United States

Oregon: Third-Party Performing Warranty Work Causes Loss of Public Law 86-272 Protection

Apr 10, 2017
From KPMG TaxWatch

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The Oregon Tax Court, Magistrate Division, recently addressed whether a third party corporation was acting on behalf of an out-of-state taxpayer claiming P.L. 86-272 protection. The taxpayer, a Georgia-based wholesale tire distributor, sold tires to a single customer, Les Schwab Tire Centers, in Oregon. The taxpayer provided a warranty on its tires and instructed Oregon purchasers to go to Les Schwab if there was an issue with a tire. Les Schwab determined whether the issue was the result of a manufacturing defect or an installation error covered by its own warranty. If the error was related to a manufacturing defect, Les Schwab completed the warranty form and submitted it to the taxpayer. The taxpayer subsequently issued Les Schwab a payment or credit for the defective tires. The taxpayer argued that Les Schwab, an independent contractor, was not acting on its behalf and therefore Les Schwab’s activities did not cause the taxpayer to lose P.L. 86-272 protection.

After walking through various cases interpreting the scope of P.L. 86-272, the court observed that it appeared to be dealing with a case of first impression. Prior cases holding that an out-of-state corporation’s activities exceeded P.L. 86-272 protections generally involved the out-of-state corporation’s own employees or subsidiary companies. In contrast, this case involved imputing the activities of a separate and distinct corporation to an out-of-state taxpayer. Nevertheless, a finding that Les Schwab was an unrelated corporation and an independent contractor did not end the inquiry. Rather, the issue was whether Les Schwab’s activities exceeded solicitation and were made “on behalf” of the taxpayer. The taxpayer appeared to argue that Les Schwab was not performing warranty work on behalf of the taxpayer because it was not compensated directly for the warranty work. The court rejected this argument and held that when Les Schwab completed the warranty form for a tire purchaser and submitted it to the taxpayer to be paid or given a credit for defective tires that activity went beyond solicitation. The fact that Les Schwab was not paid directly for the warranty work did not change the outcome. The taxpayer transmitted payment or credit for the defective tires to Les Schwab, thus the court concluded that the warranty work was performed on behalf of the taxpayer and resulted in the loss of P.L. 86-272 protection. Please contact Rob Passmore at 503-820-6844 with questions on Cheng Shin Rubber USA, Inc. v. Oregon Dept. of Rev.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.