The Oregon Tax Court, Regular Division, held that P.L. 86-272 did not preclude Oregon from imposing its excise (income) tax on an out-of-state manufacturer of cigarettes and other tobacco products based on two activities. First, the court held that the manufacturer’s mandate that the in-state wholesalers accept product returns was not a protected activity. The manufacturer contractually required in-state wholesalers of its products to accept returns of all of the products.  If the products were unsalable, the manufacturer would provide the wholesaler with a credit. Rejecting a common law “agency” analysis, the court found that these activities were performed, under the language of P.L 86-272, “on behalf of” the manufacturer. The court therefore treated the activities as if the manufacturer had performed them itself. As the court explained, “The absence of a right to control might negate an agency relationship, but it does not negate the possibility of action on behalf of another.” Second, the court held that the manufacturer’s “Pre-Book Order” process was not a protected activity. The manufacturer’s employees solicited sales for in-state wholesalers and used the “Pre-Book Order” process to help ensure the retailers completed the sales. Specifically, the court found that “addressing Retailers’ failure to follow through” with orders by implementing the process was something the manufacturer had reason to do apart from soliciting orders and was thus unprotected.

Based on the court’s broad reading of the phrase “on behalf of,” and narrow reading of “solicitation,” taxpayers relying on P.L. 86-272 for Oregon purposes should evaluate their facts in light of the Santa Fe decision.

Santa Fe Natural Tobacco Co. v. Dep’t of Revenue, TC 5372 (Or. Tax Court, Rev. Div., Aug. 23, 2022).