The Wayfair decision recently changed whether a state could impose sales tax on an out-of-state company that has no physical presence in the state. Many wineries and wine retailers (those that are eligible to ship legally into a state) may need to change their behavior. Depending on whether they meet certain sales thresholds or enter into a certain amount of transactions (the number for these categories varies by state), they will be required to collect and remit tax.

Now that physical presence does not matter for sales tax purposes, wineries and retailers may be tempted to enter a state by sending in employees to establish a market or hire representatives to perform these activities on their behalf.

Establishing a market is a positive thing, however, efforts in establishing the market may lead to unforeseen tax consequences that may alter a company’s business plan. Specifically, a company should be aware that the activities of its representatives or contractual representatives may unknowingly trigger another tax obligation, an income tax obligation.



The legal landscape has changed and may change even further based on the Tennessee Wine case (which could allow retailers to ship wine across state lines).

A winery or retailer could be tempted to enhance its market share by having employees or agents enter a state. However, any overreach in activity could cause a winery or retailer to become unknowingly subject to state income tax.

To guard against these consequences, a winery or retailer should be aware exactly what its employee’s or agent’s activities are in a given state.


The taxing standard

Public Law 86-272 (P.L. 86-272) governs the limits for a state’s authority to impose income tax on business entities that sell tangible personal property in the state. As wine is obviously tangible personal property and not a service, this is the standard we utilize for determining the limits on a state’s power to impose corporate income tax on a business entity.

Under P.L. 86-272 a business entity that’s sole activity is limited to soliciting sales of tangible personal property in a state, is immune from state corporate income tax. Further, any activity that is ancillary to the solicitation of sales is also immune from state corporate income taxation. P.L. 86-272 will narrowly expand the scope of immunity by allowing activity beyond ancillary activity, if the activities are de minimis.

A company should consider an activity occurring more than a couple of times as more than de minimis.


Protected and unprotected activities
Unprotected activities

P.L. 86-272 provides activities that are protected from state income tax and those that are not. Because these activities are specifically enumerated, any company wanting to actively solicit in a market should make themselves aware of these guidelines.

As merchants and manufacturers of wine, some of the activities are irrelevant to our discussion. For example, installing or performing maintenance on tangible personal property is an unprotected activity. With nothing to install or provide maintenance for, this is something that will not be included in this discussion. We will focus on the most relevant activities for these businesses.

The standards set down in P.L. 86-272 are very strict and deviating from the principles of solicitation will cause people to lose their immunity to state income taxation. Even activities that seem benign and related to the sale could cause a business to become subject to tax.

For example, if an employee or an independent contractor approves or accepts orders, this activity would cause a company to lose the protections of P.L. 86-272. Other activities that would be considered beyond solicitation would include but are not limited to:  securing deposits on sales; picking up or replacing damaged property; and investigating, handling or assisting in resolving customer complaints.

Additionally, owning leasing, or maintaining certain types of property would not be protected by P.L. 86-272. These include but are not limited: an office; warehouse; meeting place for employees; stock of goods; and a telephone answering service attributable to the company or its agent.


Protected activities

P.L. 86-272 provides a list of activities that are protected from state taxation, these are the activities that allow a business to perform in the state without being subject to tax. Protected activities included but are not limited to: soliciting of orders; passing orders, inquiries, and complaints onto the home office; coordinating shipment or delivery without payment; mediating direct customer complaints when the purposes are to ingrate the sales personnel with the customer and facilitate request for orders.

Further, P.L. 86-272 allows a business to own or maintain certain property in the state without being subject to income tax. For example, a representative can have an in-home office in the state and can maintain personal property such as a cell phone that is limited to carrying on soliciting activity in the state.


Independent Contractors

P.L. 86-272 provides protection to independent contractors for certain in-state activities that would not be afforded to a company’s employees or agents.

Problematically, P.L. 86-272 does not make this distinction in specific terms nor does it list the activities that allow the independent contractor more immunity than an employee or agent.

P.L. 86-272 does enumerate activities that an independent contractor can participate in such as; soliciting sales, making sales, and maintaining an office.

If someone is going to classified as an independent contractor, it can’t represent a single company.

Further, if a company provides specific guidelines on what activities the agent can and can not perform, it will most likely not be considered an independent contractor

Hence, to avoid confusion, a company may want to make someone an agent as opposed to an independent contractor.


States in which to proceed with caution

There are four states that impose a gross receipts tax on corporations, these states include; Nevada, Ohio, Texas, and Washington.

In these states the standard for establishing a taxable presence may be lower than an income tax state. Further, P.L. 86-272 may not apply and hence the protections of P.L. 86-272 may not apply.

So, any company entering these states would need to plan accordingly and determine what the specific taxable nexus standards the state utilizes.



Wineries and wine retailers are entering a new world based on a changing legal landscape. These entities should take advantage of the opportunity to expand their markets, while at the same time planning to run their business in a way to minimize its tax liability.

There is no reason why a company should pay more tax than necessary. With some forethought and planning, a company can minimize its tax exposure and liability, while at the same time complying with the law.

Expand on but proceed with caution!

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