Amway Corp., Inc. v. Director of Revenue

Citations: 794 S.W.2d 666; 1990 WL 109513Docket: 72155

Court: Supreme Court of Missouri; September 11, 1990; Missouri; State Supreme Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The Supreme Court of Missouri reversed the Administrative Hearing Commission's (AHC) decision that had denied the Director of Revenue's assessment of income tax, interest, and penalties against Amway Corporation for the fiscal years ending August 31, 1978, 1979, and 1980. The central legal question was whether federal law (15 U.S.C. 381) or the U.S. Constitution barred Missouri from imposing an apportioned net income tax on Amway. The court noted that AHC decisions must be upheld if authorized by law and supported by substantial evidence.

Amway, a Michigan corporation selling various products through distributors, argued that fees paid by potential distributors were solely for purchasing a sales kit and a monthly publication, claiming no fees were paid to Amway to become or renew a distributorship. However, the court found that substantial evidence contradicted Amway's claim, including testimony indicating that distributors did pay fees to Amway, albeit indirectly through their sponsors. Amway also conceded that distributors were required to renew their status annually by submitting fees.

The court emphasized that the AHC's findings, which stated that new distributors paid fees and that Amway incentivized its distributors to recruit others, were supported by substantial evidence. The AHC characterized these transactions as "sales of distributorships," which the court upheld. Thus, the ruling favored the Director of Revenue, allowing the tax assessment against Amway.

Amway defines its distributors as self-employed, independent operators who buy products at wholesale prices to resell for profit. There is no employment or agency relationship between Amway and its distributors, who are prohibited from presenting themselves as Amway representatives. Distributors primarily sell to direct distributors, who purchase products in bulk for resale, while catalog items can be bought by all distributors. Distributors have discretion over pricing and sales methods, though certain practices are discouraged by the Amway Code of Ethics. They must comply with the Amway Sales and Marketing Plan, which allows them to sell products and recruit new distributors. The sale of distributorships is a direct agreement with Amway, with all proceeds going to the company.

Following a tax audit, the Multi-State Tax Commission assessed a state income tax deficiency against Amway for the fiscal years 1978-1980, arguing that Amway's activities in Missouri exceeded the thresholds set by 15 U.S.C. 381, which limits states' authority to impose income taxes based on specific business activities. Amway appealed, and the Administrative Hearing Commission found the assessment erroneous. The Director is now appealing this decision. The relevant law (15 U.S.C. 381) prohibits states from imposing a net income tax on income from interstate commerce if the business activities consist solely of soliciting orders that are processed and delivered outside the state. The Court previously interpreted this statute in a related case involving CIBA Pharmaceutical, which faced a similar tax assessment despite employing sales representatives in Missouri.

Orders were sent to CIBA's New Jersey headquarters for approval and subsequently fulfilled by shipping goods into Missouri from outside the state. CIBA provided automobiles and reimbursed expenses for Missouri sales representatives, who conducted educational meetings in St. Louis and visited healthcare professionals to distribute product samples and literature. The Court determined that CIBA's activities did not constitute intrastate commerce and did not meet the standards of 15 U.S.C. 381 for state income tax on interstate commerce. 

Amway's activities in Missouri were argued to be less than CIBA's; however, the determination of tax liability under the federal statute hinges on the quality, not quantity, of activities. CIBA's sole focus was on selling tangible pharmaceuticals, whereas Amway's distributorships are classified as nonexclusive franchises, representing intangible personal property. Amway contended that since its distributors are independent and not employees, they are not soliciting distributorship sales on behalf of Amway. However, Amway’s marketing plan allowed distributors to solicit new distributorships, making them representatives of Amway in this context. The AHC identified the sale of distributorships as a method to promote product sales, categorizing it under solicitation activities.

The sale of distributorships significantly increased Amway's product sales and generated substantial income from the renewal and sale of distributorships, independent of tangible product sales. By 1980, Missouri had over 35,000 distributors, leading to a minimum income from renewals exceeding $175,000. While the solicitation of distributorships was a continuous income source, it ultimately nullified the protection under 15 U.S.C. § 381, which applies only when Amway and its distributors solicit tangible personal property. Amway also contends that Missouri's imposition of income tax violates the Fourteenth Amendment's Due Process Clause due to insufficient connections with the state. The contested tax, imposed on Missouri taxable income, relies on specific apportionment formulas. For a state to tax a foreign corporation's income, a "substantial nexus" must exist, alongside fair apportionment and non-discrimination against interstate commerce. Amway's operations, including sales of goods and distributorships, are acknowledged as part of a unitary business, fulfilling the nexus requirements. The remaining issue is whether Missouri has provided sufficient benefits to warrant taxation, especially as Amway claims it lacks property, offices, and employees in the state.

Amway's distributors, characterized as independent businessmen, were nonetheless acting with Amway's full authority when soliciting sales in Missouri. This relationship enabled Amway to benefit from commercial activities in the state, making it subject to state income tax. The AHC incorrectly concluded that Amway's solicitation of tangible personal property exempted it from a net income tax under 15 U.S.C. 381, and the assessment does not violate the Due Process Clause of the Fourteenth Amendment. Consequently, the AHC's decision is reversed. Amway has other claims regarding tax protections that were not addressed by the AHC. While unresolved issues may require further findings, there is no need for additional evidence collection. On remand, the AHC must make necessary factual findings and legal conclusions to resolve outstanding issues and issue a decision aligned with the facts and law.