Blue Buffalo v. Comptroller

Blue Buffalo Company, Ltd. v. Comptroller of the Treasury, No. 495, September Term, 2018, Opinion by Adkins, J. CORPORATE TAXATION – IMMUNITY – SOLICITATION OF ORDERS: Because the systematic gathering of competitive information exceeded the protection granted to the solicitation of orders, and was not de minimus, the corporation’s in-state activities were not immune from taxation under 15 U.S.C. § 381 . The circuit court correctly upheld the tax court’s order. Circuit Court for Baltimore City Case No.: 24-C-17-004798 REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 495 September Term, 2018 ______________________________________ BLUE BUFFALO COMPANY, LTD. v. COMPTROLLER OF THE TREASURY ______________________________________ Kehoe, Leahy, Adkins, Sally D. (Senior Judge, Specially Assigned), JJ. ______________________________________ Opinion by Adkins, Sally D., J. ______________________________________ Filed: December 20, 2019 Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. 2019-12-20 11:19-05:00 Suzanne C. Johnson, Clerk Federal law provides immunity from state taxation to interstate corporations whose sole business in the taxing state is the solicitation of orders. 15 U.S.C. § 381 (a).

When the State asserts its rights to tax an interstate corporation that sells its goods within our borders, we look to the Supreme Court’s decision in Wisconsin Dep’t. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 223 (1992) for instruction as to interpreting the statute. At issue here is whether a dog food manufacturer exceeded the scope of the statutory protection when its employees performed various activities in Maryland relating to its product. Upon review, we hold that important aspects of the appellant’s activities went beyond the solicitation of orders. We therefore affirm the decision of the Circuit Court for Baltimore City.

FACTUAL OVERVIEW AND PROCEDURAL POSTURE Appellant Blue Buffalo Co., Ltd., is a Delaware corporation that is commercially domiciled in the state of Connecticut. Blue Buffalo is in the business of formulating and selling premium pet food. During 2011 and 2012 (the “Tax Years”), these products were produced by independent manufacturers located outside Maryland, shipped into the state by common carrier, and sold through national chains and local independent retailers. Blue Buffalo did not maintain any corporate office, warehouse, storeroom, or distribution facilities inside the state.

Although most of Blue Buffalo’s business was conducted outside of Maryland, the corporation maintained several employees inside the state. During the Tax Years, those employees were: one Distributor Sales Manager, one Account Manager, two Regional Demo Managers, and several dozen “Pet Detectives.” The parties dispute the nature, scope, and significance of these individuals’ activities during the Tax Years. Blue Buffalo’s management staff was responsible for building the company’s relationships with retailers and taking advantage of market opportunities. The Distribution Sales Manager regularly met with the managers of local independent retail stores to arrange bulk orders of Blue Buffalo products.

Likewise, the Account Manager met with representatives of national chains that carried Blue Buffalo products—such as Pet Smart, Petco, and Tractor Supply. From time to time, both managers served as a face for Blue Buffalo in the broader community. The Distribution Sales Manager periodically attended pet-related community events, such as adoption fairs and pet walks. The Account Manager organized events in retail stores to demonstrate the advantages of Blue Buffalo’s products to ultimate consumers.

Each Regional Demo Manager was chiefly responsible for recruiting, training, and managing Pet Detectives in their assigned geographic area. The Pet Detectives were on- the-ground sales representatives, stationed at retail locations where Blue Buffalo products were sold. Their primary duty was to interact with customers and encourage them to buy Blue Buffalo products from the retailer. They also advised retailers on the proper display of Blue Buffalo products and encouraged retailers to place orders when inventory was running low.

The Pet Detectives would provide their Regional Demo Manager with regular reports on detailing sales, pet visits, and hours worked at each store. These reports occasionally included comments on customer interactions, product suggestions, the activities of competitors, and issues encountered on the job. -2- Blue Buffalo paid Maryland’s corporate income tax in 2011 and 2012 for a total amount of $706,966 based on the activities of its Maryland employees. It later filed amended returns for the Tax Years to request a full refund, on the grounds that its staff were limited to the solicitation of orders, an activity protected from taxation under 15 U.S.C. §§ 381-384 (“Public Law 86-272”). After a hearing, the Comptroller determined that Blue Buffalo had not met its burden to show that it qualified for protection under 15 U.S.C. § 381 for the Tax Years.

Blue Buffalo appealed to the Maryland Tax Court, characterizing its employees’ activities as missionary sales protected by 15 U.S.C. § 381 (a)(2). The Tax Court found that several of Blue Buffalo’s activities served an independent business purpose, and therefore upheld the Comptroller’s decision. The Circuit Court for Baltimore City affirmed, and Blue Buffalo now appeals. DISCUSSION Standard of Review On appeal, we review the decision of the Tax Court, rather than the circuit court.

Comptroller of Treasury v. Johns Hopkins Univ., 186 Md. App. 169, 181 (2009). We may uphold a Tax Court decision only on the findings and reasons given by the Tax Court. NIHC, Inc. v. Comptroller of Treasury, 439 Md. 668, 683 (2014). As the Tax Court is an adjudicatory administrative agency, its final orders are examined under the same standards of review governing other agencies.

Id. at 682 . Findings of fact are reviewed for substantial evidence and entitled to deference if the record reasonably supports the agency’s conclusion. Id. at 683 . Pure questions of law are reviewed without deference.

Ramsay, Scarlett & Co., Inc. v. Comptroller of Treasury, 302 Md. 825, 834 (1985). -3- Our review of the Tax Court’s application of the law to the facts is generally narrow: “we will not substitute our judgment for the expertise of . . . the administrative agency.” Gore, 437 Md. at 503-04 (cleaned up). Commensurate with this expertise, an agency’s legal conclusions based on interpretations of the statutes and regulations it administers are afforded “great weight.” Id. at 505. This principle is limited by the “plain meaning” rule of interpretation; that is “where there is no ambiguity and the words of the statute are clear, we simply apply the statute as it reads.” Frey v. Comptroller of Treasury, 422 Md. 111, 182 (2011) (cleaned up). Likewise, an agency’s conclusion predicated on the application of case law presents “a purely legal issue uniquely within the ken of a reviewing court,” and will not receive deference.

Id. (internal citation omitted). Defining Solicitation Of Orders The Tax Court assessed Blue Buffalo’s claim under the Interstate Commerce Tax Act, Public Law 86-272, as codified in 15 U.S.C. § 381 . Section 381 prohibits states from taxing the net income of an out-of-state corporation whose only business inside the state during the taxable year was one of the following: (1) the solicitation of orders by [a] person, or his representative, in [a] 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 [a] person, or his representative, in [a] 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). -4- Congress enacted this provision to define a “‘lower limit’ for the exercise of the state taxing power” after the Supreme Court upheld state income taxes imposed on interstate corporations based on the activities of their travelling salespeople. 1 Wisconsin Dep’t. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 223 (1992); see Comptroller of Treasury v. World Book Childcraft Int’l, Inc., 67 Md. App. 424, 432 (1986) (Section 381 bars taxation unless company’s activities “meet certain minimum standards”).

Section 381(a)(1) protects the direct solicitation of orders by an out of state business. Section 381(a)(2) protects an activity referred to as missionary sales—solicitation of ultimate consumers on behalf of a third-party retailer, who will eventually place an order to replenish their inventory. Wrigley, 505 U.S. at 233–34. Although § 381 does not define “solicitation of orders,” the Supreme Court has issued one decision defining the scope of these protections.

In Wrigley, it upheld the imposition of Wisconsin’s franchise tax on the world’s largest manufacturer of chewing gum. Id. Wrigley, an international corporation based in Chicago, did not have an office or facility in Wisconsin, did not own or lease property in Wisconsin, did not process orders in Wisconsin, and was not licensed to do business in Wisconsin. Between 1973 and 1978, Wisconsin nevertheless taxed Wrigley based on the in-state income generated by its sales 1 See Northwestern States Portland Cement Co. v. State of Minnesota, 358 U.S. 450, 454 (1959) (“We conclude that net income from the interstate operations of a foreign corporation may be subjected to state taxation provided the levy is not discriminatory and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same.”); Heublein, Inc. v. South Carolina Tax Comm’n, 409 U.S. 275, 280 (1972) (observing the prevailing state of confusion regarding the nature and amount of in- state activities sufficient to impose an income tax). -5- force.

After the Wisconsin Supreme Court disallowed the tax, the Supreme Court granted the State’s petition for certiorari. Id. at 219–220. Concluding that § 381 “covers more than what is strictly essential to making requests for purchases,” the Court reasoned that the statute immunizes the entire process associated with requesting orders. Id. at 228 (emphasis in original).

Solicitation, in common parlance,2 includes both “explicit verbal requests for orders” and “speech or conduct that implicitly invites an order,” such as a salesperson’s acclamation of the advantages and virtues of his products. Id. at 223. Moreover, restricting the immunity to requests alone would defeat its purpose, as salespeople must be provided with logistical support and supplies to enable their solicitation efforts. Therefore, the Court held that 15 U.S.C. § 381 protects activities that are entirely ancillary to the solicitation process—those that serve “no independent business function apart from their connection to the soliciting of orders . . . .” Id. at 229 .

That an activity is not ancillary does not end this analysis; unprotected activities only forfeit the statutory immunity when they establish a nontrivial additional connection with the taxing State. Id. at 232 . Ultimately, most of Wrigley’s activities were ancillary to solicitation and protected. Wrigley, 505 U.S. at 234–35.

The company’s in-state recruitment, training, and evaluation of salespeople were immunized, as the solicitation of orders is the only reason to develop and maintain an in-state sales force. Id. at 235 . Furnishing and refilling display racks, 2 The Wrigley Court defined “solicitation” as “asking” for, or “enticing” to, something; alternatively, “to approach with a request or plea (as in selling or begging).” Id. at 223 . -6- providing free samples, and distributing promotional literature were likewise protected, as these activities were designed to facilitate missionary sales. Additionally, the regional manager’s periodic mediation of credit disputes between key accounts and corporate headquarters was accepted as ancillary to solicitation: “[t]he purpose of the activity . . . was to ingratiate the salesperson with the customer, thereby facilitating requests for purchases.” Id. at 235 .

Nevertheless, several of Wrigley’s activities went beyond the solicitation process. Wrigley’s sales representatives maintained a personal stock of gum in the state, occasionally renting dedicated space for storage. Every time a sales representative visited a retailer, they would inspect the retailer’s inventory for freshness, replacing and disposing of stale gum at no cost. Additionally, sales representatives used their stock to refill empty displays, and issue “agency stock checks” to bill the retailer for the cost of the gum replaced.

Taken together, these activities represented a nontrivial connection with Wisconsin sufficient to forfeit the statutory immunity. Id. at 233-34 . Evaluating Blue Buffalo’s Activities From Wrigley we distill a two-step analysis to review the decision of the Tax Court. First, we will examine each of Blue Buffalo’s activities to evaluate whether they are ancillary to the solicitation of orders—whether they serve no independent business purpose.

Second, we will evaluate whether the non-ancillary activities are de minimis— whether, taken together, they constitute only a trivial additional connection to the State of Maryland. -7- Since Wrigley, there have been only a handful of reported decisions interpreting 15 U.S.C. § 381 (a), and few of any import to our issue today. The Comptroller relies heavily on Kennametal, Inc. v. Comm’r of Revenue, 686 N.E.2d 436 (Mass. 1997) in support of taxation, and although we ultimately reject that court’s disposition, we agree with its recognition that “[t]here 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.” Id. at 441 . The activities and pursuits of salespeople exist “along a continuum” and must be evaluated “on an individual basis.” Id. The facts in Wrigley, although not dispositive, provide “examples at each end of that continuum,” and will serve as a useful starting point for our analysis.

Id. 3 3 Beyond Wrigley and Kennametal, the parties largely cite to unreported decisions of tax courts in other jurisdictions. The Comptroller provides passing mention of state appellate cases decided before Wrigley that rest on a narrower construction § 381. E.g., U.S. Tobacco Co. v. Martin, 801 S.W.2d 256 (Ark. 1990); Drackett Products Co. v. Conrad, 370 N.W.2d 723 (N.D. 1985); National Tires, Inc. v. Lindley, 426 N.E.2d 793 (Ohio App. 1980). Our independent research reveals only a handful of reported appellate cases applying Wrigley.

Most of these decisions reference Wrigley in passing, and do not provide a relevant analysis. E.g., Troester v. Starbucks Corp., 421 P.3d 1114 (Cal. 2018) (referencing Wrigley to illustrate the de minimis principle); Disney Enterprises, Inc. v. Tax Appeals Tribunal of the State, 888 N.E.2d 1029 (N.Y. 2008) (turning entirely on corporate synergy between Disney and its corporate subsidiary); Agley v. Tracy, 719 N.E.2d 951 (Ohio 1999) (applying Wrigley but turning primarily on Ohio corporate law). The decisions offering more substantive discussion of Wrigley have typically engaged in a fact- specific analysis that is of limited value to our decision. E.g., Kelly-Springfield Tire Co. v. Bajorski, 635 A.2d 771 (Conn. 1993) (in-state visits from creditors to ensure collectability of payments constitutes an independent business purpose); Commonwealth, Dept. of Tax’n v. National Private Truck Council, 480 S.E.2d 500 (Va. 1997) (company did not exceed solicitation by using its own vehicles to ship goods into the state in response to orders filled out of state). -8- The Tax Court found that several activities pursued by Blue Buffalo’s Maryland salesforce systematically exceeded the scope of 15 U.S.C. § 381 .

These activities may be generally categorized as: (1) consumer relations activities intended to build customer relationships and community goodwill; (2) product trainings designed to educate retailers; and (3) retail services including inventory management and competitive market research. Blue Buffalo maintains that the bulk of these activities are ancillary to the solicitation process, with only trivial exceptions. Consumer Relations The Tax Court found Blue Buffalo’s Distributor Sales Manager occasionally attended pet-related community events, and the Pet Detectives frequently persuaded in- store consumers to purchase Blue Buffalo products from retailers. The Comptroller further highlights that this latter activity routinely featured conversations with customers about their shared appreciation for pets.

The Tax Court determined, and the Comptroller argues, that these activities serve an independent objective of “building general goodwill in the community, ingratiating consumers, and taking advantage of market opportunities.” See Kennametal, 686 N.E.2d at 441 (“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.”). We are not persuaded by the tax court’s legal conclusion or the Comptroller’s argument as to this point. A salesperson’s ingratiation of the retail customer is a quintessential form of missionary sale and a classic solicitation technique. When such conversation occurs in a retail setting, the consumer is directly—if not explicitly—invited to purchase the -9- salesperson’s products from the wholesaler’s customer.

The corresponding increase in sales eventually results in the retailer placing additional orders with the company.4 Requiring a salesperson to refrain entirely from building consumer relationships to avoid taxation would restrain any sales activity other than direct requests for orders. Such a narrow construction contravenes the statute’s express grant of immunity to missionary sales. See Wrigley, 505 U.S. at 226 (rejects a definition of solicitation that precludes “any activity other than requesting the customer to purchase the product”). Therefore, we decline to treat consumer goodwill as an independent business purpose in this context.

The Distribution Sales Manager’s attendance at community events is another matter. Certainly, in some circumstances, the connection between a company’s consumer relations activity and the solicitation of orders might be too tenuous to sustain the claimed immunity. The simple fact that an activity is related to sales is not sufficient to invoke § 381. See id. at 229 (“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).

Moreover, the Wrigley Court rejected a standard that would immunize any and all business activities routinely accompanying the solicitation process. Id. at 227. Such a sweeping definition would render the immunity entirely subject to corporate discretion. 4 This