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Massachusetts and Virginia Courts Strike down Nexus Regulations as Unconstitutional

Reprinted with permission from Interstate Tax Insights, Vol. 2 no. 1 1998


Within the last year, the high courts of two states have found unconstitutional department regulations that required delivery of goods by common carrier as a prerequisite to the protection from net income tax of Public Law 86-272.(1) Neither the Massachusetts Supreme Judicial Court nor the Virginia Supreme Court would be persuaded that Congress had meant to restrict this protection to situations in which title passed from shipper to customer from a point outside the state.(2) Both decisions are final, as the Virginia Department of Taxation did not appeal, and the U.S. Supreme Court denied certiorari in the Massachusetts case on May 26, 1998.(3)

The Plaintiff

The plaintiff in both cases is a national trade association consisting of corporations that operate their own truck fleets to deliver their products. Some of the members owned their own trucks, while others leased them from subsidiaries or from another carrier. Although the disputed regulations conceded that foreign corporations did not have income tax nexus if their sole activity in the state was the mere solicitation of orders, the Massachusetts version only granted this protection if such orders were filled through shipment or delivery by common or contract carrier from a point outside the state,(4) while the Virginia regulation simply required delivery by common carrier.(5) In the end, there was really no distinction between the two, as the parties in the Massachusetts case stipulated that common and contract carriers were the same -- that is, for-hire transportation in which the shipper and the carrier are different entities.


The Massachusetts Regulation promulgated by the Commissioner on January 1, 1990, underscored its message by providing an example in which a foreign corporation delivered furniture to Massachusetts customers on its own trucks. The Regulation characterized the delivery trucks as "corporate property that the company owns or uses in Massachusetts in a corporate capacity....(6) The furniture seller was not protected by Public law 86-272 in the example because "delivery of goods does not constitute 'solicitation' of orders."

Regulation Struck Down

In rejecting this interpretation of 86-272, the Massachusetts Supreme Judicial Court noted that the Commissioner was, in effect, reading the language to require that orders be filled not only by delivery from a point outside the state, but to a point outside the state in order to have the protection of that law. The court found that the statute contained no such double requirement; only the goods needed to originate outside the state, not the transfer of goods to the buyer.(7)

Other States

As support for its conclusion, the court cited other states, including Virginia, that had reacted similarly to such restrictions on the reach of Public Law 86-272. Tax authorities in New Jersey and New York also had issued opinions that "private carriage" was a protected activity under 86-272.(8) On the other hand, Florida had issued a Technical Assistance Advisement in 1995 making delivery in company trucks a taxable activity.(9)

Tenth Amendment

The Commissioner next argued that, even if the activities of plaintiff's members were protected by 86-272, the law itself should be found in violation of the Tenth Amendment of the U.S. Constitution, which reserves to each state the sovereign power to tax interstate commerce conducted within its borders. The court rejected this argument as well, finding that Congress has the power to prohibit states from imposing taxes that interfere with interstate commerce. When Congress acts within an enumerated power, such as that granted by the Commerce Clause, the Tenth Amendment is not even implicated.(10) Furthermore, the limitation set by 86-272 was a "permissibly small preclusion of State taxing power to protect interstate commerce."


In striking down the Virginia regulation, the Virginia Supreme Court limited itself to an analysis of the "plain and clear language" of 86-272. According to the court, 86-272 extended immunity to a particular income-generating transaction, consisting of soliciting and approving orders, then shipping or delivering the goods ordered:

"To limit the tax immunity granted by §381 to the activity of solicitation only, as the Department suggests, renders the protection intended by that section meaningless. Potentially taxable income is not generated within the taxing state until there has been a successful 'shipment or delivery' of goods. Exempting merely 'solicitation' is no exemption at all."

Delivery is Protected

A 1964 Congressional report made it clear that, while the meaning of "delivery" could be disputed, the act of delivering goods into a state did not itself deprive the seller of statutory immunity.(11) Thus, the only question was whether Congress had identified any manner of delivery necessary to qualify for immunity under Public Law 86-272. And the answer was that it had not. Public Law 86-272 did not specify common, contract, private carrier, or any other particular mode of delivery, for that matter. Thus, the court concluded that, in the absence of such qualifications, the Department could not "add conditions to, or otherwise limit, the protection offered by §382."(12)


When the Massachusetts Commissioner applied for certiorari to the U.S. Supreme Court on the basis that Public Law 86-272 was unconstitutional, it seemed unlikely that it would turn out to be a serious challenge. That having become true, the next likelihood is that both Massachusetts and Virginia will look harder to find other indicia of nexus from foreign corporations shipping goods within their borders.

Kenneth E. Werner is a Partner with the law firm of Day, Berry & Howard LLP in Charleston, South Carolina. He received his B.A. from Amherst College and J.D. from Yale Law School.

1. 15 U.S.C. §381 (hereinafter referred to as §381" or "86-272").

2. National Private Truck Council, Inc. v. Commissioner of Revenue, 426 Mass. 324, 688 N.E.2d 936 (1997); Virginia Dep't of Taxation v. National private Truck Council, Inc., 253 Va. 74 (1997).

3. Docket No. 97-1570.

4. 830 Code Mass. Regs. §63.39.1(5)(a)(1993).

5. Va. Reg. §630-401(G)(1985).

6. 830 Code Mass., regs. §63.39.1(10), example 8.

7. National Private Truck Council v. Massachusetts, citing 1 J. & W. Hellerstein, State Taxation, at 6-32 (2nd Ed. 1993).

8. New Jersey Sate Tax News (Spring 1996), at p. 4; New York Advisory Opinion, TSB-A-84(11)C (September 14, 1984).

9. Florida Technical Assistance Advisement, No. 95(c)1-004 (March 17, 1995).

10. National Private Truck Council v. Massachusetts, citing New York v. United States, 505 U.S. 144, 156 (1992).

11. H.R. Rep. No. 88-1480 (1964), at p. 146.

12. Virginia v. National Private Truck Council, citing Comm'r of Revenue v. Kelly-Springfield Co., 643 N.E.2d 458, 461 (Mass. 1994), in which the Massachusetts Supreme Judicial Court invalidated a law imposing income tax nexus based merely on qualifying to do business in the state.

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