Corporate Close-Up: Intelligence Gathering by Pet Detectives and Other Employee Activities in Maryland Create Income Tax Liability for the Blue Buffalo Company


Blue Buffalo Company, a Delaware corporation headquartered and domiciled in Connecticut, failed to convince the Maryland Tax Court that its activities in Maryland were limited to the solicitation of orders for its products and de minimis ancillary activities. As a result, the court concluded that the company was subject to Maryland income tax.

Seeking a refund of more than $700,000 for taxes paid to Maryland for tax years 2011 and 2012, Blue Buffalo argued that all its business activities in the state fell under the protection of Pub. L. No. 86-272 (codified in 15 U.S.C. 381). Accordingly, the company’s position was that its activities did not amount to doing business in Maryland, and federal law protected the company from Maryland’s taxing jurisdiction.

Blue Buffalo sells premium pet products through national retail stores such as Petco and PetSmart. During 2011 and 2012, Blue Buffalo’s employees in Maryland included one Distributor Sales Manager, one Account Manager, two Regional Demo Managers, and several dozen in-store sales representatives referred to as Pet Detectives. As the Tax Court summarized, these employees all worked to facilitate sales of the company’s products by maintaining relationships with retail store managers, educating store personnel about the products, and maintaining displays of the products in the retail stores.

In particular, the Pet Detectives were primarily responsible for interacting with the actual purchasers of Blue Buffalo’s pet products, according to the court. They were assigned to various stores and pitched Blue Buffalo’s products directly to consumers. They regularly collected and reported information about competitors who were present in the stores at the same time, and took note if a competitor tried to interfere with a Pet Detective during a sales pitch. Pet Detectives also reported to management when a consumer believed a product was defective and returned it to the retailer.

Pub. L. No. 86-272 limits the power of a state to tax an out-of-state company engaged in interstate commerce. In general, the law prohibits states from imposing net income based taxes on non-domiciliary sellers of tangible personal property if their business activities in the taxing state are limited to the solicitation of orders when the orders are sent outside the state for acceptance or rejection and, if accepted, are filled by shipment or delivery from points outside the taxing state. The umbrella of protection also extends to orders solicited by an out-of-state company’s employees on behalf of a customer of the company. Accordingly, if the Pet Detectives had limited their activities to soliciting product purchases from PetSmart and Petco customers, Blue Buffalo may have enjoyed the protection of Pub. L. No. 86-272.

The Tax Court, however, found that the responsibilities of the Pet Detectives went beyond solicitation of orders. Not only did they encourage store customers to purchase Blue Buffalo’s products, but the detectives also gathered market data, obtained competitive intelligence from retail locations, and helped with quality control and inventory issues. The court also noted that the Account Manager’s activities involved more than solicitation of orders because the manager gathered competitive intelligence and provided product training to retail store personnel. By attending pet-related community events in Maryland, like pet adoptions and community pet walks, the Distributor Sales Manager developed goodwill in the community and took advantage of marketing opportunities. Considering all these activities together, the Tax Court concluded Blue Buffalo had the equivalent of a sales force operating in Maryland, not just employees soliciting out-of-state sales. Accordingly, the court concluded Blue Buffalo’s business activities exceeded the scope of activities protected by Pub. L. No. 86-272 and denied the refund requests.

The Multistate Tax Commission (MTC) has issued model guidance on a state’s application of Pub. L. No. 86-272. In the initial guidelines issued in 1986, the commission limited the protection of Pub. L. No 86-272 to the solicitation of sales of tangible personal property. Following the U.S. Supreme Court’s 1992 decision in Wisconsin Dept. of Rev. v. Wrigley, the MTC issued the Phase I statement, extending immunity to activities involving recruiting and training of sales personnel, and mediating customer complaints in order to facilitate requests for orders. In 1994, the MTC released the Phase II statement, further extending federal law protection to shipping and coordinating deliveries, maintaining an in-home office or automobile for sales solicitation, and creating free displays for customer demonstration. To incorporate decisions by the high courts in Virginia and Massachusetts, the MTC amended the guidelines again in 2001 to remove the use of company-owned vehicles to deliver inventory from the list of unprotected activities.

Maryland does not appear to be a signatory to any of the three amendments to the MTC model guidance. Even if the state had adopted the Phase I statement, the Tax Court still may have concluded that Blue Buffalo’s intelligence gathering and marketing efforts exceeded the scope of activities protected by Pub. L. No. 86-272.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Would the Blue Buffalo case have been decided differently in your state?

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