities of sales representatives and
managers employed by the taxpayer, a manufacturer of chewing gum based in
Chicago and conducting business nationwide. The main task of the sales force was
to request orders of Wrigley's products at their retail customers'
locations, which the Supreme Court agreed included distributing promotional
materials and free samples. SeeWrigley, 505 U.S. at 229.
However, Wrigley's sales personnel engaged in a broader range of activities
beyond simply requesting orders of Wrigley's products. The Court considered
whether the following additional activities exceeded the "solicitation of
orders" protected by Pub. L. 86-272: (1) the replacement of retail
customers' stale gum by sales representatives at no cost to the customer
("stale gum swaps"); (2) on-site replenishment of a customer's supply
of gum at a cost to the customer ("agency stock checks"); (3) the
storage of gum, racks, and promotional materials in the homes of Wrigley's field
representatives; (4) the rental of storage space to store gum, racks and
promotional materials for a sales representative who did not have ample space to
store these materials in his apartment; (5) the regional managers' recruitment,
training, and evaluation of employees in Wisconsin; and (6) the regional
managers' occasional intervention in some "'rather nasty' credit disputes
involving important accounts in order to 'get the account and [Wrigley's] credit
department communicating."'. Id. at 217, 232, 235.
In its analysis, the Court separated the activities "between those
activities that are entirely ancillary to requests for purchase -- 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 228-29 (emphasis in original). The Court emphasized
that solicitation did not include any activity simply connected with sales in
general, and thus distinguished between sales and solicitation of sales:
"it is not enough that the activity facilitate sales; it must facilitate
the requesting of sales...." Id. (emphasis in original). In drawing this
distinction, the Court noted that a certain activity, such as repair or
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 (emphasis in original). However,
the Court recognized that certain activities, while not entirely ancillary to
solicitation of sales, were nonetheless de minimis in occurrence and thus should
not by themselves subject an entity to taxation. Id. at 231-32.
*11
Ultimately, the Court found that the "stale gum swaps," the
"agency stock checks," and the storage of gum in Wisconsin were not
activities protected by Pub. L. 86-272. Id. at 233-34. The Court found that the
"stale gum swaps" were more akin to quality-control than to
solicitation of sales and accordingly that they facilitated sales in general but
did not sufficiently relate to the act of requesting a specific sale. Id. at
233. Moreover, "Wrigley would wish to attend to the replacement of spoiled
product whether or not it employed a sales force," and accordingly, the
swaps "serve[d] an independent business function quite
separate from requesting orders...." Id. Similarly, the Court found that
the "agency stock checks" were not ancillary to solicitation because
the retailers had to pay for the gum. Id. Focusing on this important fact, the
Court found that the business purpose for supplying purchased merchandise was
"quite independent from the purpose of soliciting consumers" to make a
purchase. Id. at 234. Likewise, the Court found that the storage activities were
not entirely ancillary to the solicitation of sales, because the gum stored in
the Wisconsin homes and rental space was used primarily for the "stale gum
swaps" and "agency stock checks" which were themselves not
ancillary to solicitation. Id.
However, the Court found that the in-state recruitment, training, and evaluation
of sales employees were entirely ancillary to solicitation because they
"served no purpose apart from their role in facilitating
solicitation." Id. at 235. The Court also found that the credit dispute
activity was entirely ancillary to solicitation because this occasional activity
simply served a "mediating function," the purpose of which was to
"ingratiate the salesman with the customer, thereby facilitating requests
for purchases." Id. Because of this direct link between mediating on behalf
of established customers and soliciting sales from those same customers, this
mediating activity would hardly have been assigned to another employee,
"some company ombudsman, so to speak," apart from the sales force. Id.
Accordingly, the Court found this activity to be entirely ancillary
to the solicitation of sales and thus within the protection of Pub. L. 86-272.
Id.
The Massachusetts Supreme Judicial Court has followed the principles of Wrigley
and applied them to other scenarios. In Kennametal, Inc. v. Commissioner of
Revenue, 426 Mass. 39 (1997), cert. denied, 523 U.S. 1059 (1998), the court, in
affirming this Board's decision, analyzed the activities of tooling systems
engineers ("TSEs"), who were employed as sales personnel by a
manufacturing company. During the course of soliciting orders, these experienced
engineers engaged in various technical activities, including using samples to
test the performance of Kennametal's products, preparing reports on these tests,
preparing inventory analyses for a tool standardization program, and making
frequent in-plant presentations of up to six hours in length on the use of
Kennametal's products. Id. at 44-45.
*12
The court upheld the Board's finding that Kennametal had reasons independent
of soliciting orders for having its TSEs perform the tests, analyses, and
presentations, including improving the performance of Kennametal's products and
relieving Kennametal from producing "lengthy and detailed product manuals
for customers." Id. Moreover, the court emphasized the Wrigley principle
that "the activities must facilitate the actual solicitation of orders;
they may not merely serve to increase general sales." Id. (citing Wrigley,
505 U.S. at 233). Accordingly, the court found that the activities in question
were not entirely ancillary to the solicitation of sales. Id.
In a case strongly similar to the instant appeal, Amgen Inc. v. Commissioner of
Revenue, 427 Mass. 357 (1998), the court, again affirming this Board's decision,
analyzed the activities of professional sales representatives ("PSRs")
and clinical support specialists ("CSSs") employed by a drug company.
The primary responsibility of the PSRs was to call on doctors and nurses to
persuade them to prescribe Amgen's products. Id. at 358. The PSRs were not
medical professionals, and they did not carry samples. Id. However, the
activities of the CSSs were far more extensive, including conducting frequent
programs on Amgen's products at hospitals and other facilities attended by
nurses and patients and occasionally reviewing individual patient charts or
answering questions about the use or dosage of Amgen's products in relation to
specific patients. Id. at 358-59.
The court found that the Board had correctly ruled that reviewing patient charts
and answering questions about use and dosage for specific patients had an
independent business purpose beyond the solicitation of orders for Amgen's
products. Id. at 361-62. The court ruled that the existence of possible business
purposes beyond solicitation, including the reduction of calls to Amgen's
Professional Services Group or to its "hotline," justified the Board's
finding that Amgen had assigned to the CSSs tasks that exceeded the solicitation
of orders. Id. at 362.
Most recently in Alcoa Building Products, Inc. v.
Commissioner of Revenue, 2002 ATB Adv. Sh. 402, the Board analyzed the
activities of sales representatives employed by a manufacturer of vinyl siding
products. In particular, the Board focused on the activities related to the
filing and resolution of warranty claims. [FN13] For example, documents
submitted by the appellant indicated that Alcoa district sales managers had
initiated more than one-third of the total number of warranty claims filed
nationally with Alcoa during the tax years at issue. Id. at 410. The Board also
found that district sales managers consistently visited Massachusetts building
sites to investigate the merits of warranty claims by contractors. Id. In fact,
testimony given by an Alcoa representative indicated that district managers were
expected to visit a site to investigate the validity of a warranty claim,
"because a lot of times it's not our problem" but rather the result of
improper installation of an Alcoa product by the contractor. Id. at 412.
Accordingly, "these visits were considered a form of damage-control for
Alcoa's reputation among its customers, and therefore, integral to the district
manager's job." Id.
*13
The Board also found that district sales managers provided assistance to its
customers with several tasks relative to filing warranty claims, including
filling out
claim forms, retrieving and sending samples of the defective product to Alcoa's
warranty claims department, and intervening with a claim that had been rejected
by the warranty department. Id. at 411. Thus finding that "Alcoa's sales
personnel took active steps towards resolving warranty issues" beyond the
mere "mediating function" in credit disputes performed by sales
personnel in Wrigley, the Board found and ruled that the warranty claims
activities were not entirely ancillary to solicitation but rather had an
independent business purpose beyond solicitation, "including the
improvement of Alcoa's products and the enhancement of Alcoa's reputation among
buyers...." Id. at 424-25.
The Board acknowledged Alcoa's argument "that its sales force could not be
expected to ignore the concerns of its customers...." Id. at 425. However,
the Board emphasized that "the Supreme Court has specifically found that
industry customs and professional practices should not dictate the results of
tax cases," and thus its ruling "should not be influenced by whether
these activities were suitable for performance by a sales force." Id.
("If, moreover, the approach were to be applied (as respondent apparently
intends) on an industry-by-industry basis, it would render the limitations of §
381(a) toothless, permitting 'solicitation of orders' to be whatever a
particular industry wants its salesmen to do." (quoting Wrigley, 505 U.S.
at 227)). Accordingly, the Board found that the warranty claims activities
exceeded the protection of Pub. L. 86-272 and thus subjected Alcoa to taxation
in Massachusetts. Id. at 426.
Applying the principles from these cases, the Board in the instant appeal found
that the product demonstrations, "in-service" advice, and
troubleshooting functions performed by the Kendall account managers and product
specialists were not entirely ancillary to solicitation but instead had separate
business purposes. "Although no 'bright line' exists to parcel out those
activities which are not entirely ancillary to solicitation, and sales
representatives in on-going customer relationships have a particular need to be
attentive to the needs of their customers" (Alcoa, 2002 ATB Adv. Sh. at
422), the Supreme Judicial Court has ruled that activities very similar to those
performed by the Kendall sales force were not ancillary to solicitation and,
accordingly, subjected the out-of-state corporation to tax.
First, the product demonstrations performed by Kendall's sales representatives
strongly resembled activities in Kennametal that were found to exceed
solicitation. The Board found that, considering the technical nature of
Kendall's surgical products and the fact that the demonstrations were for the
benefit of physicians and nurses who would use the products and not just for the
hospitals' purchasing agents, the product demonstrations were offered as a means
of rendering technical advice on "the application of [Kendall's] products
in actual work situations" and thus not entirely ancillary to the
solicitation of sales. Kennametal, Inc. v. Commissioner of Revenue, 20 Mass.
App. Tax Bd. Rep. 6, 8 (1996), aff'd, 426 Mass. 39 (1997), cert. denied, 523
U.S. 1059 (1998). See also, Amgen, 427 Mass. at 76 (finding that activities
"such as providing educational seminars, conducting
presentations as to how and when to use a particular drug, analyzing patients'
charts, [and] answering patient- specific questions... are more commonly
associated with the maintenance of an on-going business operation rather than
the mere solicitation of sales").
*14
Second, the "in-service" advice, consisting of "scrubbing
in" and entering operating rooms with doctors and nurses to demonstrate
Kendall products already purchased by the hospital, strongly resembled
activities in Amgen that were found to exceed solicitation, like consulting with
doctors and nurses and "occasionally reviewing individual patient charts or
answering questions about the use or dosage of Amgen's products in relation to
specific patients." The court in Amgen found those activities served
independent business functions, "including the reduction of calls to
Amgen's Professional Services Group or to its 'hotline,"' thereby
justifying the Board's finding that the CSSs' tasks exceeded mere solicitation
of the hospital to make purchase of Amgen's products. Amgen, 427 Mass. at 362.
Similarly, the Board in this appeal found that the "in-service" advice
performed by Kendall's sales force served at least one independent business
function, namely, customer support and technical consultation on the proper use
of Kendall's products already purchased and being used by the hospitals.
SeeAmgen, 427 Mass. at 362; see alsoKennametal, 20 Mass. App. Tax Bd. Rep. at 9
(finding that sales personnel exceeded solicitation when they "would be present
at the customer's plant to advise the operators on how to properly use the
Kennametal products"). At the very least, the Board found that rendering
"in-service" advice was not entirely ancillary to the solicitation of
a proposed sale by Kendall to the hospital and, accordingly, this activity was
sufficient to create a taxable nexus for Kendall in each of the thirty-three
disputed jurisdictions.
Third, the troubleshooting activities, including filling out claim forms,
remitting samples to Kendall's quality assurance department, and pulling
defective products from the hospitals' shelves, were very akin to the warranty
activities which the Board in Alcoa found to serve independent business
functions apart from solicitation, "including the improvement of Alcoa's
products and the enhancement of Alcoa's reputation among buyers...." Alcoa,
2002 ATB Adv. Sh. at 424-25. Perhaps the attentiveness of Kendall's account
managers and product specialists may have ingratiated the sales force to the
physicians with whom they had ongoing customer relations (seeWrigley, 505 U.S.
at 233), but the important distinction emphasized by the Supreme Court, and in
turn by the Supreme Judicial Court, is that "the activities must facilitate
the actual solicitation of orders; they may not merely serve to increase general
sales." Kennametal, 426 Mass. at 45 (citing Wrigley, 505 U.S. at 233).
In the instant appeal, the Board found that activities such as entering a
hospital operating room to examine why a catheter had not deflated served an independent
business purpose beyond facilitating the solicitation of sales with a repeat
customer. Instead, such activities were a function of quality-control, ensuring
that Kendall's products, already purchased by the hospitals, were being used
properly by hospital staff. This quality-control increased the reputation of
Kendall's products among its customers and thereby facilitated sales in general.
See Kennametal, 426 Mass. at 45 ("Kennametal had reasons independent of
soliciting orders that motivated it to provide the activities in question"
including "the proper use of Kennametal's products [which] improves
performance and enhances the company's reputation among buyers.").
Accordingly, the Board found and ruled that the troubleshooting activities were
sufficient to create a taxable nexus for Kendall in the thirty-three disputed
jurisdictions.
*15
The Board ultimately found that Colgate met its burden of proving that its
tax liability, based on facts in evidence, was "more probable" than
that calculated by the Commissioner. SeeChef Chang's House, Inc. v. Commissioner
of Revenue, 14 Mass. App. Tax Bd. Rep. 67, 74 (1996) (quoting Suprenant v.
Commissioner of Revenue, 14 Mass. App. Tax Bd. Rep. 12, 17 (1991)); Glandore Caf€,
Inc. v. Commissioner of Revenue, 17 Mass. App. Tax Bd. Rep. 15, 25 (1994).
During his closing statement, the Commissioner argued that Colgate had not met
its burden of proving that it was taxable in each of the thirty-three
jurisdictions at issue, because Colgate had not "pinpointed exactly where anybody
was in any of these" disputed jurisdictions. However, the Board found that
Colgate's burden did not require it to "pinpoint" exactly where and
when specific activities occurred throughout every corner of the thirty-three
disputed jurisdictions. The Board found that the appellant met its burden of
proving that Kendall engaged in "in-service" advice and
troubleshooting activities "as a matter of regular company policy, on a
continuing basis" throughout the disputed jurisdictions where it registered
sales. Wrigley, 505 U.S. at 235. These activities were sufficient to create
nexus for Kendall with each of the thirty-three jurisdictions in dispute. The
Commissioner produced no evidence to refute this evidence. Accordingly, the
Board found and ruled that the Commissioner improperly applied the
"throwback" rule to the sales revenue associated with those sales.
2. Kendall's sales connected with zone offices operating outside of the
Commonwealth.
As previously discussed, the "throwback" rule applies only if the
taxpayer cannot satisfy one of the following two conditions:
[1] the corporation is not taxable in the state of the purchaser and [2] the
property was not sold by an agent or agencies chiefly situated at, connected
with or sent out from the premises for the transaction of business owned or rented
by the corporation outside this commonwealth....
G.L. c. 63, § 38(f). As previously explained, the Board found that Colgate
satisfied its burden of proving facts sufficient to satisfy the first condition
relating to nexus for sales made in all thirty-three of the disputed
jurisdictions. The Board similarly found that, for twenty-three of the disputed
jurisdictions, Colgate also satisfied the second condition relating to sales
made by agents "connected with or sent out from the premises for the
transaction of business owned or rented by the corporation outside the
Commonwealth."
The Commissioner first contended that Kendall's products were not
"sold" by Kendall's sales personnel, but rather by the independent
distributors who actually dispensed the products to the hospitals pursuant to
purchase orders. The Board, however, found persuasive the testimonies of Mr.
Jones and Mr. Calvert explaining the importance of Kendall's product specialists
and account managers visiting hospitals to "generate the pull" for
Kendall's products in a competitive and controlled market that left no room for
price negotiations. The Board thus found and ruled that Kendall's sales
personnel actually "sold" their products within the meaning of the G.L.
c. 63, § 38(f), because they generated the sales by soliciting the ultimate
customers to fill out purchase orders for Kendall's products with the
independent distributors. The Board therefore found and ruled that Colgate met
its burden of proving that the sales by Kendall in twenty-three
of the disputed jurisdictions were "sold by" Kendall sales agents
"connected with or sent out from the premises for the transaction of
business owned or rented by the corporation outside this commonwealth."
Accordingly, the Board found and ruled that the Commissioner had improperly
applied the "throwback" rule to the sales made in these jurisdictions.
*16
The Commissioner next attempted to dispute the existence of the zone offices
and suggested that, even if they were in existence, they may have been used for
the conduct of research and development activities rather than sales activities.
However, such insinuations are not sufficient to disprove Colgate's zone office
theory. "'Evidence of a party having the burden of proof may not be
disbelieved without an explicit and objectively adequate reason.... If the
proponent has presented the best available evidence, which is logically
adequate, and is neither contradicted nor improbable, it must be
credited...."' New Boston Garden Corp. v. Assessors of Boston, 383 Mass.
456, 470-471 (1981) (quoting L.L. Jaffe, Judicial Control of Administrative
Action 607-608 (1965)).
The Board found and ruled that based on the testimony of Mr. Jones and the
evidence presented at the hearing, particularly the sales directory from 1988,
Colgate met its burden of proving the existence and operation of the zone
offices. The Board thus found and ruled that sales activities in twenty-three of
the disputed jurisdictions were controlled by zone managers conducting business
in zone offices leased by Kendall and located outside of the Commonwealth.
[FN14] Accordingly, the Board found that, for $823,091 of the total $1,085,282
of tax in dispute, the Commissioner's application of the "throwback"
rule was erroneous based on two grounds, Kendall's nexus in these states and its
sales connected with out-of-state zone offices.
3. Sales revenues from all thirty-three contested jurisdictions were properly
before the Board for its consideration.
At the close of the hearing of this appeal, the appellant moved that it be
allowed to amend its petition to clarify that Colgate was contesting the
Commissioner's application of the "throwback" rule to capture the
revenues from sales made in thirty-three jurisdictions, rather than just those
twenty-two jurisdictions included in the $758,937 of corporate excise, the
amount stated in the appellant's petition.
The appellant believed that the challenge against the "throwback" of
all thirty-three jurisdictions was "implicit, particularly because of the
nexus" argument, but had prepared the motion in the event that "your
Honor would like an amendment to conform to the evidence...." The Board
denied the motion to amend, because it found and ruled that the issue was
sufficiently raised by the original petition and sufficiently addressed by the
testimony and exhibits submitted during the hearing.
The propriety of litigating an issue not raised by the pleadings was examined in
Deveau v. Commissioner of Revenue, 51 Mass. App. Ct. 420 (2001). In Deveau, the
Commissioner, at all times prior to the hearing before the Board, had
consistently taken the position that the taxpayer was not engaged in a trade or
business. According to this theory, the partnership's income was effectively
connected with Massachusetts real property and therefore taxable as
Massachusetts source income under G.L. c. 62, § 5A(a)(3). [FN15] Id. at 421,
424. Moreover, the Commissioner contended that a management fee was therefore
not deductible by the partners as a business expense but instead includable in
the partners' distributive shares of their taxable income. Id. at 424. On the
day of the hearing, however, the Commissioner "did an about-face" and
contended that the partnership was engaged in a trade or business, and that the
taxpayers themselves were subject to tax on their income effectively connected
with a trade or business conducted in the commonwealth; the result was that the
Commissioner conceded the previously disallowed management fee deduction, but
contended that each partner's distributive share of the partnership's income was
taxable under G.L. c. 62, § 5A(a)(1). Id. The Board allowed consideration of
the Commissioner's new theory, found the theory persuasive, and accordingly
ruled that the appellants' income was subject to tax under § 5A(a)(1). Id.
*17
On appeal, the Massachusetts Court of Appeals held that "the [B]oard has
not made any findings, and the record viewed in its entirety is barren of any
facts or circumstances to support its (implicit) determination that equity and
good conscience require it to entertain the [C]ommissioner's newly advanced and
significantly different legal position." Id. at 427. See G.L. c. 58A, § 7;
831 CMR 1.22. Accordingly, deference to the Board's determination of whether
equity and good conscience required consideration of this new legal theory
"[wa]s not warranted." Id. at 428.
In the instant appeal, however, the Board need not find that "equity and
good conscience" required its consideration of the sales revenues from all
thirty- three jurisdictions, because the Board found and ruled that the
"throwback" issue was specifically raised in the petition. Here,
unlike in Deveau, there was no change of legal theory on the day of hearing, and
the Commissioner had ample notice of the appellant's contentions with respect to
the assessment at issue. The Board found that the appellant's abatement
application and petition set forth the precise legal contention which Colgate
had raised with the Commissioner throughout its lengthy assessment and appellate
process. Both the abatement application and the petition clearly stated that
"some of the sales at issue were made to purchasers in states in which
Kendall was taxable during 1988" and accordingly those sales "were not
'throwback' sales within the meaning of G.L. c. 63, § 38(f) and were not
properly includable in the numerator of Kendall's sales factor." The Board
found that these phrases gave a "clear and
concise" statement of the factual assertions upon which the appellant
planned to rely in proving its legal contention. See 831 CMR 1.03(2). It was no
surprise to the Commissioner, nor does the Commissioner assert a lack of
preparedness to litigate the issues surrounding the taxability of Kendall in
jurisdictions outside the Commonwealth.
As explained by counsel for Colgate, during discovery and preparation for trial,
the evidence gradually came to indicate that the same legal theory (nexus in
states outside the Commonwealth) applied to sales in all thirty-three
jurisdictions. The Board in the instant appeal found and ruled that the
appellant did not assert a new "issue of fact" by contesting the tax
arising from sales in all thirty-three jurisdictions in dispute because the
issue was already raised by the abatement application and the petition. Mr.
Jones and Mr. Calvert both testified to the "in-service" advice and
troubleshooting activities performed by the Kendall sales force nationwide.
These activities did not vary from jurisdiction to jurisdiction, but rather,
they were part of Kendall's overall business strategy to be an industry leader
in the sale of hospital products. Neither Colgate nor the Commissioner
differentiated or discussed the degree to which Kendall employees participated
in these activities in each individual jurisdiction, but only whether they were,
in general, sufficient to create a taxable nexus for Kendall outside of the
Commonwealth. The Board thus found that the appellant sufficiently notified the Commissioner
of the contentions of fact and issues of law on which the appellant planned to
rely during the hearing before the Board. Accordingly, the Board found and ruled
that the relevant factual and legal issues pertaining to the revenues from all
thirty-three jurisdictions were properly before the Board for its consideration.
*18
Moreover, to the extent that it could be argued that the appellant's claim
regarding taxability in all thirty-three jurisdictions had not been specifically
set out in the petition, equity and good conscience would require adjudication
of the claim for the same reasons discussed above. See G.L. c. 58A, § 7
("[T]he Board shall not consider, unless equity and good conscience so
require, any issue of fact or contention of law not specifically set out in the
petition upon appeal or raised in the answer.") (emphasis added). The
Commissioner clearly had notice of the appellant's "throwback" claim.
The testimony offered at trial in support of that claim supported a ruling that
Kendall was taxable in all thirty-three jurisdictions. The Commissioner did not
object to this testimony, or suggest that it should be taken as evidence only
for a certain number of jurisdictions. No unfair surprise to the Commissioner
resulted from this testimony, which was not effectively challenged on cross-
examination or redirect examination. Accordingly, the Board found and ruled that
no reasonable basis for disregarding the evidence or the taxpayer's claim for
all thirty-three jurisdictions has been advanced by the Commissioner.
4. Conclusion
The Board found and ruled that the product demonstrations,
"in-service" advice, and troubleshooting activities performed by
Kendall's sales personnel in the thirty-three jurisdictions in dispute exceeded
the protection of Pub. L. 86-272 and accordingly that Kendall was taxable in all
thirty-three jurisdictions in dispute. The Board thus found and ruled that the
Commissioner improperly assessed "throwback" taxes on $121,828,450 of
sales for the tax years at issue, which resulted in $1,085,282 of additional
tax. The Board also found that Kendall met its burden of proving that it had
operated three out-of- state zone offices during the tax year at issue, and that
sales from twenty- three of the jurisdictions in dispute were made by agents
connected with those zone offices. The Board therefore found that the
Commissioner had improperly applied the "throwback" rule to
$92,396,624 of sales from twenty-three jurisdictions, which resulted in a second
ground of abatement for $823,091 of the $1,085,282 in additional tax at issue in
this appeal.
Accordingly, the Board issued a decision for the appellant and ordered an
abatement in the amount of $1,085,282 attributable to the sales at issue, plus
statutory additions.
By: Abigail A. Burns
Chairman
FN1. Kendall's offices were originally located at 1 Federal Street in Boston but
moved to Mansfield in early 1988.
FN2. An updated NOA dated February 7, 1998 reflected a larger amount of interest
due, a higher amount of payments received, and a smaller total amount due from
the taxpayer than the amounts shown on the February 3, 1998 NOA.
FN3. The thirty-three jurisdictions in dispute were: Alaska, Arizona, Arkansas,
Colorado, Delaware, District of Columbia, Florida, Hawaii, Idaho, Indiana,
Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Mexico, Oklahoma, Oregon, Pennsylvania,
Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia,
and Wyoming.
FN4. The sales not included in the $758,937 of tax were those made from eleven
jurisdictions which Colgate had originally believed had been assigned to
management by a "zone office" in Mansfield, Massachusetts. The
jurisdictions assigned to the Mansfield, Massachusetts office were Delaware,
District of Columbia, Florida, Maine, Maryland, New
Hampshire, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia.
However, as will be explained, while Colgate had submitted information to the
Commissioner indicating that sales in Florida had been assigned to the zone
office in Mansfield, Massachusetts, information discovered by Colgate after the
time of that submission indicated that sales in Florida actually had been
assigned to the zone office in Atlanta, Georgia.
FN5. These states were: Arizona, Colorado, Florida, Indiana, Kansas, Louisiana,
Maine, Maryland, Michigan, Mississippi, Missouri, Nebraska, New Hampshire, New
Mexico, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Virginia, and
Washington.
FN6. These states were: Arizona, Colorado, Florida, Indiana, Kansas, Louisiana,
Maryland, Michigan, Missouri, Pennsylvania, Virginia, and Washington.
FN7. As explained by Mr. Calvert, hospitals in some geographic areas purchased
their supplies directly from Kendall, and Kendall also sold to some government
agencies.
FN8. Mr. Calvert explained this procedure in his direct testimony:
We sell them the product, the hospital. The hospital says yes, we'll buy it.
They take a purchase order, and they send it to the distributor, and the
distributor supplies that hospital with the product because of what the hospital
just did. They send them a purchase order.
FN9. The sales directory indicated that each zone office was identified by a
specific code number, and each of the jurisdictions were then assigned to a
particular zone office by means of that code. According to the sales directory,
the thirty-three jurisdictions were assigned to zone assignments as follows:
Mansfield, MA Atlanta, GA Barrington, IL Irvine, CA
----------------- ----------- -------------- ----------
Delaware Florida Indiana Alaska
Dist. of Columbia Mississippi Kansas Arizona
Maine Michigan Arkansas
Maryland Missouri Colorado
New Hampshire Nebraska Hawaii
Pennsylvania South Dakota Idaho
Rhode Island Louisiana
Vermont Montana
Virginia Nevada
West Virginia New Mexico
Oklahoma
Oregon
Utah
Washington
Wyoming
FN10. The abatement application submitted by Colgate requested abatement
in the amount of $1,091,587. However, a portion of this amount pertained to an
issue that is not the subject of the instant appeal.
FN11. The $758,937 figure specified in Colgate's petition accounts for sales
from only twenty-two of the twenty-three jurisdictions that the Board found were
made from agents connected with Kendall's non-Massachusetts zone offices. At the
time that Colgate submitted its petition to the Board, Colgate had mistakenly
assigned sales from Florida as having been supervised by the zone office in
Massachusetts. See note 4, infra.
FN12. See G.L. c. 63, § 38(b) (a corporation is "taxable" in another
jurisdiction if "that state has jurisdiction to subject such corporation to
a net income tax regardless of whether, in fact, the state
does or does not."); see also Amray, Inc. v. Commissioner of Revenue, 7
Mass. App. Tax Bd. Rep. 13, 16 (1986) ("Thus, it is immaterial that the
taxpayer may not have filed a tax return in a given state so long as the
taxpayer's connections with the state provide a basis upon which the state might
assert its jurisdiction to assess an income tax.") (citing Goldberg v.
State Tax Commission, 618 S.W.2d 635, 642 (Mo. 1981) and Indiana Dept. of State
Revenue v. Continental Steel Corp., 399 N.E.2d 754, 758 (Ind. App. 1980)).
FN13. The Commissioner had charged that the conducting of product training
seminars also exceeded the protection of Pub. L. 86-272. However, the Board
found that Alcoa had ceased those activities prior to the tax years at issue.
Therefore, the Board did not find whether that activity was entirely ancillary
to solicitation of sales. See Id. at 405-09.
FN14. These jurisdictions were: Alaska, Arizona, Arkansas, Colorado, Florida,
Hawaii, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon, South Dakota, Utah,
Washington, and Wyoming. See supra note 10 for specific zone office assignments
of these jurisdictions.
FN15. The ownership interest allegedly arose out of interests the partners had
in partnerships that made mortgage loans which were secured primarily by real
estate located in the Commonwealth.