State Tax Return - Nexus Update: 2003/2004 cont´d

i. The out-of-state vendor and the in-state business use an "identical or substantially similar name, tradename, or goodwill, to develop, promote or maintain sales;"

ii. The in-state business and the out-ofstate vendor pay for each others’ services in whole or in part contingent upon the value of sales;

iii. The in-state business and the out-ofstate vendor share a common business plan or substantially coordinate their business plan; or

iv. The in-state business provides services to the out-of-state company (or services that inure to the benefit of the out-ofstate business), so long as these services are related to "developing, promoting, or maintaining the in-state market."

i. On August 4, 2003, the Alabama Department of Revenue issued a ruling addressing affiliate nexus. The ruling considered whether the in-state presence of a company with retail store operations necessarily creates "substantial nexus" for a separate out-of-state mail order affiliate ("Catalog L.P.").

ii. The Department concluded that, standing alone, the out-of-state mail order affiliate lacked substantial nexus with Alabama. Although the Department acknowledged the physical presence rule stated in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), in the context of separate corporate activities, it noted that separate corporate status may not be enough to trigger Quill’s protections. This ruling reflects a new trend toward heightened scrutiny in light of Section 40-2A-50 of the Alabama Code discussed above.

iii. According to the Department, "where two entities with a common parent do not have any integrated operations or management, are each organized and operated as separate and distinct corporate entities and neither being the alter ego, nominee or agent of the other for any purpose, they will be analyzed separately for nexus purposes." However, merely having and operating separate legal entities would not prevent Catalog L.P. from having nexus. This ruling signals a retreat from strict "separate entity" analysis.

iv. The Department also showed a new willingness to look to other factors in the nexus analysis. According to the Department, "if the two entities are conducting essentially the same business operation, offering essentially the same items for sale, using the same marketing or using the same trade name, the Commissioner will consider the actual facts presented by the situation and will make a determination of whether or not the two or more entities will be treated as one taxpayer for proper administration of Alabama’s tax laws." 

i. Dell Catalog Sales L.P. ("DCSLP"), a Texas limited partnership, was a vendor of computers that conducted a national mail order business, operating exclusively through interstate commerce. Customers placed orders by contacting DCSLP in Texas through the internet or by telephone, facsimile, mail or e-mail. It had no employees in Connecticut, nor did it solicit sales by employees, independent contractors, agents, or other representatives in Connecticut.

ii. The Commissioner asserted that DCSLP’s relationship with an independent company, BancTec USA ("BancTec"), that performed service in Connecticut pursuant to BancTec’s service contracts with its customers, established nexus with Connecticut for DCSLP.

iii. The Court disagreed. The parties stipulated that DCSLP acted as BancTec’s broker in marketing the service contracts, that BancTec is an independent company service provider throughout the United States, and that the on-site service was performed solely by BancTec and its subcontractors. Those stipulations negated the Commissioner’s claim that BancTec was an agent of DCSLP. Moreover, DCSLP had no right to direct or control Banctec’s work.

iv. The use tax assessment against DCSLP was reversed in its entirety. The Commissioner of Revenue Services did not appeal.

i. Effective July 1, 2004, a closely related company is required to collect and remit sales and use tax on its sales to Indiana. 

ii. A company is closely related if: (1) both use an identical or substantially similar name, trademark or goodwill to develop, promote or maintain sales; (2) pay for each other’s services in whole or in part contingent on the volume of sales; or (3) share a common business plan and both are corporations that own directly indirectly or constructively 50% of the corporation’s outstanding stock, or both are limited liability companies partnerships, limited liability partnerships and own directly, indirectly, beneficially or constructively at least 50% of the stock of both. Indiana Code § 6-2.5-8- 10(f).

i. Iowa Code defines the term "retailer maintaining a place of business in this state" to include any retailer having or maintaining within the state, directly or by a subsidiary: 

(a) An office, distribution house, sales house, warehouse, or other place of business, regardless of whether the place of business is located in the state permanently or temporarily; or 

(b) Any representative operating within the state under the authority of the retailer or its subsidiary, permanently or temporarily.

i. Effective July 1, 2003, Kansas expanded affiliate nexus. Nexus is triggered by a distribution house, sales house, warehouse or similar place of business by direct ownership or indirect ownership through a parent, subsidiary or affiliate. 

ii. A retailer shall be presumed to be doing business in the state if both of the following conditions exist:

(a) The retailer holds a substantial ownership interest in, or is owned in a whole substantial part by, a retailer maintaining a sales location in Kansas; and

(b) The retailer sells the same or a substantially similar line of products as the related Kansas retailer does so under the same or a substantially similar business name, or the Kansas facilities or Kansas employees of the related Kansas retailer are used to advertise, promote or facilitate sales by the retailer to consumers.

i. Dell Catalog Sales L.P. ("DCSLP"), a Texas limited partnership, was a vendor of computers that conducted a national mail order business, operating exclusively through interstate commerce. Customers placed orders by contacting DCSLP in Texas through the internet or by telephone, facsimile, mail or email. It had no employees in Louisiana, nor did it solicit sales by employees, independent contractors, agents, or other representatives in Louisiana.

ii. The Court granted summary judgment to DCSLP. Finding that BancTec did not service computers in Louisiana on behalf of DCSLP, the Court held that DCSLP did not have substantial nexus with Louisiana. BancTec was not performing service for DCSLP, but rather its obligation was to the customers who purchased the service contract. In addition, DCSLP did not control the operations of BancTec.

iii. The Department of Revenue has appealed the case to the Court of Appeals, First Circuit.

i. Effective May 19, 2002, the definition of "retailer maintaining a place of business in the state" includes an affiliate of a retailer. Affiliates shall collect sales and use tax and remit them to the Minnesota commissioner. A entity is an affiliate of a Minnesota business if the related entity promotes the affiliate’s business or provides services to the out-of-state entity, and the retailer and entity are related parties.

ii. An in-state entity creates nexus for an out-of-state seller if the two entities are related and the in-state entity advertises, promotes or facilitates the establishment or maintenance of a market in Minnesota for the out-of-state seller. Also, nexus is triggered if the in-state entity provides services to the out-of-state seller, such as accepting returns from the seller’s customers, and resolving complaints from the seller’s customers.

i. An Ohio LLC will be doing business in Pennsylvania. The LLC is owned 50% by an Ohio S corporation and 50% by an Ohio C corporation.

ii. Issue: does ownership in the LLC by the Ohio S and the Ohio C corporations create nexus.

iii. Dept. of Revenue found that ownership in the LLC creates nexus with Pennsylvania for purposes of corporate income tax. However, ownership in the LLC would not create nexus with Pennsylvania for the purposes of capital stock franchise tax provided that Ohio S corporation and Ohio C corporation are not doing business in Pennsylvania independent of the LLC.

i. Effective July 1, 2004, a related seller is required to collect and remit sales tax if its in-state affiliate engages in advertising, marketing or sales activities on behalf of the out-of-state vendor or if the in-state affiliate accepts returns of items sold by the out-of-state vendor.

ii. "Related seller" means a seller not required to collect and remit sales and use tax that is (1) related to a seller that is required to pay or collect and remit sales and use tax as part of an affiliated group or because of common ownership or (2) a limited liability company owned by the parent corporation of an affiliated group. Utah Code Ann. § 59-12-107(f)(i)(C).

iii. "Affiliated group" "means one or more chains of corporations that are connected through stock ownership with a common parent corporation that meet the following requirements: (i) at least 80% of the stock of each of the corporations in the group, excluding the common parent corporation, is owned by one or more of the other corporations in the group; and (ii) the common parent directly owns at least 80% of the stock of at least one of the corporations in the group." Utah Code Ann. § 59-7-101(2). "Affiliated group" includes a corporation that is qualified to do business in Utah but not otherwise doing business there. Utah Code Ann. § 59-12-107(f)(i)(A).

i. Taxpayer operates a call center located in Texas. Kansas customers telephone the call center in Texas and request electrical repair work to be performed in Kansas. Taxpayer contacts an electrical subcontractor located in Kansas to perform the electrical repair work. Taxpayer has no physical location, employees, inventory or fixed assets in Kansas.

ii. The Kansas Department of Revenue found that provision of call center services did not establish nexus with Kansas.

(a) Taxpayer was in the business of collection services. Taxpayer obtained a certificate of authority to do business in Texas and named a Texas company as its registered agent. The certificate of authority was surrendered after Dec. 2000 and a certificate of termination was issued in March, 2001. Taxpayer contracted with Texas companies to provide collection services, loss recovery services and loss prevention services and had six contract salespersons in Texas soliciting business on its behalf.

(b) The Comptroller found that the holding of a certificate of authority and/or sales tax permit is insufficient to establish substantial nexus; however, Taxpayer’s six contract salespersons established substantial nexus.

i. Petitioner was a food service distributor. Petitioner did not own, rent, lease or maintain any real property in New York. Petitioner had employees, who were not based in New York but served New York customers and solicited orders which were taken back to the Pennsylvania office for approval. Goods were shipped one time per week to New York from Pennsylvania via company owned trucks. Delivery personnel normally did not collect amounts due, but would sometimes do so as a convenience to the customer. Delivery personnel would also pick up damaged items for return to Pennsylvania.

ii. The Department found that the presence in New York of salespersons who solicited orders from customers in New York that were accepted in Pennsylvania and delivered once a week to New York via company owned trucks did not establish substantial nexus.

iii. However, the post-delivery activities, delivery personnel picking up damaged products and checks for the amount due, were activities exceeding the solicitation of orders as contemplated by Public Law 86-272 and would subject Petitioner to franchise tax.

i. National Presto Industries, a Wisconsin corporation, is a wholesaler of small household electrical appliances and housewares. It does not have a place of business in Pennsylvania and its only activity within Pennsylvania is the solicitation of orders.

ii. The Commonwealth Court stated that the Pennsylvania franchise tax is a tax on the right or privilege to conduct business in Pennsylvania, (not a tax on income) and thus, no more than an "active presence" of a corporation was required to impose the tax. National Presto’s solicitation of sales in Pennsylvania established substantial nexus under the Commerce Clause for purposes of Pennsylvania’s franchise tax.

a. Acco, a Delaware corporation with its principal place of business in Illinois, markets office supplies and employed two Michigan residents as sales representatives to call on customers in Michigan and other states. Orders were sent to Acco’s home office in Illinois for acceptance and fulfillment.

b. The Court of Claims found that the two part-time sales people did not establish substantial nexus under the Commerce Clause standard.

c. The Court of Appeals reversed the Court of Claims’ decision, relying on Orvis Co., Inc. v. Tax Appeals Tribunal of the State of New York, 654 N.W.2d 954 (1995). It held that the admitted presence of two Acco employees in Michigan who regularly called on customers and solicited orders in Michigan on its behalf, was sufficient to establish nexus for the purposes of the Commerce Clause.

a. During the period from January 1, 1989 to March 31, 2000, Hobbs contracted with Ziegenbein, located in Wisconsin, to promote the sale of Hobbs’ products in several states, including Michigan. Ziegenbein, in turn, employed Mr. Piper who lived in Michigan to promote Hobbs’ products. All orders received by Mr. Piper were accepted and approved by Hobbs in Illinois. Mr. Piper did not provide technical advice or engineering services to Hobbs’ customers.

b. Prior to 1998 (under RAB-1989-46), Hobbs did not have nexus for SBT because it had only one nonexclusive independent contractor as an in-state representative. However, in 1998 (as a result of Gillette v. Dept. of Treasury, 497 N.W. 2d 595 (1993)), the Department announced the SBT nexus standards in RAB 1998-1, which were more encompassing than the previous businessactivity- nexus standard and found nexus if an independent contractor performed activity in Michigan on behalf of Hobbs for more than 10 days.

c. The Court determined that Mr. Piper’s sales activities were insufficient to establish nexus, and that Hobbs was immune from SBT liability for tax years 1989 through 1997. Further, the court held that the Department was bound by the nexus standard issued in RAB 1989-46 for tax years 1989 through 1997. Hobbs was assessed under the new SBT nexus standards for the years 1998- 2000.

d. The Court relied on In Re D’Amico Estate, 435 Mich. 551, 460 N.W.2d 198 (1990), where the Michigan Supreme Court stated that "it has been held that an administrative agency having interpretive authority may reverse its interpretation of a statute, but that its new interpretation applies only prospectively."

a. Bantam, a publisher and seller of books, was a Delaware corporation with its principal place of business located in New York. During the audit period, Bantam did not print books in Michigan or maintain any book storage or distribution facility in the state. However, it employed two field sales representatives in Michigan to solicit orders of books from wholesalers or retailers.

b. The Tax Tribunal determined that Bantam was subject to single business tax ("SBT") and affirmed the Department of Treasury’s assessment in its entirety.

c. The Court of Appeals affirmed the Tax Tribunal’s determination. It found that Bantam’s activities satisfied the definition of "business activity" under MCL 208.3(2), which imposes a tax on persons conducting business activity in Michigan, and determined that Bantam was subject to the SBT. Under MCL 208.3(2), the definition of "business activity" includes an action conducted within this state that causes a subsequent transfer in legal or equitable title of property located in intrastate, interstate or foreign commerce.

d. The Court found that, although Bantam did not transfer title to property in Michigan because it processed its customers’ orders and shipped the books from locations outside the state, its sales representatives caused the transfer of title to be made by soliciting purchasing orders from Michigan wholesalers and retailers. Moreover, Bantam’s sales representatives undertook their activities "with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others."

i. AutoZone Inc. ("AZI") is a Nevada corporation engaged in the nationwide retail sale of automobile parts. AZI later became a holding company that provides management services for several subsidiaries. The ownership of AZI’s retail stores was placed in AutoZone Development Corporation ("Development"), which leased the premises to AutoZone Stores, Inc. Development is required to distribute its rental income to AutoZone Properties, Inc. ("Properties"), a Nevada corporation which holds Development’s shares, in the form of dividends. During the years 1996 through 1998, there were at least 68 AutoZone retail stores in Louisiana that paid about $20 million in rental income to Development. Although AutoZone Stores took a deduction for the rent paid to Development, both Development and Properties did not report the income received.

ii. The Louisiana Department of Revenue ("Department") assessed corporate income and franchise tax against Properties for the dividends received from Development. Development did not pay the assessment and instituted suit under Louisiana’s long arm statute. Properties objected on the basis that Louisiana did not have personal jurisdiction over it.