United States: Is DILWORTH Still Good Law Or Just A Bump In The Road In The Development Of The Commerce Clause; The CARE COMPUTER Case

Last Updated: April 30 2004
Article by Patrick Derdenger

[Prepared for 10th Annual ABA/IPT "Advanced Sales/Use Tax & Advanced Property Tax" Seminars March 20-23, 2001]

THE CARE COMPUTER CASE.

Arizona Department of Revenue v. Care Computer Systems, Inc., 4 P.3d 469 Ariz. 197 414 P.3d 469 (App. 2000), review denied (February 15, 2001).

The Issue. The issue present by the Care Computer case is whether Arizona may impose its transaction privilege (sales) tax [not the use tax] on Care Computer’s interstate mail-order sales. Or, stated another way, did Care Computer have sufficient nexus with Arizona for the imposition of the state’s transaction privilege tax.

I. FACTUAL BACKGROUND.

The Arizona Department of Revenue audited Care Computer Systems and imposed Arizona’s transaction privilege tax on Care Computer’s gross receipts from its interstate mail-order sales to Arizona customers. Care is a mail-order company located in Bellevue, Washington, that licenses and sells computer software to nursing homes throughout the United States. Care has never had any physical location or facility of any kind in Arizona. It has no Arizona sales or service office, warehouse, storage, product inventory, advertising or other business address. It has no employees, independent contractors, sales representatives or other agents based or residing in Arizona. In short, it had no regular presence of any kind in Arizona.

Care’s Sales Take Place in Washington, Not In Arizona. Care’s Arizona customers would send their orders to Care’s Washington headquarters by fax or mail. Before the goods were shipped, all contracts had to be approved by a corporate officer at Care’s Washington headquarters. Goods were shipped from Care’s Bellevue headquarters to Arizona customers by mail or common carrier. Under Care’s standard sales contract, the goods were shipped F.O.B. Washington (i.e., title passed when the goods were delivered to the carrier or post office in Washington).

While Care’s Arizona transactions were conducted solely by mail order and fax, Care employed a salesman who lived in Irvine, California and worked out of Care’s Brea, California office. Care’s salesman, Gary Trabant, had as his primary territory southern California and also Arizona. His sales efforts were primarily limited to southern California because of the state’s large population base and the number of nursing homes. Mr. Trabant traveled to Arizona irregularly and only on seven occasions, averaging once per year, through the audit period of January 1985 through November 1991. He made his trips by airplane, returning home the same day in most cases and never staying longer than overnight. Mr. Trabant did not have authority to accept or approve any orders and the few that he did receive he forwarded to Care’s Washington headquarters for approval and acceptance.

Occasionally other Care personnel visited Arizona nursing home customers to conduct software training sessions, which lasted one or two days. The training reps were sent from Care’s headquarters or another service office outside Arizona and returned immediately after the training was completed. Care had training representatives in Arizona averaging 21 days per year. Care engaged in some 180 transactions with Arizona nursing homes during the 5-year audit period, with 65% of those transactions being with a single customer. Of those 180 transactions, 178 involved sales of software with the other two transactions being short-term, trial-basis leases of a personal computer and software programs.

Arizona Regulations Dealing With Out-of-State Vendors. As additional background, Arizona regulations provide guidance as to when a transaction is subject to the sales tax and when a transaction is subject to the use tax. A.A.C. R15-5-2307 captioned "When a Transaction is Subject to the Sales Tax" provides that "sales made by vendors maintaining a place of business within Arizona are subject to the sales tax." In turn, A.A.C. R15-5-2308, captioned "When a Transaction is Subject to the Use Tax" lays out the corollary rule that "purchases made from vendors not maintaining a place of business in this state to Arizona customers are subject to the Use Tax." It was undisputed that Care Computer did not maintain a place of business within Arizona: it had no office, inventory, resident sales person, etc.

Assessment and Appeal. The Arizona Department of Revenue imposed the state’s transaction privilege tax on Care with respect to all of its mail-order sales to Arizona customers. The Department did not impose the state’s use tax collection obligation. Care filed a protest and the Arizona State Board of Tax Appeals agreed with Care that the state lacked the required nexus to impose its transaction privilege tax on those mail-order sales. The Department appealed to the Arizona Tax Court, which upheld the Board’s decision. The Department then appealed to the Court of Appeals, which held that Care’s interstate, mail-order sales were subject to Arizona’s transaction privilege tax. The Arizona Supreme Court denied review on February 15, 2001.

II. DEPARTMENT OF REVENUE’S APPELLATE ARGUMENTS.

The Department of Revenue made the following arguments in the Court of Appeals case.

1. Care’s Business Activities in Arizona Provided Sufficient Nexus for the Imposition of Arizona’s Transaction Privilege Tax. The Department of Revenue argued that the something more than "slightest physical presence" test of Quill applied to the Care/Arizona transaction privilege tax situation. In other words, the Department argued that as long as Care had physical presence in Arizona, but something more than "slightest" physical presence, the constitutional substantial nexus standard was met. The Department further relied on, among other cases, Orvis Co., Inc. v. Tax Appeals Tribunal, 654 N.E.2d 954 (N.Y. 1995), cert. denied 516 U.S. 989 (1995), and Brown’s Furniture, Inc. v. Wagner, 665 N.E.2d 795 (Ill. 1996), cert. denied 117 S. Ct. 175 (1996), as to the number of transactions or visits in a state which meet the more than slightest physical presence standard [it should be noted that the Orvis and Brown’s Furniture cases are use tax collection cases and do not involve a transaction privilege or gross receipts tax.]

The Department noted that Quill did not say just how much fiscal presence would satisfy the substantial nexus test but left that decision for the state courts to decide on a case by case basis. The Department argued that in the Orvis case, which involved Orvis Co. and Vermont Information Processing (VIP), addressed the question of what number of contacts with taxing states would be sufficient to satisfy the nexus requirement. Orvis employees visited up to 19 New York wholesale customers on the average of four times a year (76 times per year). VIP marketed computed software and hardware to beverage distributors in New York and its employees visited its New York customers’ locations on 41 occasions over the three year audit period. The New York Court of Appeals held that Orvis’ and VIP’s contacts were sufficient to satisfy the "substantial nexus" requirement of Quill and upheld New York’s imposition of its use tax collection function on Orvis and VIP.

The Department of Revenue also relied on Brown’s Furniture, where Brown’s Furniture during a ten month period in 1989 made 942 deliveries of its merchandise into Illinois (from its furniture business located in Missouri). The Illinois Department of Revenue assessed use tax on Brown’s sales to Illinois residents and the Illinois Supreme Court upheld the assessment on the grounds that the 942 deliveries constituted substantial nexus with Illinois.

The Arizona Department of Revenue argued that Care’s contacts with Arizona (one annual visit by the traveling salesman and 21 days in-state by training personnel) constituted substantial nexus under the Orvis and Brown’s Furniture cases.

2. The Tyler Pipe Standard Was Met. The Department also argued that the Tyler Pipe standard for substantial nexus was met because Care’s in-state activities "are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales." See Tyler Pipe Ind. Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232 (1987). The Department also relied upon the more recent Arizona Court of Appeals case of Arizona Department of Revenue v. O’Connor Cavanagh, Anderson, Killingsworth & Beshears, PA, 192 Ariz. 200 963 P.2d 279 (App. 1997), which adopted the Tyler Pipe standard for Arizona transaction privilege tax. [It should be noted that the out-of-state vendor in both Tyler Pipe and O’Connor Cavanagh had arrangements with an in-state manufacturer’s representative to act as their sales agent, where the in-state representative maintained an office in the state. Care Computer had no similar arrangement.]

The Department argued that under the Tyler Pipe and O’Connor Cavanagh standard "Care had substantial nexus with Arizona through its numerous business transactions, its ownership of lease computers and software, and through the continuous activities of its salesmen and training personnel. Thus, it is clear that Care had a physical presence in Arizona and its activities were significantly associated with its ability to establish and maintain a market in Arizona for sales."

III. CARE COMPUTER’S ARGUMENTS.

Care Computer argued that it did not have the required substantial nexus with Arizona for imposition of the transaction privilege tax on its mail-order sales into Arizona. It made the following points:

1. Different Nexus Standard for Transaction Privilege Taxes. Care set the stage by arguing that transaction privilege taxes require a higher showing of nexus than does use tax collection. See General Trading Co. v. State Tax Commission, 322 U.S. 335 (1944) (presence of traveling salesmen in state was sufficient nexus for use tax duty collection to be imposed) and McCleod v. J. E. Dilworth Co., 322 U.S. 327 (1944) (presence of a traveling salesman was not sufficient nexus for the imposition of the sales tax in an interstate sale transaction). See also Norton Co. v. Illinois Department of Revenue, 340 U.S. 534 (1951) (Illinois transaction privilege tax on Norton’s sales made through its Illinois branch office was upheld; the Court distinguished the nexus requirement in transaction privilege tax cases from sales and use tax cases). See City of Phoenix v. West Publishing Co., 148 Ariz. 31, 712 P.2d 944 (App. 1985) (in which the Arizona Court of Appeals specifically noted that Arizona’s transaction privilege tax should be "viewed more carefully and critically than are use taxes, which merely inflict the administrative burden of collection upon the vendor" as opposed to a transaction privilege tax which is imposed on the vendor.)

Care argued that the use tax nexus threshold was physical presence, but something more than "slightest physical presence." On the other hand, the nexus threshold for transaction privilege or gross receipts tax is higher being the Tyler Pipe standard: The taxpayer’s in-state activities "are significantly associated with the taxpayer’s ability to establish and maintain a market in the state for the sales." There is a significant difference between mere physical presence and "maintaining a market" in the state. Establishing these differing nexus standards was critical in order to distinguish the Quill line of cases the Department relied on.

2. The Quill Line of Cases Do Not Apply Because They Involve the Nexus Threshold For Use Tax Collection. Care argued that the Quill line of cases relied on by the Department (Orvis, Brown’s Furniture) were use tax collection cases which set a lower nexus standard than for a transaction privilege tax or gross receipts tax.

3. City of Phoenix v. West Publishing Co. Is Controlling. Care argued that the prior Arizona appellate decision of West Publishing controls. In the West Publishing case, the City of Phoenix attempted to impose its privilege license tax on West’s sales of law books to lawyers and law firms in the Phoenix. West Publishing did not have a business location in Phoenix. It had, though, a sales representative (an employee) that worked out of his home office. The Arizona Court of Appeals held that the presence of the in-state resident salesman was not sufficient nexus for the imposition of the city’s privilege license tax (which is the same as the state’s transaction privilege tax). Care argued that the West Publishing case should control and that the presence of Care’s traveling sales person and training personnel, which were not based in Arizona, as the West resident sales person was, did not provide the requisite nexus.

4. The Dilworth Case Would Preclude Arizona From Imposing Its Transaction Privilege Tax On Care’s Interstate Sales. Care also argued that the U.S. Supreme Court decision in Dilworth should apply to preclude Arizona from imposing its transaction privilege tax on Care’s interstate mail-order sales. The U.S. Supreme Court in Dilworth held that the presence of a traveling salesman in the destination state did not provide sufficient nexus for the destination state to impose its sales tax when the vendor was located in another state. In other words, Dilworth precludes the state from imposing its sales tax on a pure interstate sale transaction. In this regard, it should be noted that Care’s traveling sales person did not have authority to accept any orders and did not accept such orders. Rather, those orders were all accepted and approved at Care’s Washington headquarters, where the offer to purchase and the sales contract made was accepted. Additionally, the F.O.B. point was Bellevue, Washington, so that title passed in Washington and not Arizona. Since the F.O.B. point was in the State of Washington, transfer of possession of the goods could be viewed as being constructively made in Washington, and not Arizona. If Dilworth were applied to the Care situation, Arizona would not be able to assess its transaction privilege tax on Care’s interstate, mail-order sales to Arizona customers.

5. The Department of Revenue’s Own Regulations Require That To Be Subject To the Transaction Privilege Tax, the Out-of-State Vendor Must Maintain a Place of Business In Arizona. Care argued that the Department’s own regulations (A.C.C. R15-5-2307) preclude the Department from imposing its transaction privilege tax on Care because it does not maintain a place of business in the state. The regulations, rather than establishing a constitutional nexus standard, established a bright-line "maintaining a place of business" test. Since Care did not maintain a place of business in Arizona, then under the Department’s own regulations, the state could not impose its transaction privilege tax on Care’s mail-order sales into Arizona.

6. Care Does Not Meet the Tyler Pipe Nexus Standard. Care also argued that it did not meet the Tyler Pipe nexus standard because it did not have an in-state manufacturer’s representative, as Tyler Pipe did, which maintained a place of business in the state. In other words, the nexus standard for a transaction privilege tax or a gross receipts tax requires some type of business presence in the state, either through the out-of-state vendor maintaining a branch office in the state or making arrangements with a manufacturer’s representative to represent it in the state, where the manufacturer’s representative maintains its office in the state. The taxpayer in Tyler Pipe had an in-state manufacturer’s representative which maintained an office in Washington through which and by its various contacts it maintained a market in Washington for the taxpayer’s products. Likewise, in the Norton case, the taxpayer maintained a branch office in the State of Illinois. And, in the O’Connor Cavanagh case, the out-of-state vendor, Dunbar Furniture, contracted with a manufacturer’s representative which maintained an office in Scottsdale, Arizona through which it could maintain a market for Dunbar’s products in Arizona. In short, Care argued that nexus requirement for a transaction privilege or gross receipts tax required the in-state presence of either a branch office or a manufacturer’s representative’s or other agent’s office. Care did not have such an office in Arizona and thus it argued its contacts did not satisfy the substantial nexus requirement for a transaction privilege tax.

IV. COURT OF APPEALS DECISION.

The Court of Appeals reversed both the State Board of Tax Appeals and the Arizona Tax Court, concluding that Care Computer’s interstate, mail-order sales were subject to the Arizona transaction privilege tax. The Court reasoned that the presence of Care’s California based sales person in Arizona on an average of once per year and the presence of the training personnel on an average of 21 times per year was sufficient nexus for the imposition of the state’s transaction privilege tax. The important and interesting elements of the Court of Appeals decision follow.

1. The Court of Appeals Held That Care Had Substantial Nexus With Arizona Through the Activities of its Traveling Sales Person and the Training Personnel. The Court used the Tyler Pipe/O’Connor Cavanagh test of the taxpayer’s ability to "establish and maintain" a market in Arizona for the sales. This is despite the fact that Care did not have an in-state manufacturer’s representative, as did the out-of-state vendor in O’Connor Cavanagh and as did Tyler Pipe.

2. The Dilworth Case. The Court of Appeals gave short shrift to the Dilworth case. It mentioned it in an historical reference and then later suggested that Dilworth had been "overruled in 1977 by Complete Auto." The fact of the matter is that the U.S. Supreme Court has never overruled or questioned the vitality of its 1944 decision in McCleod v. Dilworth. Complete Auto set out a four prong test for the taxation of interstate transactions but the first prong still requires "substantial nexus." Dilworth can be squared with Complete Auto in that Dilworth concluded that the presence of an in-state traveling sales person did not provide the required "substantial nexus" for a sales tax. Complete Auto should not be read as overruling Dilworth. Does the Care decision mean that a pure interstate sale, where the vendor is located in one state and the purchaser is located in another state, with the vendor’s only contact with the purchaser’s state being the fleeting presence of a traveling salesman is now subject to the destination state" sales tax. Conversely, may the originating state impose its sales tax on the vendor? The Arizona Court of Appeals Care decision suggests yes.

3. Transaction Privilege Tax and Use Tax Have Same Nexus Standard. The Care appellate court also rejected Care’s argument that a transaction privilege tax or gross receipts tax requires a higher level of nexus with the taxing state than does a use tax. The Arizona court relies on Complete Auto Transit for its conclusion that there is no difference in nexus standards. Does this mean that the Quill "more than slightest physical presence" standard is the nexus standard for sales taxes, transaction privilege taxes and gross receipts taxes? Hasn’t the Arizona Court of Appeals then effectively ignored the U.S. Supreme Court’s Tyler Pipe decision.

4. Department of Revenue Does Not Have to Follow Own Regulations. The most frustrating part of the Court’s decision is that it rejected Care’s regulation argument that since it did not maintain a place of business in the state, A.A.C. R15-5-2307 (which provides that "sales made by vendors maintaining a place of business within Arizona are subject to the sales tax"), precludes Arizona from imposing its transaction privilege tax. The court reasoned that because "Arizona’s use tax thus functions primarily as a complement to the retail transaction privilege tax," the Department of Revenue could have imposed a use tax on Care’s Arizona customers pursuant to A.A.C. R15-5-2308 (which provides that "purchases made from vendors not maintaining a place of business in the state to Arizona customers are subject to the use tax"). While the Department of Revenue could have imposed the use tax collection obligation on Care, it did not and rather imposed the transaction privilege tax. There is a rate difference between the Arizona transaction privilege tax and the use tax; the transaction privilege tax (5%) includes the county component, which in Maricopa County is .7%, for a combined total of 5.7%, while the use tax is only 5%. There is incentive then for the Department to make a choice at the time of audit and assess the transaction privilege tax. The Court of Appeals simply reasoned that since the Department could have imposed the use tax under the regulation, it can also impose the transaction privilege tax. The import of this part of the decision is substantial and far reaching for Arizona businesses and taxpayers. The Court of Appeals essentially held that the Arizona Department of Revenue does not have to follow its own regulations. Thus, aren’t businesses and taxpayers put at jeopardy if they rely on the Department’s own regulations when it comes to tax compliance and planning? That is not a result which squares with a fair tax system.

5. Dissent. Judge Noel Fidel, the Presiding Judge of the Arizona Court of Appeals dissented. His dissent was extremely strong in taking issue with the majority’s opinion and quite forcibly and simply stated that the court should hold the Department "to regulations on the books." Pertinent extracts of Judge Fidel’s dissent follows:

My colleagues acknowledge the proposition that a regulatory agency must follow its own rules and regulations. That proposition, if applied, not merely acknowledged, would bring a swift and simple end to this unnecessarily complicated case.

The majority quotes the applicable regulations in footnote 2 to its opinion. The regulations are remarkably clear, not only when compared with other tax regulations but when compared with other regulations of any sort. R15-5-2306 informs the public that sales taxes (which, the court and parties agree, include transaction privilege taxes) and use taxes are meant to be complementary and that the former are imposed on sales by in-state vendors, while the latter are levied on purchases from out-of-state vendors. In keeping with this complementary intent, R15-5-2307 provides that "[s]ales made by vendors maintaining a place of business within Arizona are subject to the Sales Tax," and R15-5-2308 provides that "[p]urchases made from vendors not maintaining a place of business in this state [by] Arizona customers are subject to the Use Tax." These regulations were drafted in harmony, and there is nothing ambiguous about them. Because Care Computer Systems does not maintain a place of business in Arizona, ADOR had it followed its own regulations, would have subjected Care’s transactions with Arizona customers to a use tax not a sales tax.

But, says the majority, "the vendor’s place of business is an overly simplistic test in light of current Commerce Clause jurisprudence regarding [sales] taxation."

***

By taking this approach, my colleagues achieve a curious result. They effectively invalidate R15-5-2306, -2307, and –2308 for taxing too narrowly – for failing to tax sales to the full extent that the Commerce Clause permits. This is curious because it reverses ordinary constitutional analysis. Ordinarily when courts find a statute or regulation incompatible with the Constitution, they find that it exceeds constitutional constraints. Here the opposite pertains; my colleagues render ADOR’s sales tax regulations inoperative because they bite off less than ADOR is constitutionally permitted to chew.

I disagree with this approach. That ADOR might have adopted more comprehensive sales tax regulations is beside the point. The immediate question is not whether ADOR might constitutionally adopt broader regulations but whether ADOR must follow the narrower regulations that it has adopted and has not seen fit to change.

There are good reasons why Arizona law requires administrative agencies to follow their own rules and regulations. Our Administrative Procedure Act ("APA") not only requires the publication of existing agency rules and regulations, see A.R.S. §§ 41-1011, -1012, but also the publication of a monthly register concerning "proposed repeals, makings or amendments of the rules." A.R.S. § 41-1021 through –1036 (1999). The APA provides for public notice and comment before the adoption or amendment of agency rules.

***

Through publication of current rules and notice of amendments, an agency not only permits members of the public to comment on impending changes, but also to consult the evolving body of rules and regulations, determine the agency’s approach to circumstances that its rules and regulations define, and order their affairs accordingly. And the purpose of permitting the public to order its affairs in accordance with published regulations is particularly keen for tax regulations that govern commercial transactions. When the parties to commercial transactions factor likely taxes into pricing decisions, they should do so in the confidence that the taxing authority will tax as its published regulations say it will tax, and not as it might tax under a different, unproposed, unapproved, and unadopted regulatory scheme.

In consequence, I see no need to embark on the quest for elusive nexus to resolve this case. On the far simpler ground that ADOR has failed to follow its own regulations, I would affirm. Because my colleagues have opened the subject of nexus, however, I will make one further point.

***

I do not hold the majority responsible for the Tyler Pipe standard. They are stuck with it as are we all. To apply that standard to these facts and those of O’Connor, however, shows it to add bulk without nourishment to the law. What, other than ad hoc pronouncement, distinguishes an activity significantly associated with the taxpayer’s ability to establish and maintain a sales market from an activity not significantly associated with that ability? One is hard pressed to say. The best the court can do is conclude by comparative analysis that, if the attenuated circumstances of O’Connor meet that standard, so must the equally attenuated circumstances of this case. And do, validating the taxation of one attenuated transaction after another after another, the courts erode the general standard of substantial nexus into something very substantial indeed.

"Substantial nexus" is a swamp we should stay out of in this case. If ADOR amends its regulations to detach sales taxes from the terra firma of the vendor’s place of business, there will be time enough to gauge nexus. Until then, we should hold ADOR to regulations on the books.

For the foregoing reasons, I respectfully dissent.

V. ARE THERE DIFFERENT NEXUS STANDARDS FOR DIFFERENT TYPES OF TAXES?

1. Use Tax - Quill. The Quill standard for use tax collection is precise in that the out-of-state vendor must have physical presence in the state, but something more than slightest physical presence. This arguably would and should be the lowest nexus threshold because the incidence of the tax is on the purchaser and only a administrative collection duty is placed on the out-of-state vendor. Thus, the mere presence of a traveling salesman in the state would be sufficient nexus. See General Trading Co. v. State Tax Commission, 322 U.S. 335 (1944). See also Norton Co. v. Illinois Department of Revenue, 340 U.S. 534 (1951) (distinguished nexus requirement in transaction privilege tax cases from sales and use tax cases); and City of Phoenix v. West Publishing Co., 148 Ariz. 31, 712 P.2d 944 (App. 1985) (Arizona Court of Appeals specifically noted that Arizona’s transaction privilege tax should be "viewed more carefully and critically than are use taxes, which merely inflict the administrative burden of collection upon the vendor."

2. Sales Tax - Dilworth. Dilworth held that a state may not tax a pure interstate sale where the vendor is in one state and the customer is in another state, and where the only nexus in the taxing state is the presence of a traveling salesman. But, more far ranging, doesn’t Dilworth suggest that a state may impose a sales tax on a sale transaction only when all the indicia of the sale take place within that state’s borders?

3. Transaction Privilege Tax – Tyler Pipe. "The crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in the state for the sales." 483 U.S. at 250. Tyler Pipe involved a manufacturer’s representative that was physically present and acted on behalf of the out-of-state taxpayer, and maintained an office in the state. See also Norton Co. v. Illinois Department of Revenue, supra. (Illinois transaction privilege tax imposed where Norton maintained a branch office in the state); Arizona Department of Revenue v. O’Connor Cavanagh, et al., supra. (Arizona Court of Appeals adopted the Tyler Pipe standard and applied it in the situation where the out-of-state vendor had an in-state manufacturer’s representative which maintained an office in Arizona).

If Care Computer is wrong, and there are different nexus standards for use tax, sales tax and transaction privilege tax, under Tyler Pipe, O’Connor Cavanagh and Norton, must not the out-of-state vendor maintain some type of physical office in the state either its own branch office or through an in-state manufacturer’s representative in order to satisfy the higher nexus standard for a transaction privilege tax or gross receipts tax?

VI. DILWORTH HAS NOT BEEN OVERRULED BY THE U.S. SUPREME COURT AND IS STILL GOOD LAW.

The Arizona Court of Appeals stated in its opinion that the Dilworth case was overruled by the U.S. Supreme Court in Complete Auto Transit. The Arizona Court of Appeals reasoned that the Dilworth case was decided in a time when "state taxes on interstate commerce were per se unconstitutional." The Arizona Court then noted that cases so holding were "overruled in 1977 by Complete Auto, which upheld a privilege tax assessment on an interstate business’s gross receipts from the taxing state."

Complete Auto Transit set out a four prong test for determining when a state may impose a tax on interstate transactions: (1) the tax is applied to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce and (4) fairly related to the services provided by the state. Complete Auto Transit did not suggest in any way that it was overruling Dilworth. Nor, have any other U.S. Supreme Court cases specifically overruled Dilworth.

In fact, Dilworth squares completely with Complete Auto Transit when it comes to the first prong of the Complete Auto test. Dilworth inferentially concluded that the presence of a traveling salesman in the taxing state was not sufficient nexus for the destination state to impose its sales tax. I would suggest that the Complete Auto court had it applied the four prong test to the Dilworth factual situation, would have come to the same conclusion based on the lack of substantial nexus. It could also be suggested that the Dilworth facts would have failed the second prong (no fair apportionment of the tax between the origination and destination state) and the fourth (since all the indicia of the sale took place in the origination state, the Arkansas tax was not fairly related to the services provided by Arkansas).

Can’t Dilworth be looked at from another focus: If a state is to impose its sales tax [not a use tax] or even a transaction privilege tax on a sale transaction, all the indicia of that sale must take place within the taxing state. The order must be accepted in the taxing state, and title and transfer of ownership must pass in the taxing state. In other words, the required nexus for the imposition of a sales tax is that the sale must take place in the taxing state.

Dilworth involved Arkansas attempting to impose its sales tax1 on sales made by Dilworth, based in Tennessee, to customers in Arkansas. More specifically, Dilworth was a Tennessee corporation with its home office and place of business in Memphis where it sold machinery and mill supplies. Dilworth was not qualified to do business in Arkansas and did not have a sales office, branch plant or any other place of business in Arkansas. Orders for goods went to Tennessee through solicitation in Arkansas by traveling salesmen domiciled in Tennessee, by mail or telephone. No matter how an order is placed, it requires acceptance by the Memphis office, and on approval the goods are shipped from Tennessee. Title passes upon delivery to the carrier in Memphis, and collection of the sales price is not made in Arkansas. As the Dilworth court noted: "In short, we are here concerned with sales made by Tennessee vendors that are consummated in Tennessee for the delivery of goods in Arkansas." 322 U.S. at 1025.

The Dilworth court concluded:

… in this case the Tennessee seller was through selling in Tennessee. We would have to destroy both business and legal notions to deny that under these circumstances the sale – the transfer of ownership – as made in Tennessee. For Arkansas to impose a tax on such transactions would be to project its powers beyond its boundaries and to tax an interstate transaction.

322 U.S. at 1025.

Simply, Dilworth held that a state may not tax a sale transaction if the sale does not take place in the taxing state.

The argument was also made in Dilworth that "Arkansas could have levied a tax of the same amount on the use of these goods in Arkansas by the Arkansas buyers, and that such a use tax would not exceed the limits upon state power derived from the U.S. Constitution." 322 U.S. at 1025. The Dilworth court noted that a "sale tax and a use tax in many instances may bring about the same result. But they are different in conception, are assessments upon different transactions, and … may have to justify themselves on different constitutional grounds." 322 U.S. at 1025-1026. And, as we know, in the companion case of General Trading, the same U.S. Supreme Court upheld the imposition of a use tax with the same facts as Dilworth.

Application of Dilworth to the Care Facts. If Dilworth is applied to the Care facts, shouldn’t the outcome be the same as in Dilworth? The Care facts and the Dilworth facts are virtually identical. Both have their offices outside the taxing state with no offices or the facilities in the taxing states. The only contact was by the way of traveling salesmen that had no power to accept orders. In both cases, the orders had to be approved by the home office, whether in Tennessee or in Washington. Also, in both cases, the goods were then shipped from the home office F.O.B., Tennessee or Washington. Both the Dilworth and Care sales transactions were consummated in Tennessee or Washington for delivery of goods in Arkansas or Arizona. Shouldn’t the outcome in the Care case have been the same as in Dilworth?

What If the Arizona Court of Appeals Is Correct and That Dilworth Is No Longer Good Law? If the Arizona Court of Appeals is correct in that Dilworth is no longer good law, then the entire sales/use tax structure on interstate sales will be thrown into complete disarray, with the following two likely consequences:

  1. The origination state would impose its own sales tax.
  2. The destination state would also wish to impose its sales tax, or continue to impose its use tax .

The Dilworth – General Trading regime for the sales and use tax treatment of interstate sales has worked well over the years and has prevented the specter of this type of potential, double taxation of interstate sales.

Endnote

1 The Arkansas sales tax was imposed pursuant to the state’s "Gross Receipts Act."

To view this article in its full entirety (and any diagrams/footnotes), please enter the following link into a fresh browser:
http://www.steptoe.com/publications/IPT.pdf

Copyright © Steptoe & Johnson LLP. All Rights Reserved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions