Legal ruling 372

Franchise Tax Board - Legal Division

January 15, 1974

Applicability of Public Law 86-272 to Certain Nonresident Salesmen


Certain salesmen, who are not California residents, solicit orders from California residents, while present within California, under the following conditions:

  1. The orders are for tangible property.
  2. The acceptance or rejection of the orders is done at a place outside of California.
  3. Shipment is made from a point outside of California.


Are such salesmen exempted from California income tax withholding by operation of Public Law 86-272, 15 USC § 381?




Public Law 86-272 provides in relevant part:

(a) "No state . . . shall have power to impose . . . a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during the taxable year are . . .

(1) the solicitation of orders by such person, or his representative, in such State 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. . ."

The purpose of Public Law 86-272 is explained in Senate Report No. 658, 1959 U.S. Code, Cong. & Admin. News 2548 at p. 2549 as follows:

Need for the Legislation

Hearings were held by your committee on July 21, and 22, 1959, in connection with S. 2213, S. 2281 and Senate Joint Resolution 113, all of which would prescribe limitations on the power of the States to impose taxes on income derived from the conduct of interstate commerce.  In addition, Senate Joint Resolution 113 would provide for the establishment of a commission on taxation of interstate commerce to bring about greater uniformity of State taxation of income derived from interstate commerce.  These bills and the joint resolution deal with the problem arising by reason of a recent decision of the U.S. Supreme Court in Northwestern States Portland Cement Co. v. State of Minnesota and T. V. Williams, Commissioner v. Stockham Valves & Fittings, Inc. (79 S.Ct. 357, 358 U.S. 450, 3 L.Ed.2d 421 (1959)).

Your committee finds that the broad language used by the Supreme Court in its decision in these cases --

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.  (358 U.S. 450 at 452).

has created considerable concern and uncertainty.[Emphasis in original.]

Persons engaged in interstate commerce are in doubt as to the amount of local activities within a State that will be regarded as forming a sufficient "nexus," that is, connection, with the State to support the imposition of a tax on net income from interstate operations and "property apportioned" to the State . . .

It is clear from the foregoing language that the statute was intended to apply only to income derived from interstate commerce and that it was intended to limit the state's power to tax income of interstate businesses.

The intended operation of the statute is further explained in Senate Report No. 658 at p. 2553 as follows:

Under the provisions of section 1 of the bill no net income tax on income derived within the State by any person from interstate commerce may be imposed by a State of political subdivision thereof for any taxable year ending after the date of enactment of the act if the only business activities by or on behalf of such person are those described above in section 1(a) and (c).

Consequently, if the only business presence within the State by a person engaged in interstate commerce is the solicitation by his salesmen of orders for sales of tangible personal property and the orders are sent to an office out of the State for approval or rejection, and if the order is approved, it is filled by shipment or delivery from a stock of goods, warehouse, plant, or factory located out of the State, the net income tax of the State or political subdivision thereof on income derived within the State by such person from interstate commerce may not be imposed.  [Emphasis supplied.]

The above language make it clear that the law refers to the income of the person who is engaged in interstate commerce, as distinguished from the income of his salesman.  The salesman does not derive his income from interstate commerce in the sense intended by Congress.  He derives his income from wages or salary paid to him as an employee.  He transacts business in interstate commerce, not on his own behalf, but only as an agent of his employer.

Consequently, the limitations of Public Law 86‑272 do not apply to him.