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Letter Ruling

Letter Ruling Letter Ruling 96-1: Nexus Determination

Date: 05/22/1996
Referenced Sources: Massachusetts General Laws


You have requested a nexus determination pursuant to 830 CMR 63.39.1(9). This determination is being published as a letter ruling as permitted by that section. We must determine whether the activities of the taxpayer constitute "doing business" for purposes of G.L. c. 63, § 39, and, if so, whether they fall within the scope of "solicitation" within the meaning of P.L. 86‑272.

Table of Contents


*************** (the "Company") is incorporated in California, with headquarters in *************** California. The Company, which is qualified to do business in Massachusetts, sells water purification units, filters and accessories. Retail sales are made through "Independent Distributors" ("Distributors"). The Company states that orders are accepted or rejected in California and that shipments are made from California via common carrier. Customer relations "are handled in California" and "support for our sales and marketing efforts is provided by the staff and personnel at the corporate headquarters." Massachusetts is the site of "in‑state recruiting, training, evaluation of sales, [and] hotels and homes [in Massachusetts are used] for sales meetings."

To become a Distributor, an individual must "register" by paying a "fee" and signing the Independent Distributor Agreement, which states, "It is acknowledged that Distributor will not be an employee, agent, or legal representative of [the Company]. Distributor serves as an independent contractor and as such is responsible for [his or her] own business including the cost of selling." After paying the fee and signing the Agreement, the Distributor receives the "Distributor Manual" and a "Business Kit" of advertising materials. Company material states that becoming a Distributor requires "virtually no investment....[The Company provides a] liberal inventory plan, continuous company help in reaching your goals...[a] Dynamic Compensation Plan...[and] Permanent Qualification is offered to help stabilize and motivate organization building....[The Company offers] technical and marketing support that is second to none."

Distributors are "encouraged" to advertise the Company's products. Advertising materials "must include only [the Company's] official claims, logos, trademarks, etc. [Distributors] must submit proposed advertising and promotional materials to the [Company's] sales Department for prior approval." Distributors may also purchase business cards and stationery imprinted with the Company logo and their name and address (or "message" in lieu of an address); advertising materials provide a space for the Distributor's name and address, as well as the Company's logo and address. Distributors offer the Company's gift certificate savings promotions to customers, such as the "Holiday Special" discount. These promotions are advertised in the Company's magazine for Distributors.

Distributors buy "sales" materials (audio and visual tapes, books, brochures, clothing, forms) from the Company. They may also, upon the payment to the Company of a refundable deposit and the purchase of unit filters, receive up to five "loaned Demonstrator Units" with which to demonstrate the purification system to prospective customers. Demonstration units may be rented to customers; if this occurs, a replacement is shipped to the Distributor. All demonstration units "remain the property of [the Company]."

Customer orders may be mailed, faxed or called in to Company headquarters by the Distributor, who receives a commission for each sale. "Bonuses" are offered to Distributors who reach designated levels of both personal sales and sponsored sales (see "Business Opportunity" Plan, below) in the Distributor "network." The Company offers contests and prizes to Distributors, and maintains honor groups for Distributors who have reached designated goals. The Company also offers "Optional Programs" for Distributors, which include "Incentive Programs" and "Sweepstakes," and holds periodic meetings and an annual national conference for Distributors.

Customers may also rent purifications units, and unlike units that are sold and directly shipped to the purchaser, rental units may be shipped to the customer or to the Distributor. The rental order form also requires that the Distributor sign the rental agreement with the customer, and, if the sale is made in cash, the Distributor must retain the "cash receipt" the Company issues for such sales. All rental components "remain the property of [the Company]" and the rental customer must first notify the Company before relocating the rented system. Distributors also receive commissions for rental units.

Customers may pay for their purchases in installments. The Installment Payment Order Form is "approved by" the Distributor, whose signature is required on the "Buyer Credit Application" section of the form. The Distributor may accept installment payments in cash, and must retain the cash receipt issued by Company for such sales. The Company retains a security interest in products bought via installments.

Distributors or their customers may call the Company toll‑free and receive "customer service and delivery information." Distributors may also call toll‑free to receive "sales support and distributor information."

" Business Opportunity" Plan

Distributors are "encouraged to advertise and promote [the Company's]...Business Opportunity" Plan by "review[ing] the "Business Opportunity" brochure with prospective Distributors [and] connect[ing] a...Unit in their kitchen and demonstrat[ing] how crystal clear the water is." Distributors receive a commission whenever an individual the Distributor has recruited ("sponsored") to become a Distributor makes a sale. Distributors increase their earnings via this "network" system of recruitment since each time a Distributor sells a unit, his or her sponsoring Distributor is also compensated. Sponsoring Distributors may "train distributors in [their] downline" using "Video Seminars" in "group meetings, seminars or one‑to‑one."

For the purposes of coming within the protection of P.L. 86‑272, the Company maintains that its activities in Massachusetts are limited to solicitation and activities ancillary to solicitation, or that its activities in Massachusetts, although beyond solicitation, are nevertheless de minimis.


In general, a foreign corporation is subject to the tax jurisdiction of Massachusetts pursuant to G.L. c. 63, § 39, if it does business in Massachusetts, which includes selling property in the commonwealth, exercising or enforcing contract rights in the commonwealth, and any other act, power, right, privilege or immunity exercised or enjoyed in the Commonwealth by virtue of the powers and privileges acquired by the corporate form. See 830 CMR 63.39.1(4)(b). In addition, the excise may be imposed upon a corporation that owns or uses any part or all of its capital, plant or other property in the Commonwealth. Id. at (4)(d). A corporation owns or uses property in the commonwealth if the corporation owns property that is held by another in Massachusetts under a lease, consignment, or other arrangement. Id. at (4)(d)1.

However, a foreign corporation whose activities encompass any of those described in G.L. c. 63, § 39 and 830 CMR 63.39.1(4), including those listed above, is not subject to Massachusetts taxation pursuant to P.L. 86‑272 if the sole activity of the corporation in Massachusetts is the solicitation by the corporation's representatives of orders for the sale of tangible personal property, provided that the orders are sent outside Massachusetts for approval or rejection, and such orders are filled by shipment or delivery by common carrier or contract carrier from a point outside Massachusetts.

The term "solicitation" includes only actual requests for purchases and activities that are entirely ancillary to requests for purchases. An activity is ancillary only if it serves no independent business purpose apart from its connection to the soliciting of orders. 830 CMR 63.39.1(5)(e)1; Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 112 S.Ct. 2447 (1992).

The activities of employees, agents, or representatives however designated will be imputed to the foreign corporation, but activities of an independent contractor will not be imputed to the corporation. 830 CMR 63.39.1(7). To be an independent contractor the individual must: not be an employee of the foreign corporation; not be subject to the supervision or control of the foreign corporation; hold him or herself out to the public as an independent contractor in the regular course of its business; regularly act on behalf of at least one bona fide principal apart from the foreign corporation; and not approve orders or execute contracts on behalf of the foreign corporation except to the extent permitted by P.L. 86‑272. Id.


I. Independent Contractor

We must consider whether the Distributors operate as independent contractors with respect to the Company. This is a factual determination. The Company's designation that the Distributors will serve as "independent contractors" is not controlling when determining the nature of the Distributor's in‑state activities. See Scripto, Inc. v. Carson, 362 U.S. 207, 211 (1960).

Here, the Company provides "continuous, ongoing support" for Distributors, once they have paid a "registration fee" and received the Company's packet of promotional materials. The Company also offers Distributors a multi‑level reimbursement system consisting of various commissions and bonuses, as well as "Permanent Qualification [to] help stabilize and motivate organization building." The Company requires that all promotional materials used by Distributors include the Company's official claims, logos and trademarks and that all proposed advertising and promotional materials be approved by the Company before being used by the Distributor. In addition, the Company sponsors contests, clubs, sweepstakes and "optional Programs" for Distributors, awards prizes to Distributors and highlights their sales and sponsorship accomplishments in the Company magazine. The Company also provides training materials with which Distributors can train their sponsorees, and provides Distributors with Company gift certificates and similar devices to attract individuals to the Company both as customers and as potential Distributors. Distributors accept cash payments on behalf of the Company for sales; accept shipments from the Company of rental units to distribute to customers; and approve customer credit applications.

The facts and circumstances regarding the relationship between the Company and its Distributors indicate that the Distributors are representatives of the Company who act on behalf of the Company, and that they are not independent contractors under 830 CMR 63.39.1(2) since they are subject to the supervision and control of the Company. In addition, the Distributors apparently do not regularly act on behalf of at least one bona fide principal apart from the Company.1 P.L. 86‑272; 830 CMR 63.39.1(7).

II. Solicitation

Although some of the Company's activities in Massachusetts involve protected solicitation insofar as they involve the solicitation of orders for the sale of water purification units and accessories ( see 830 CMR 63.39.1(5)(c); Directive 88‑8; Letter Rulings 88‑7; 91‑2; 91‑6; 91‑8; 84‑104), other activities of the Company in Massachusetts do not involve the solicitation of orders for the sale of tangible personal property.

Public Law 86‑272 requires that for the purposes of solicitation sales orders must be filled for shipment by common carrier from a point outside Massachusetts. However, not all of the Company's orders are so filled, e.g., the Company allows customers to rent demonstration units that are owned by the Company and are located in Massachusetts. In addition, recruitment of and sponsoring individuals to become Independent Distributors by company representatives in Massachusetts does not involve solicitation of orders for sales of tangible personal property. The following activities when performed in‑state by Company representatives also do not involve solicitation: investigating and approving creditworthiness, approving or accepting orders, securing deposits on sales, providing shipping information and coordinating deliveries, carrying samples for sale, exchange or distribution in any manner for consideration or other value, and the representative's retention of cash payments and receiving shipments of property from the Company. See 830 CMR 63.39.1(5)(d); Letter Rulings 81‑41; 81‑21; 81‑9; 91‑9.

Such activities are not protected by P.L. 86‑272 unless they are de minimis within the meaning of Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 112 S.Ct. 2447 (1992): ("[W]hether in‑state activity other than 'solicitation of orders' is sufficiently de minimis to avoid loss of the tax immunity conferred

by § 381 depends upon whether that activity establishes a nontrivial additional connection with the taxing State." Id. at 2458.) 830 CMR 63.39.1(5)(d). The effect of such activities is "cumulative," that is, when determining if a taxpayer's unprotected activities are de minimis, all such activities must be considered as a whole. Id. at (5)(e)3; see also Wrigley.2

The facts and circumstances regarding the unprotected in‑state activities of the Company indicate that the totality of such activity, performed on a continuing basis as a matter of Company practice, constitutes a "nontrivial connection" with Massachusetts and is not de minimis.


The Company's activities in Massachusetts exceed the scope of solicitation and are not de minimis. The Company is subject to the corporate excise, G.L. c. 63, § 39, and may not claim immunity under P.L. 86‑272.

Very truly yours,

/s/Mitchell Adams

Mitchell Adams
Commissioner of Revenue


LR 96‑1

  1. According to the Company, some in‑state distributors are associated with other businesses, but this is not enough to meet the independent contractor requirements of P.L. 86‑272.
  2. "We need not decide whether any of the nonimmune activities was de minimis in isolation; taken together, they clearly are not. [Taxpayer's in‑state] sales representatives exchanged [Taxpayer's stale product for fresh product], as a matter of regular company policy, on a continuing basis, and [Taxpayer] maintained a stock of [its product] worth several thousand dollars in the state for this purpose....Although the relative magnitude of these activities was not large compared to [Taxpayer's other in‑state activities]...they constitute a nontrivial additional connection with the State." 112 S.Ct. at 2460.
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