Relationship Advice:
Remote Seller Collection Duties Based on
Relationships
(Attacks on Quill and Other Issues)
th
COST’s 39 ANNUAL MEETING
October 24, 2008
Orlando, Florida
By: Giles Sutton
Partner, Grant Thornton LLP
Practice Leader, State & Local Tax Technical Services
201 South College Street, Suite 2500
Charlotte, NC 28244
Phone: (704) 632-6885
Email: giles.sutton@gt.com
[A] Attributional and Agency Nexus – General Concepts ............................................. 3
[1] Agency Nexus ...................................................................................................................... 3
[2] Effect of Independent Agents – The Dell Cases ............................................................... 4
[a] Dell Catalog Sales (Connecticut) (2003) ............................................................................................. 4
[3] MTC Nexus Bulletin 95-1.................................................................................................... 6
[4] Other Agency Nexus Holdings .......................................................................................... 7
[a] Kmart Properties (NM) (2001) and Furnitureland South (MD) (1999) ............................................... 7
[i] Kmart Properties ............................................................................................................................... 7
[A] Due Process Clause ................................................................................................................ 7
[B] Commerce Clause ................................................................................................................... 8
[ii] Furnitureland South .......................................................................................................................... 8
[c] Jafra Cosmetics (MA) (2001) ............................................................................................................. 9
[5] Affiliate Nexus ................................................................................................................... 11
[a] SFA Folio Collections (OH) (1995) ..................................................................................................11
[b] Borders Online (CA - 2005); Barnes & Noble (CA - 2007) ...............................................................12
[i] Borders Online (2005) ..................................................................................................................12
[ii] Barnes & Noble (CA) (2007) .......................................................................................................14
[iii] Barnes & Noble (LA) (2007) .......................................................................................................15
[6] Subsidiary Nexus ............................................................................................................... 16
[a] Bass Pro Outdoor World, TSB-A-03 (NY State Tax Commission) (2003) .........................................16
[b] SFA Folio Collections (CT) (1991) ...................................................................................................16
[c] G.P. Group, Inc. (MO) (1993) ..........................................................................................................16
[i] Operative Facts ............................................................................................................................17
[ii] The State’s Assertion ...................................................................................................................17
[iii] Findings of the Court .................................................................................................................17
[d] Points of Analysis ............................................................................................................................19
[i] Agency Nexus Points of Analysis .................................................................................................19
[ii] Attributional Nexus Points of Analysis ..................................................................................20
[A] Alter Ego Theory ...................................................................................................................20
[C] Affiliate or Unitary Concepts .................................................................................................21
[e] Unitary Relationship ....................................................................................................................21
[B] NY Department Taxation & Finance Issues Guidance – the “Amazon” Rule .. 21
[1] Budget Change Created a Presumption ........................................................................... 21
[2] Memorandum Creates “Amnesty” Period For Sellers Subject to the Presumption...... 22
[a] New York Provides Examples of the Application of this Rule ..........................................................23
[b] Amazon’s Response .........................................................................................................................23
[c] Commentary Regarding New York’s Remote Seller Rule ..................................................................23
[d] New York Voluntary Disclosure Agreements for Out-of-State E-Commerce Retailers That Use Instate Representatives to Solicit Sales ......................................................................................................24
[3] California State Board of Equalization (SBE) Information Paper 6/18/08 ................... 24
[C] Recent Developments............................................................................................... 25
[1] Virginia, Corporate Income Tax Nexus & Merchandise Returns ................................. 25
[D] Non-Traditional Remote Seller Issues ................................................................... 25
2
[1] Evolution of Drop Shipment Transactions ..................................................................... 26
[A] Attributional and Agency Nexus – General Concepts
Nexus is the term used to describe the types of contacts between a taxpayer and a state that are
necessary to establish a state’s right to impose a tax obligation. An entity is generally subject to sales
tax, and for retailers, collection and reporting obligations in the jurisdictions in which it owns
property or employs personnel, so long as the activity conducted by those employees exceeds the
nexus standard set by the state and the federal government. A state’s ability to assert nexus on an
entity on the basis of that entity’s relationship with another entity doing business in the state is
referred to as “attributional nexus.”1 In certain situations, the nexus creating activities of an in-state
entity are “attributed” to an out-of-state entity on the basis of their relationship – agency or
affiliation. As discussed below, the key to asserting nexus based on agency or affiliation hinges upon
the nature of the relationship between the entities in question. The analysis is heavily dependent on
the facts of the taxpayer, transaction or commercial relationship in question.
Further, it is important to note the chronology in which the decisions discussed below were handed
down. State taxation is often an evolutionary process, and nowhere is this more evident than in the
area of nexus. As such, it is important for taxpayers and practitioners to pay close attention to when
crucial cases are decided as well as to the details of the particular factual and legal analysis utilized.
Finally, the concepts of agency, affiliate or subsidiary nexus have been put forth by taxing authorities
to secure jurisdiction to tax (nexus) over out-of-state corporate entities. In the sales tax context,
none of these concepts, in the tax context, has been fully developed or consistently analyzed. Often,
because common law rules regarding agency and corporate alter ego and piercing of the corporate
veil, upon which the taxation-based jurisdictional issues which are the subject of such litigation are
founded, differ from state to state, the analysis becomes blurred. The discussion below seeks to, at a
minimum, outline the known “concepts” in this area.
[1] Agency Nexus
Agency is a common law concept defining the legal ramifications of circumstances when a party acts
for or represents another party under the authority of the latter.2 Agency relationships between
related and unrelated entities have often caused tax consequences with regard to sales and use taxes.3
“Attributional nexus” has generally been asserted under concepts, sometimes truncated, of agency, alter ego
or affiliate or unitary business nexus.
2 See, e.g., Gorton v. Doty, 69 P.2d 136 (Idaho 1937).
3 The Readers Digest Assn. Inc. v. Mahin, 255 N.E.2d 458 (Ill. 1970). It should also be noted that recently states
have reached beyond related party groups to extend agency nexus concepts to commercial relations between
unrelated parties. See, e.g., Louisiana v. Dell Internat'l, Inc., 922 So.2d 1257 (2006). For income tax purposes,
agency relationships between related and unrelated parties have also been deemed to create nexus for the
principal. See, e.g., Minnesota Tribune Co. v. Comr. of Tax., 37 N.W.2d 337 (Minn. 1949); Western Acceptance Co. v.
State Dept. of Rev., 472 So.2d 497 (Fla. Dist. Ct. App. 1985), rev. denied, 486 So.2d 598 (Fla. 1986); Amway Corp. v.
1
3
As complex as it may be to apply general principles of agency to the vast number of commercial and
organizational structures that corporate taxpayers have undertaken, the task becomes even more
onerous when one considers how states define key terms within the concept of agency. Historically,
states have only focused on the definition of an “agent” for imputing nexus under an agency
standard.4 Generally, states will seek to determine whether the deemed agent in the relationship is
acting under the “authority” or “control” of the putative principal.5 Further, some states have
determined that actual legal agency need not be present to impute nexus under an “agency” theory.6
Even if the assertion that the legal agency need not be present in order to assert nexus is correct,7 a
still somewhat untested theory, the need to establish that the agent in question is, in fact, acting
under the authority and control of the putative principal, seems to be well-established by case law. It
should be noted that, in the sales tax context, the case law governing agency in a given jurisdiction is
very informative, if not governing. Further, the influence of similarly decided cased in other
jurisdictions needs to be considered as it is also, often, quite informative in this area.
[2] Effect of Independent Agents – The Dell Cases
The Dell cases have provided what is, to date, the best perspective on the ambiguity regarding
independent agents and sales tax nexus. As is true with so much of state tax law, clarity, although at
a premium, is hard to find. The Dell cases involved the provision of services provided by a putative
third party “agent” in support of Dell’s interstate sale of computers, an area that seems to have given
particular angst to state departments of revenue as well as the Multistate Tax Commission.
[a] Dell Catalog Sales (Connecticut) (2003)
The first Dell case was decided by a Connecticut Superior Court.8 Historically, Dell, through a
subsidiary, sold computers to retail purchasers. Although customers were comfortable buying
equipment from Dell, they were not comfortable performing their own computer repairs. As such,
because such repair services required considerable investments in vehicles, equipment and employees
and remote management of the service function, Dell decided to outsource this function. Dell
outsourced the service function to BancTec, an unrelated Delaware corporation with its principal
place of business in Dallas, Texas.9 The negotiations between Dell and BancTec were at arm’s-length
and reflected each party’s economic concerns.10
BancTec performed service repairs on-site and technicians were dispatched from Dell’s Tech
Support function. The mechanics involved in getting BancTec on-site were as follows: 1) the
Director of Revenue, 794 S.W.2d. 666 (Mo. 1990) and Formal Ruling 95-04, Vermont Dept. of Taxes (Apr. 25,
1995).
4 See, e.g., Scholastic Book Clubs v. California St. Bd. of Equal., 207 Cal. App. 3d 734 (Cal. Ct. App. 1989), a sales tax
case finding an “implied” agency standard.
5 See, e.g., In re Service Merchandise of Fishkill, New York, Nos. 812709 and 812710 (N.Y. Div. Tax Apps., Mar. 21,
1996).
6 J. C. Penney National Bank v. Tennessee Comr. of Rev., Tennessee Chancery Court, No. 960276-1 (Oct. 1998).
7 The assertion of nexus based on a theory of agency that focuses solely on the definition of an agent (authority
and control of the principal over the agent) without analyzing other key components of an agency relationship,
such as consent and capacity, would seem misplaced both from the perspective of tax policy and analytical
consistency.
8 Dell Catalog Sales v. Commissioner, Department of Revenue Services, 834 A.2d 812, 48 Conn. Supp. 170 (2003).
9 Id.
10 Id.
4
customer called in a problem to a toll-free number at Dell’s tech support for a diagnosis of the
problem; 2) once the problem was understood, a determination as to how to handle the problem was
made; 3) if telephone resolution of the problem was not possible, then the Dell tech support
function called BancTec; and (4) once Dell’s tech support contacted BancTec, BancTec was
responsible for resolving the problem.11
Customers could only purchase service contracts when buying a Dell computer. Dell’s customers
were not required to purchase a service contract, but approximately 75% of Dell’s customers
purchased service contracts.
The Revenue Commissioner argued that Dell had nexus in Connecticut sufficient to require it to
collect sales tax because BancTec acted as Dell’s representative in Connecticut to service Dell
computers. The Commissioner relied on the holding in Scripto, Inc. v. Carson12 that the
characterization of the representative is of no “constitutional significance.”
The court found that the Commissioner’s position was supported by the Multistate Tax Commission
(MTC).13 The MTC had taken the position that an out-of-state computer vendor has nexus with a
state if it contracts with a service provider to repair computers sold by the vendor in the state.
Further, the court cited Scripto, Inc. v. Carson14 and Tyler Pipe Industries, Inc. v. Washington Dept. of
Revenue15 for the proposition that an out-of-seller may have nexus with a state if it has third parties
that act on its behalf in the state. However, the extent of the third parties’ activities must be
considered in determining whether the out-of-state vendor has nexus.
The court noted that both parties had stipulated that BancTec was an independent computer service
provider that performed the on-site service. This stipulation negated the Commissioner’s claim that
BancTec was Dell’s agent in Connecticut. Because BancTec was an independent service provider,
Dell had no right to direct or control BancTec’s work.
The court discussed In re the Appeal of Intercard,16 where the Kansas Supreme Court held that eleven
service contacts during a three month period was insufficient to establish substantial nexus. This
case was contrasted with In the Matter of the Tax Appeal of the Family of Eagles, LTD,17 where the Kansas
Supreme Court found that the presence of a sales force of independent service representatives was
sufficient to establish substantial nexus.
According to the court, “[t]he missing ingredient in determining whether BancTec’s on-site service
established nexus in Connecticut as a representative of Dell would be the frequency, if any, of the
number of on-site service calls.”18 The stipulated facts did not indicate the extent of BancTec’s
service calls in the state. However, the court inferred that the number of service calls was minimal
because Dell earned 90% of the price of the service contracts and BancTec only earned about 10%
of the price of the service contracts. The burden of proof was on the Commissioner to show that
Dell “had sufficient substantive physical contacts in the state of Connecticut to warrant the
The BancTec resolution of the problem may, or may not, involve Dell’s technical support group.
362 U.S. 207, 211 (1960).
13 MTC National Nexus Program Bulletin 95-1 (Dec. 20, 1995). For further discussion of this bulletin, see
below.
14 362 U.S. 207 (1960).
15 483 U.S. 232 (1987).
16 14 P.3d 1111 (Kan. 2000).
17 66 P.3d 858 (Kan. 2003).
18 Dell Catalog Sales v. Commissioner, Department of Revenue Services, 834 A.2d 812, 48 Conn. Supp. 170 (2003).
11
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involuntary imposition of a tax.”19 Because the Commissioner did not meet this burden of proof, the
court found in favor of Dell.
[b] Dell International (LA) (2006)
In Louisiana v. Dell International, Inc.,20 the Louisiana Court of Appeals reversed a motion for summary
judgment that had been granted in favor of Dell. Previously, the trial court had granted Dell’s
motion for summary judgment and found that Louisiana failed to prove that BancTec provided
computer repair services in Louisiana on behalf of Dell. In reversing the trial court, the appellate
court discussed a previous decision, State v. Quantex Microsystems, Inc., 21 that involved an out-of-state
company’s use of independent contractors to provide computer repair services. The court stated
that:
The nature and extent of the activities (Scripto, 362 U.S. at 211) and whether those activities
are significantly associated with the taxpayer’s ability to establish and maintain a market in
this state (Tyler Pipe Industries, Inc., 483 U.S. at p. 250; Quantex, 809 So.2d 252) are the
determinative factors of whether Dell’s contractual dealings with BancTec constitute a
sufficient physical nexus for the purpose of justifying the imposition of a use tax.22
In discussing the nature and extent of Dell’s activities in the state, the court found that the service
contracts indicated that “Dell retained control over many of the significant aspects of the services to
be provided by BancTec . . ..” Also, during the five years at issue, BancTec was dispatched by Dell
to perform more than 30,000 service calls for customers in Louisiana. According to the court, “[t]he
record also clearly establishes that having BancTec contracted to provide on-site repair services on
Dell’s computers in this state was highly critical to Dell’s ability to establish and successfully maintain
a market in this state.” Accordingly, Dell did not show that the state lacked factual support that
Dell’s activities in Louisiana constituted sufficient nexus.23
[3] MTC Nexus Bulletin 95-1
The Multistate Tax Commission (MTC)24 has weighed in on the issue of agency nexus. The MTC
has taken the position that warranty repair services conducted in a state will cause income and sales
tax nexus for out-of-state sellers of computers.25 One of the major criticisms leveled against the
MTC’s position on warranty services is that, often, the existence of an agency relationship is an
intensely factual analysis. Even if the somewhat untested assertion that the legal agency need not be
present in order to assert nexus is correct, the need to establish that the agent in question is, in fact,
acting under the authority and control of the putative principal appears to be well established by case
law. Further, one questions why the MTC’s bulletin was aimed so narrowly at computer repair
Id.
922 So.2d 1257 (La. App. 2006), writ application denied by the La. Supreme Court. The facts of this case are
virtually identical to the facts of the Dell case discussed above.
21 809 So.2d 246 (2001).
22 Louisiana v. Dell International, Inc., 922 So.2d 1257 (La. App. 2006).
23 Id.
24 The Multistate Tax Commission (MTC) is an organization formed to promote interstate commerce through
uniform state tax requirements. MTC model rules and bulletin are often influence legislation and tax policy in
numerous states.
25 MTC National Nexus Program Bulletin 95-1 (Dec. 20, 1995).
19
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services. Presumably, it would have broader applicability, but without providing an analytical
framework based on common components of typical commercial agency relationships, the MTC has
seemingly muddied the nexus waters.
[4] Other Agency Nexus Holdings
[a] Kmart Properties (NM) (2001) and Furnitureland South (MD) (1999)
Kmart Properties26 and Furnitureland South27 provide perhaps the two most insightful cases regarding
agency nexus in the sales tax area. The next section explores the detail of those cases in order to
highlight the relevant facts and analysis pertinent to agency determinations in the sales tax context.
[i] Kmart Properties
Kmart, the national retailer, had a wholly owned Michigan subsidiary, KPI, which held and licensed
certain intellectual property to its parent company which operated stores in New Mexico. The
holding in this case, in relevant part, dealt with income tax nexus.28 Nonetheless, the case’s analysis is
highly informative to the topic of agency nexus.
[A] Due Process Clause
The court explained that the “fundamental concern of due process is fairness: whether a foreign
corporation’s contacts with the taxing state are sufficient to put the foreign corporation on notice
that the taxing state will exercise power over it.”29 Further, the court noted that KPI allowed Kmart
to use its trademarks in New Mexico for 1.1% of the revenue generated in the state. As the court
stated, “[b]y allowing its marks to be used in New Mexico to generate income, KPI ‘purposely
avail[ed] itself of the benefits of an economic market in the forum state.’”30 In finding that KPI had
sufficient contacts with New Mexico to satisfy due process, the court noted that its holding was not a
surprise to KPI because “New Mexico courts have long held that the Due Process Clause permits
Kmart Properties, Inc. v. Department of Taxation and Revenue, 131 P.3d 27 (N.M. Ct. App. 2001); rev’d in part, 131
P.3d 22 (N.M. 2005). The appellate court held that the taxpayer was subject to both the corporate income tax
and the gross receipts tax. However, the New Mexico Supreme Court partially reversed and held that the
taxpayer was not subject to the gross receipts tax.
27 Furnitureland South Inc. v. Comptroller, Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC
(1999); rev’d on other grounds, 771 A.2d 1061 (2001).
28 Kmart Properties, Inc. v. Department of Taxation and Revenue, 131 P.3d 27 (N.M. Ct. App. 2001); rev’d in part, 131
P.3d 22 (N.M. 2005). The appellate court found that the taxpayer was subject to New Mexico gross receipts
tax. The combination of the parent company’s activities in New Mexico and the tangible presence of the
taxpayer’s trademarks constituted the functional equivalent of physical presence. On appeal, the New Mexico
Supreme Court considered the gross receipts tax portion of the appellate court’s holding. After examining the
language of the gross receipts tax statute, the court reversed this portion of the appellate court’s decision.
Because the license was not actually sold in New Mexico, the gross receipts tax statute was not satisfied.
Therefore, the court was not required to consider the constitutional issues.
29 Kmart Properties, Inc. v. Department of Taxation and Revenue, 131 P.3d 27 (N.M. Ct. App. 2001); rev’d in part, 131
P.3d 22 (N.M. 2005), citing to Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
30 Id. The court also cited to Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) (“due process is satisfied ‘[s]o
long as a commercial actor’s efforts are ‘purposely directed’ toward residents of another State.’”).
26
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the state to tax a foreign corporation that allows its intangible trademarks to be used in New
Mexico.”31
[B] Commerce Clause
The commerce clause requires there be “substantial nexus” between the taxpayer and the taxing
state.32 The court concluded that the commerce clause analysis of New Mexico income tax is
controlled by the substantial nexus test announced in Complete Auto Transit33 rather than Quill’s34
physical presence standard. Accordingly, “[t]he use of KPI’s marks within New Mexico’s economic
market, for the purpose of generating substantial income for KPI, establishes a sufficient nexus
between that income and the legitimate interests of the state and justifies the imposition of a state
income tax.” The Department’s assessment of state income tax on KPI’s royalty revenue was not an
undue burden on interstate commerce..35
[ii] Furnitureland South
In Furnitureland South Inc. v. Comptroller,36 the taxpayer appealed from assessments made by the
Maryland Comptroller regarding the failure of the taxpayer to collect sales tax on certain sales
shipped from North Carolina but delivered to customers in Maryland.
Furnitureland was a large furniture retailer based in North Carolina that had customers in all 50 states
and in a number of different countries. All of Furnitureland’s showrooms and employees were
located in North Carolina. Prior to 1991, Furnitureland had its own fleet of trucks and drivers to
make deliveries in east coast states. Royal Transport, Inc. (Royal) was established in 1991 as a motor
carrier. Furnitureland provided initial financing to Royal, but the two companies had separate
employees. However, the operations of the two companies were closely related and the majority of
the trucks displayed Furnitureland advertising. Royal made over 100 deliveries for Furnitureland in
Maryland each month and the annual sales to Maryland residents were nearly $3.5 million in 1997.
[A] Agency Analysis
The court first considered whether Furnitureland qualified as an out-of-state vendor that was
required to collect use tax. The definition of “out-of-state vendor” includes a vendor that has an
Kmart Properties, Inc. v. Department of Taxation and Revenue, 131 P.3d 27 (N.M. Ct. App. 2001); rev’d in part, 131
P.3d 22 (N.M. 2005), citing to Aamco Transmissions, Inc. v. Taxation and Revenue Department, 93 N.M. 389, 600 P.2d
841 (Ct. App. 1979) and American Dairy Queen Corp. v. Taxation and Revenue Department, 93 N.M. 743, 605 P.2d
251 (Ct. App. 1979).
32 Complete Auto Transit v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079 (1977).
33 430 U.S. 274, 279, 97 S. Ct. 1076, 1079 (1977).
34 504 U.S. 308 (1992).
35 Kmart Properties, Inc. v. Department of Taxation and Revenue, 131 P.3d 27 (N.M. Ct. App. 2001); rev’d in part, 131
P.3d 22 (N.M. 2005).
36 Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC (1999) ; rev’d on other grounds, 771
A.2d 1061 (2001).
31
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agent operating in the state for the purpose of delivering tangible personal property.37 The court
found that “Furnitureland is an out-of-state vendor and that Royal is an agent for Furnitureland,
handling on a regular and systematic basis, the delivery, set-up and repair of furniture, the collection
of accounts as well as other services to Maryland customers.” As a result, both Furnitureland and
Royal were liable for collecting tax.38
[B] Substantial Nexus Analysis
In finding that there was substantial nexus, the court stated that Furnitureland’s “activities amount to
a large scale, continuous and systematic exploitation of the Maryland consumer furniture market and
create a sufficient nexus to require Furnitureland to collect and remit for Maryland customers the
required use tax.”39
The court also considered the application of the “safe harbor” from National Bellas Hess, Inc. v.
Department of Revenue of the State of Illinois.40 The court noted that “[i]n Quill, the Supreme Court
observed that Bellas Hess created a so-called ‘safe harbor’ for out-of-state vendors ‘whose only
connection with customers in the taxing State is by common carrier or the United States mail.’”41
Furnitureland argued that it fell within the safe harbor because Royal was a common carrier. Because
the Supreme Court has not addressed the precise definition of “common carrier” when used in a
nexus analysis, the court considered the Supreme Court’s intended definition. The court found that
“’[t]he personalized delivery service’ provided by Royal to Furnitureland customers does not fit
within the meaning of the term ‘common carrier’ as contemplated by the Supreme Court in Bellas
Hess.” Further, “[t]he fact that Royal’s drivers regularly do minor in-home repair work on damaged
Furnitureland furniture and that Furnitureland has control over the time, manner and means of
delivery is also evidence that Royal is not a common carrier as envisioned by the Supreme Court in
Bella Hess.”42
[c] Jafra Cosmetics (MA) (2001)
At issue in Commissioner of Revenue v. Jafra Cosmetics, Inc.,43 a 2001 case, was whether “consultants” who
sold Jafra’s products in Massachusetts and were the only persons authorized to sell Jafra products
within the state, were “representatives” of Jafra, the taxpayer, within the meaning of G.L. c. 64H, §
1(5), based on the fact that they were not contractually obligated to sell such products as they had no
authority to bind the taxpayer.
Md. Code Ann., Tax-Gen § 11-701(b).
Furnitureland South, Inc. v. Comptroller, Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC
(1999) ; rev’d on other grounds, 771 A.2d 1061 (2001). Note that the Maryland Tax Court subsequently found that
the federal Interstate Commerce Act expressly prohibited the state from compelling Royal to remit the sales
and use tax. Royal Transport, Inc. v. Comptroller of the Treasury, Maryland Tax Court, Nos. 02-SU-OO-0298 and 02SU-OO-0299 (2003).
39 Furnitureland South, Inc. v. Comptroller, Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC
(1999) ; rev’d on other grounds, 771 A.2d 1061 (2001).
40 386 U.S. 753 (1967).
41 Furnitureland South, Inc. v. Comptroller, Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC
(1999), quoting Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
42 Furnitureland South, Inc. v. Comptroller, Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC
(1999) ; rev’d on other grounds, 771 A.2d 1061 (2001).
43 433 Mass. 255, 742 N.E. 2d 54 (2001).
37
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The taxpayer was a California corporation (a subsidiary of Massachusetts-based Gillette Co.) that
sold its products through independent sales contractors labeled by the taxpayer as “consultants”
who, in turn, marketed the products using a “direct selling method.” The consultants were
independent contractors whose compensation was the difference between the wholesale price
charged by the taxpayer and the retail price at which products were sold to consumers. The
consultants were prohibited by contract with the taxpayer, from selling through wholesale or retail
establishments. The legal relationship between the taxpayer and its consultants was governed by a
one page Independent Consultant Agreement.”44 The agreement provided that the consultant had
no authority to bind Jafra “in any way.”
Based on these facts, the Massachusetts Appellate Tax Board concluded the “consultants” were not
“representatives” within the meaning of G.L. c. 64H, § 1(5). Specifically, if the “consultants” were
“representatives” under Massachusetts law, then they created nexus based on agency principles. If
the “consultants” were not “representatives” under Massachusetts law, then no agency relationship
would exist for sales tax nexus purposes. The Board had decided that the “consultants” were
“representatives” within the meaning of G.L. c. 64H, §1(5). The question on appeal was whether the
“consultants” were, in fact, “representatives” under G.L. c. 64H, §1(5).
In analyzing this issue, the Supreme Judicial Court of Massachusetts adopted the analysis used by the
Florida Supreme Court and approved by the United States Supreme Court in Scripto.45 The analysis
focused on the nature and extent of the out-of-state taxpayer’s involvements with its putative in-state
sales force. Specifically, the court looked to determine whether the connection between the parties
(the out-of-state taxpayer and the in-state “consultant”) was sufficient to find that the in-state
“consultants” were, in fact, “representatives” for purposes of Massachusetts law. In doing so, the
court ignored what it termed “artful drafting” of contractual relationships. Instead, the court looked
at the control exerted by the “principal” over the “agent.” In doing so, it found the following:



The manner and place where a consultant could makes sales was contractually limited;
The claims that representatives could make about products being sold was contractually
limited; and
Although consultants were not contractually bound to sell the products of the taxpayer
at the suggested retail price, testimony at trial indicated that, as a matter of fact, the
consultants did not deviate from suggested retail prices.
Largely because of the consultants’ adherence to these policies, they became “a reflection of the
company (Jafra).” These facts so blurred the line of distinction between the company and its
independently contracted consultants that the substance of the relationship between Jafra and its
consultants would be given effect over the contractual form of the relationship. In reaching this
conclusion, the Massachusetts Supreme Judicial Court noted “the determination that it was the
taxpayer’s elaborate involvement with its consultants that brought them within the reach of the
statutory term [representative], not the fact that the taxpayer ‘exploit[ed] the retail sales market in the
commonwealth’ through its consultants.”46
The fact that this agreement was one page in length was particularly noted in the court’s recitation of the
facts in the case and it would seem, tended to undermine the economic substance surrounding the distinction
of the taxpayer from its consultants in Massachusetts.
45 Scripto, Inc. v. Carson, 105 So. 2d 775, 782 (Fla. 1958), aff’d, 362 U.S. 207 (1960).
46 Id.
44
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[5] Affiliate Nexus
A number of states have taken the position that the existence of common ownership between an instate taxpayer and an out-of-state corporation could potentially create nexus for the out-of-state
corporation. The basis for this position lies in the rule of law found in §52 of the Restatement
(Second) Conflict of Laws.47
The economic issue driving litigation in this area is the fact that many national retail concepts have
captive,48 on-line entities making sales into various states. Because of their lack of physical presence
nexus, as required by Quill,49 sales made through related entities do not require the selling entity to
collect sales tax on retail sales, even though similar sales made through a related “bricks and
mortar”50 entity within the state would require the collection of sales tax.
[a] SFA Folio Collections (OH) (1995)
In SFA Folio Collections, Inc. v. Tracy,51 SFA Folio Collections, Inc. (“Folio”) was a New York
corporation and a wholly owned subsidiary of Saks & Company (Saks”), also a New York
corporation. Folio sold clothes and accessories by direct mail to customers in Ohio and elsewhere.
Folio mailed its catalogues to customers and received orders by telephone, mail or fax.
Saks also owned another subsidiary, Saks Fifth Avenue of Ohio, Inc. (“Saks-Ohio”). Saks-Ohio
operated Saks Fifth Avenue stores in Ohio and elsewhere. Saks-Ohio was a separate profit center
from Folio.
Saks-Ohio received copies of Folio’s catalogues (at Folio’s direction) from Folio’s printer. These
catalogues were used for training store personnel and were also placed on the counters for
customers. Saks-Ohio did not rely on or use Folio’s stock to place orders when the store did not
have the merchandise although store personnel would refer customers to Folio. Saks-Ohio did not
place orders with Folio. Saks-Ohio would accept returns of merchandise that Folio sold in
accordance with each store’s policy. Each store charged the returned merchandise to its inventory
and attempted to sell the merchandise subsequently. The Saks-Ohio stores would not contact Folio
about such transactions. Such returns of Folio merchandise to Saks-Ohio stores were minimal.
According to the Restatement of Conflicts, “[j]udicial jurisdiction over a subsidiary corporation does not of
itself give a state judicial jurisdiction over the parent corporation.” Therefore, “a state does not have judicial
jurisdiction over a parent corporation merely because a subsidiary of the parent does business in the [state].”
However “[j]udicial jurisdiction over a subsidiary corporation will…give the state judicial jurisdiction over the
parent corporation if the parent so controls and dominates the subsidiary so as in effect to disregard the latter’s
independent corporate existence.” Likewise, “[j]udicial jurisdiction over the parent corporation will give the
state judicial jurisdiction over the subsidiary corporation if the parent so controls and dominates the subsidiary
so as in effect to disregard the latter’s independent corporate existence.”
48 In this context, a “captive” on-line entity is one which is wholly owned by the retail venture (the retail entity
often being a publicly traded entity with multiple subsidiaries).
49 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
50 The phrase “bricks and motor” as it applies in the retail context is the presence, within a give state, of
physical store locations.
51 73 Ohio St. 3d 119, 652 NE2d 693 (1995).
47
11
The Ohio Tax Commissioner assessed Folio use tax on its sales of merchandise to Ohio residents as
Folio had not collected use tax on those sales. The basis for the assessment was, in part, the fact that
Folio was a member of an affiliated group which included Saks-Ohio and that under Ohio R.C.
5739.01(B)(3)(e) Folio had nexus in Ohio. Further, the Commissioner asserted that Saks-Ohio was
an agent of Folio which provided Folio with substantial nexus in Ohio.
The court found that Saks-Ohio did not own or operate an in-state place of business for Folio. The
acceptance of the occasional return of Folio merchandise at Saks-Ohio stores may have created
“minimal nexus,” but not “substantial nexus.” Further, the presence in the Saks-Ohio stores of 200
catalogues per issue was of a minimal and not a substantial nature. As such, there was neither an
agency relationship nor a sufficient physical presence to create nexus.
[b] Borders Online (CA - 2005); Barnes & Noble (CA - 2007)
[i] Borders Online (2005)
In Borders Online, LLC v. State Board of Equalization,52 the California Court of Appeal analyzed whether,
through an affiliated entity (Borders, Inc.), Borders Online (Online) had sufficient presence in
California to justify the imposition of sales tax collection. The trial court had ruled, in a summary
judgment, in favor of the California State Board of Equalization (SBE). In this case, Online
challenged the Board’s ruling on its merits.
Online was a Delaware limited liability company (LLC) with its headquarters in Michigan. From
April 1998 to September 1999, Online sold more than $1.5 million in books and other similar goods
over the Internet to customers in California. Online did not own or lease property in California
during the period and did not have any employees or bank accounts in California. Online employees
outside of California received and processed all orders placed through Borders.com, Online’s
website. Online did not collect or pay sales or use taxes on items sold to California purchasers
during the periods in question.
Online was wholly owned by Borders Group, Inc., which also owned Borders and the Borders retail
stores located in California. Borders sold items similar to those sold by Online. Receipts at Borders
stores in California contained the phase “visit us online at www.Borders.com.” Borders, Inc and
Online shared corporate directors. Both legal entities shared a common logo, financial and market
data but did not intermingle their corporate assets.
However, during most of the audit period in question, Online posted the following return policy on
its website: “you may return items purchased at Borders.com to any Borders Books and Music store
within 30 days of the date it was shipped. All returns must be accompanied by a valid packing slip
(your online receipt and shipping notification are not valid substitutes for a packing slip on returns to
stores). Gift items may be returned or exchanged if they are accompanied by a valid gift packing slip.
You may not return opened music or video items, unless they are defective.” Any merchandise
returned in accordance with this policy was either absorbed into Borders’ own inventory or was
disposed of. Borders did not charge Online for accepting Online’s retuned merchandise. Borders
accepted such merchandise returns, even without a receipt, and provided a store credit for same,
provided that Borders carried the returned items. However, exchanges or credit card refunds for
returned items were routinely provided only to Borders and Online customers with receipts or
packing slips.
52
29 Cal. Rptr. 3d 176 (2005).
12
California asserted that Borders acted as an agent of Online and, as such, Online was “engaged in
business in the state” under Cal. Rev. & Tax Code Sec. 6203(a) and therefore was required to collect
sales taxes. Specifically, the SBE reasoned that Online was engaged in business in California because
Borders (its related affiliate with physical presence in California) was acting as an agent by accepting
return merchandise on behalf of Online pursuant to Online’s return policy post on its website.
Online removed its return policy from its website on August 11, 1999.
The SBE determined that Online was a retailer engaged in business in California pursuant to Cal.
Rev. & Tax Code Sec. 6203(c)(2) and at trial filed a motion for summary judgment. The trial court
granted the SBE’s motion holding that: (1) Online was covered by Sec. 6203(c)(2) because Online’s
return policy permitted customers to return items purchased through Online’s website to a Borders
store in California; (2) the imposition of the tax on Online did not violate the commerce clause; and
(3) the fact that Online’s return policy was not posted on its website during the entire disputed
period did not affect the conclusion that Online had sufficient physical presence in California to
support a finding of “substantial nexus.”
The question presented on appeal was whether Online had a “representative” or “agent” in
California acting under Online’s authority for the purpose of selling tangible personal property
pursuant to Cal. Rev. & Tax Code Sec. 6203(c)(2).
The Court of Appeals found the following facts contained within the trial court’s record particularly
relevant:



Each Borders store in the state would accept returns and provide a refund, store credit
or exchange of Online’s merchandise;
Borders encouraged its store employees to refer customers to Online’s website; and
Receipts at Borders stores sometimes invited patrons to “Visit us online at
www.Borders.com.”
The court also noted that “Borders’ practice of providing unique and preferential services to Online
purchasers by offering cash refunds to any purchaser of Online merchandise who wanted one, when
it could refuse to do so for customers of Online’s competitors, indicates that Borders provided such
preferential services because it was Online’s authorized agent or representative.”
The court noted that agency is a question of fact. The court held that by accepting Online’s
merchandise for return, Borders acted on behalf of Online as its agent or representative in California.
Further, the court rejected the “four-factor test” for agency historically cited in California case law.53
Under the “four-factor test,” agency will be deemed to exist only if (1) the agent has the power to
alter the legal relationships of the principal; (2) the agent acts as the fiduciary of the principal; (3) the
principal can control the agent; and (4) the agent consents to act as the principal’s agent.
While noting that courts should consider these issues in determining the presence of an agency
relationship, the court concluded that there was no bright-line “four-factor test” for determining
agency in California. From the tenor of the decision in Borders, it was irrelevant that the putative
agent (in this case Borders) believed it was an agent of Online. Instead, what governed was the fact
that Borders, in accepting Online’s returned items, was effectuating Online’s policy and thereby,
functionally, making Borders an agent of Online.
53
See, Michelson v. Hamada, 29 Cal.App.4th 1566, 1580 (1994); Violette v. Shoup, 16 Cal.App.4th 611, 620 (1993).
13
The court found that the stores were effectuating Online’s return policy by accepting Online's
merchandise under the terms of Online's return policy. Thus, the stores acted as Online's agent or
representative. Online met the statutory definition of a retailer engaged in business in the state by
having a representative or agent operating in California. Further, by accepting returns of items sold
by Online, the stores were Online's representative "for the purpose of selling" Online's goods. The
court concluded that the imposition of a use tax on Online did not violate the commerce clause of
the U.S. Constitution.54
[ii] Barnes & Noble (CA) (2007)
Subsequent to the decision in Borders Online,55 a California superior court ruled that another internet
retailer, whose promotional materials were distributed by an affiliated retailer with a physical location
in the state, did not have the requisite nexus under Cal. Rev. & Tax. Code Sec. 6203(c) to be
subjected to California use tax collection.56 The court held that nexus is determined by a twopronged test, both prongs of which must be met. While the internet retailer met the requisite
“selling” requirement, its affiliate did not qualify as an “agent.”
During the time period in question,57 barnesandnoble.com, LLP (“bn.com”) was an internet retailer
selling into California without a physical presence. It was 40 percent owned by Barnes & Noble, Inc.
(“BN, Inc.”), which also owned 100 percent of Booksellers, its retail “bricks and mortar”58
operations located in California and other states. The internet retailer accepted customer orders, and
fulfilled them by delivery through common carriers from locations outside California. BN, Inc.
neither directed nor controlled bn.com’s operations. There were no shared offices, employees,
warehouses, inventory, equipment or computer systems. Booksellers similarly had no connections of
any kind with bn.com. In particular, Booksellers’ stores did not accept product returns, or provide
any services or referrals to bn.com customers.
During the period in question, however, Booksellers used shopping bags that contained pre-inserted
$5 discount coupons for bn.com merchandise and which were imprinted with bn.com’s logo
opposite to Booksellers’ logo. The coupons were inserted by an unrelated, non-California vendor
that distributed the bags to Booksellers’ stores throughout the United States. It was the use of these
shopping bags that the Franchise Tax Board (FTB) looked to as support for its determination of
nexus and a use tax collection obligation. The FTB issued a tax deficiency. Bn.com paid the
deficiency and filed a claim for refund, which was denied by the State Board of Equalization (SBE)
and led to this litigation.
The superior court determined that Cal. Rev. & Tax. Code Sec. 6203(c)(2) required that BN, Inc.
both act as “agent”59 of bn.com, and engage in “selling” on its behalf, to support a finding of nexus.
Regarding “agency,” the court ruled that the code section and the two cases relied upon by the SBE60
provided no useful test for the instant fact pattern. Instead, the court applied general rules of agency,
and looked to whether Booksellers could “bind the principal,” bn.com. Booksellers had no authority
Id.
Supra.
56
barnesandnoble.com v. Franchise Tax Board, Case No. CGC-06-456465, Sup. Ct. S.F. County, Sep. 7, 2007.
57 Mid-November, 1999 to December 19, 1999.
58 Meaning that it has a physical presence through retail stores.
59
The court also determined the terms “agent” and “representative” to be synonymous.
60
Borders Online v. SBE, 129 Cal. App. 4th 1179 (2005); Scholastic Book Clubs, Inc. v. SBE, 207 Cal. App. 3rd 734
(1989).
54
55
14
to either adjust the terms of or redeem the coupons. It could not accept returns of books, solicit
sales or accept orders on behalf of bn.com. The court likened Booksellers to a mere “hypothetical
person on the street handing out promotional material.” Accordingly, the court found that no
agency existed, despite the fact that Booksellers and bn.com were brother-sister corporations.
Regarding the second prong, “selling,” the court held that the SBE’s interpretation of the term as
asserted in an earlier ruling61 as “inclusive of all activities that are an integral part of making sales”
had been “conclusively adopted as law” and was “now a matter of settled decisional law” as result of
a subsequent decision.62 Even though Booksellers’ activities would qualify as “selling,” however,
agency was lacking and nexus did not exist. The SBE decision was overturned and a refund ordered.
Due to the very clean fact pattern, the barnesandnoble.com decision provides little new in applying the
concept of agency for use tax collection nexus purposes. Even though an affiliate relationship
existed, an agency relationship will not be the end result if the two entities do not have the ability to
bind each other through their own activities. Regarding “selling,” however, it is clear that the SBE’s
broad interpretation, as endorsed by California jurisprudence, must be taken into account by
taxpayers, especially those that have agency relationships with other entities with a presence in
California. It is not yet known if the SBE will appeal the decision.
[iii] Barnes & Noble (LA) (2007)
A federal district court in Louisiana has also weighed in on the barnesandnoble.com fact pattern.
The court held that barnesandnoble.com , which sold items in a Louisiana parish and had an affiliated
store in the parish, was not liable for the collection of sales and use tax because it did not have
substantial nexus.63 During the period at issue, barnesandnoble.com did not maintain a mailing address
or telephone number in Louisiana. barnesandnoble.com had no employees in Louisiana and owned no
tangible personal property in the state. For part of the relevant period, the parent company owned
40% of barnesandnoble.com . For the remainder of the period, the parent company owned 80 percent
(eventually 100 percent) of barnesandnoble.com through a wholly-owned subsidiary. The parent
company also wholly owned a company (Booksellers) that operated numerous retail stores, including
a store in the subject parish. Although the two companies were both owned, in whole or in part, by
the same parent company, Booksellers and barnesandnoble.com did not share management, employees
or other important elements of their businesses.
The parish argued that the physical presence of Booksellers’ store in the parish should be attributed
to barnesandnoble.com because Booksellers allegedly acted on barnesandnoble.com ’s behalf. Specifically,
the parish cited the following aspects of the business relationship between the companies as evidence
that substantial nexus existed: (1) gift cards, (2) membership program, (3) cross-promotional
advertising, (4) commissions on in-store sales and (5) returns.64
Like the California court, the federal district court concluded that barnesandnoble.com did not have
substantial nexus with the parish. Booksellers’ activities in the parish on behalf of barnesandnoble.com
did not establish that Booksellers marketed barnesandnoble.com ’s products. Booksellers and
barnesandnoble.com were formally separate corporate entities that were wholly owned by the same
61
Borders Online, LLC, SBE Memorandum Decision, Sep. 26, 2001.
Borders Online v. SBE, Scholastic Book Clubs, Inc. v. SBE, supra.
63 St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F Supp 2d 575 (ED La 2007).
64 Id.
62
15
parent company for only part of the relevant period. According to the court, the nature and extent
of the activities performed by Booksellers on behalf of barnesandnoble.com within the parish were
insufficient to treat Booksellers as acting as a marketing presence. Booksellers had never taken or
solicited orders on behalf of barnesandnoble.com and did not provide facilities to place orders with
barnesandnoble.com .65
[6] Subsidiary Nexus
[a] Bass Pro Outdoor World, TSB-A-03 (NY State Tax Commission) (2003)
In this Advisory Opinion, New York held that the opening of a retail store in the state of New York
did not give rise to sales tax registration and collection responsibilities for a related but out-of-state
mail order entity with no physical presence in the state of New York. New York, in its analysis of
this issues, noted that if the in-state retailer did not engage in solicitation on behalf of the mail order
entity and that no common inventory, accounting or legal staffs were shared and that their respective
advertising and solicitation activities were not commingled, no registration and collection
responsibilities will be imposed on the out-of-state seller.66 This holding was premised on the
assertion that each of the related legal entities was operated on a “separate and distinct basis.”
[b] SFA Folio Collections (CT) (1991)
Similar to the Ohio case discussed above, the facts for SFA Folio Collections, Inc. v. Bannon,
Commissioner of Revenue Services,67 were virtually identical. Here, the Commissioner also asserted both a
physical presence argument in asserting nexus as well as an “enterprise theory” based on the presence
within Connecticut of an affiliated corporation, in this case Saks-Stamford. With regard to the latter
assertion, the Commissioner believed that the due process standard of “economic presence” was
sufficient to create nexus. The Supreme Court of Connecticut disagreed.
In reaching its conclusion the court noted a number of key factors. Like Folio’s case in Ohio, SaksStamford did not solicit for Folio. Further, it flatly rejected the Commissioner’s argument that
Container Corporation of America v. Franchise Tax Board68 would permit disregarding the existence of a
separate corporation and permit taxation under an “enterprise theory.” The court stated that, absent
statutory authority, the line of cases pursuant to the “unitary business principle” were inapplicable to
sales tax nexus. Further, absent the showing that the corporations were formed for illegitimate
purposes, separate corporate entities will be recognized.
[c] G.P. Group, Inc. (MO) (1993)
G.P. Group, Inc. v. Director of Revenue69 addressed whether an out-of-state seller of tabloids was liable
for use tax on sales to Missouri purchasers.
Id.
Bass Pro Outdoor World L.L.C., New York Advisory Opinion TSB-A-03(25)S, June 11, 2003.
67 217 Conn. 220, 585 A.2d 666 (1991).
68 463 U.S. 159 (1983).
69 91-002180RV; 92-000318RV; 92-000319RV; 92-000320RV; 92-000322RV; 92-000323RV; 92-000324RV,
Missouri Administrative Hearing Commission, Feb. 4, 1993.
65
66
16
[i] Operative Facts
The Enquirer/Star Group, Inc. (“Group”) was a Delaware corporation headquartered in Florida.
Group functioned as a holding company and was the parent corporation of G.P. Group, Inc.70
Group owned the following subsidiaries:
1)
2)
3)
4)
Distribution Services, Inc. (“DSI”), a Delaware corporation;
National Enquirer, Inc. (“NEI”), a Florida corporation;
Weekly World News, Inc. (“WWN”), a Florida corporation; and
SOM Publishing, Inc. (“SOM”).
DSI, NEI, WWN and SOM were headquartered in Florida. Group provided accounting and
management information services to its subsidiaries. Each company made its own decisions
regarding purchases, office space and personnel.
Although Group did not sell its publications directly to Missouri wholesalers or retailers, there were
some direct subscription sales. The subscription sales resulted primarily through advertisements in
Group’s publications. The tangible magazines themselves were sold to a distributor, News America
Publishing, Inc. (“NAPI”), an unrelated third party, which in turn sold the magazines to wholesalers.
The wholesalers then sold the magazines to retailers including retailers in Missouri.
Although Group did not sell its publications directly to Missouri wholesalers or retailers, it did sell
the publications to Missouri consumers through subscriptions. The subscription sales were solicited
through advertisements in its publications as well as nationally broadcasted television commercials.
DSI also ordered display racks for retailers to display their publications and, when hired to do so, for
third party publications. Although DSI ordered the racks for the retailers and guaranteed payment by
the retailer to the vendor it never took title to the property. DSI did, however, have “checkers,”
employees who visited retailers to ensure the racks were properly and neatly displayed. During the
audit period, DSI had twelve employees in Missouri working out of their homes.
[ii] The State’s Assertion
The Missouri Department of Revenue concluded that Group and its subsidiaries were a single entity
for sales and use tax purposes. The Department further concluded that Group owed use tax to
Missouri for: (1) the racks that DSI placed with retailers in Missouri71 and (2) publications sold to
Missouri subscribers.
[iii] Findings of the Court
G.P. Group, Inc. was incorporated in Delaware.
The amount of use tax assessed pertaining to the racks was computed by determining the total dollar amount
of racks ordered by DSI during the audit period apportioned to Missouri based on a national survey of
nationwide amounts of tabloid sales.
70
71
17
The Department asserted that DSI was simply the “alter ego” of Group as a whole. Therefore, the
Department asked the court to “pierce the corporate veil.” The court then cited the test for piercing
the corporate veil and analyzed the facts accordingly.
In Missouri, the test for piercing the corporate veil requires a two-prong finding: (1) the corporation
must be dominated by persons or another corporation; and (2) the corporate “cloak” must be used as
a subterfuge “to defeat public convenience, justify a wrong, or perpetuate a fraud.”72
Under the relevant Missouri case law, piercing the corporate veil requires the finding of several of the
following factors:











The parent corporation owns all [or] most of the stock of the subsidiary;
The parent and the subsidiary corporations have common directors or officers;
The parent corporation finances the subsidiary;
The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation;
The subsidiary has grossly inadequate capital;
The parent corporation pays the salaries and other expenses or losses of the subsidiary;
The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to it by the parent corporation;
In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or
financial responsibility is referred to as the parent corporation’s own;
The parent corporation uses the property of the subsidiary as its own;
The directors or executives of the subsidiary do not act independently in the interest of
the subsidiary but take their orders from the parent corporation in the latter’s interest; or
The formal legal requirements of the subsidiary are not observed.73
Although the court provided no indication of how many of the above factors need be present before
the corporate veil will be pierced, it held that the Department did not provide sufficient evidence to
allow the court to conclude that the corporate veil should be pierced in accordance with “intercorporate domination” prong of the Missouri test.
The Department also argued that Group used its domination of DSI to avoid its putative statutory
duties (1) to pay use tax on the racks imported into and used in Missouri; and (2) to register for
Missouri use tax purposes.
Sec. 144.650 of the Missouri statutes requires that every vendor selling tangible personal property for
storage, use or consumption in Missouri register for use tax purposes. However, the court concluded
that the Department failed to allege, and the record did not show, that DSI ever sold racks to
anyone. As such, DSI was not under an obligation, pursuant to Missouri law, to register for Missouri
use tax purposes. In reaching this conclusion, the court noted that although DSI did carry the racks
in question on its books as assets, DSI never actually owned the racks. On this point, the court
concluded that, “because the tabloid and magazine publishing industry is utterly dependent upon the
retailer to display its products, the industry provides display racks to the retailer, free of charge. The
The court cited as precedents Southside National Bank in St. Louis v. Winfield Financial Services Corp., 783 S.W.2d
140, 144 (Mo. App., E.D. 1989); and Collet v. American National Stores, Inc., 708 S.W. 2d 273, 284 (Mo. App.,
E.D. 1986).
73 Collet, at 284.
72
18
record shows that the parties behave as though the retailer owns the racks, and we conclude that is
the case.”74
Therefore, the court concluded that, because the Group did not so “dominate” DSI, that DSI was
merely the Group’s alter ego and the Department did not show that the Group manipulated DSI in
order to avoid the Group’s putative obligations under Missouri use tax law that neither the Group
nor DSI were liable for Missouri use tax.
[d] Points of Analysis
It is important to separate the analysis used to determine attributional nexus from that used to
determine agency nexus. Although there will of necessity be some overlap of the analytical points, a
finding of attributional nexus indicates that the putatively separate entities have both a commonality
of operation, management and commercial interests such that they should be treated as one actor for
tax purposes. In subtle contrast to the attributional nexus analysis, agency nexus requires a showing
of a principal and agent relationship between the parties and focuses on the key element of “control”
through an actual or imputed agency relationship.
[i] Agency Nexus Points of Analysis
The examination of state case law in the area of “agency nexus” in the sales tax context leads to the
following critical points of analysis:





Where does the burden of proof lie?
o Dell suggests in cases where the agency relationship is being implied the burden
of proof lies with the state;
What is the putative principal’s economic interest in having certain services performed?
o Again Dell suggests this interest needs to be substantial. In suggesting this
standard, Dell referenced Scripto for the proposition that:
 Courts will look to the nature and extent of services carried out by
agents/contractees; and
 The extent to which the performance of such services enable the
putative principal to maintain a market in the subject state;75
The extent to which services are customized or personalized for the benefit of the outof-state seller;76
The degree of control and structure regarding the activities of the putative in-state
agent;77
o Does the in-state party solicit sales or promote on behalf of the remote seller?
The motivation of the acceptance of returns of merchandise sold by the out-of-state
seller, specifically, for whose convenience are such returns accepted?78
1993 Mo. Tax LEXIS 34, p. 18.
See barnesandnoble.com v. Franchise Tax Board, Case No. CGC-06-456465, Sup. Ct. S.F. County, Sep. 7, 2007, for
the proposition that the taking of an order for an out-of-state seller facilitates maintaining a market.
76 Furnitureland South Inc. v. Comptroller, Circuit Court for Anne Arundel County, Maryland, No. C-97-37872 OC
(1999) ; rev’d on other grounds, 771 A.2d 1061 (2001).
77 Commissioner of Revenue v. Jafra Cosmetics, Inc., 433 Mass. 255, 742 N.E. 2d 54 (2001).
78 Borders Online, LLC v. State Board of Equalization, 29 Cal. Rptr. 3d 176 (2005).
74
75
19



o Is it a store or a company policy to accept such returns?
o Are returns accepted on “behalf” of the remote seller?79
The objective facts regarding the nature of the relationship between the in-state party
and the out-of-state party will govern over the “beliefs” of the parties in question;
o Do the separate legal entities have separate offices and operational
management?
o Are intercompany transactions at arm’s length?
To what extent can the in-state putative agent bind the out-of-state seller?80 and
The degree of common management between the in-state and out-of-state parties.81
As in all agency analyses, both the quality and the quantity of the facts which tend to support or
refute the analytical factors outlined above will influence a court’s determination in a given matter.
Nonetheless, taxpayers should pay heed to these issues as these are the factors which, to date, courts
have utilized in determining the existence of agency nexus.
[ii] Attributional Nexus Points of Analysis
Attributional nexus is a much “fuzzier” concept than agency nexus. It depends on two primary
theories, either: (1) that one entity is the “alter ego” of another legal entity; or (2) the belief that nexus
should be attributed to a given entity based on the affiliated82 or unitary83 relationship of the parties.
[A] Alter Ego Theory
The “alter ego” theory holds that an in-state entity should be ignored as being an “alter ego” of an
out-of-state actor.84 The application of this theory is dependent on whether the party seeking to
ignore the in-state legal entity (the state) can adduce sufficient evidence to persuade a court that the
given legal entity should be ignored. Accordingly, state courts will fall back on state common law
under the “piercing the corporate veil” doctrine as developed in that state.85 Typically, the test for
piercing the corporate veil will be a finding that a corporation was formed or utilized to accomplish
an illegitimate purpose, or alternatively that the corporation which is sought to be ignored lacked
economic substance86 or was a sham.87
79
barnesandnoble.com v. Franchise Tax Board, Case No. CGC-06-456465, Sup. Ct. S.F. County, Sep. 7, 2007.
Id.
81 Id..
82 An affiliated group is one or more chains of includible corporations connected through stock ownership of
80% of the voting power of all classes of stock and 80% of each class of non-voting stock. IRC §1504(a).
83 Although there are several tests used for determining whether a business is unitary, the most commonly used
is the three unities test set forth by the California Supreme Court requiring: (1) Unity of ownership; (2) unity of
operation (usually evidenced by certain centralized function within a group such as accounting or purchasing);
and (3) unity of use of centralized management and system of operation. Butler Bros, v, McColgan, 17 Cal. 2d 664,
678, 111 P.2d 334, 341 (1941), aff’d, 315 U.S. 501 (1942).
84 See, for example, Spencer Gifts, Inc., New York Advisory Opinion TSB-A-86(37)S, Sep. 18, 1986 and Thomas B.
Bottiglieri, New York Advisory Opinion TSB-A-88(20)S, Mar. 2, 1988.
85 See G.P. Group, Inc. v. Director of Revenue, 91-002180RV; 92-000319RV; 92-000320RV; 92-000323RV; 92000324RV; Missouri Administrative Hearing Commission, Feb. 4, 1993.
86 In general, economic substance exists if there are significant non-tax economic consequences associated with
an entity to support the allowance of the tax benefits of the existence of the legal entity. See, e.g., Saba Partnership
v. Commissioner, 348 U.S. App. D.C. 231 (2001).
87 See ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000).
80
20
[C] Affiliate or Unitary Concepts
As the case law illustrates, some states have sought to assert nexus based on the relationship (namely
the ownership relationship) between the in-state actor and the out-of-state related party – typically a
remote seller. However, since sales and use taxes are imposed on a legal entity basis, courts have
been unwilling to hold that one entity’s activities confer nexus on the other entity.88
Further, courts have noted that unitary business concepts, discussed below, will not be applied in the
sales tax context.89
[e] Unitary Relationship
The unitary entity concept primarily informs the area of multijurisdictional income tax
apportionment.90 In distinguishing “attributional” nexus concepts from “agency” nexus concepts,
common law notions of what constitutes agency, primarily the principle of “control” of one party
(the principal) over the other party (the agent) and the willingness of courts to look carefully at
related party transactions and structures91 in a “substance-over-form” context is informative in the
sales tax context.
[B] NY Department Taxation & Finance Issues Guidance – the
“Amazon” Rule
The New York State Department of Taxation and Finance has released a technical memorandum
that explains recently enacted legislation creating a presumption that certain vendors of taxable
tangible personal property and services are subject to the New York sales tax.92 Many tax
professionals have taken to calling the provision the “Amazon rule” as it appears to target companies
like Amazon.com and other online retailers outside New York that pay New York advertisers
commissions for sales generated from advertisements that link to online retailers’ Web sites.
[1] Budget Change Created a Presumption
The recently adopted New York budget contains a sales tax provision pursuant to which the
definition of “vendor” is amended, effective April 23, 2008. Under this provision, a person who
Current, Inc. v. State Bd. of Equalization, 24 Cal. App. 4th 382 (1994). The court noted, based on several points
of analysis, that the corporate entities in question did not have integrated operations or management.
89 G.P. Group, Inc. v. Director of Revenue, Supra.
90 “The linchpin of apportionability in the field of state taxation is the unitary business principle…” Mobil Oil
Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980).
91 An analysis informed by IRC §§ 267 and 269 and related case law.
92 TSB-M-08(3)S, Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation
and Finance, May 8, 2008.
88
21
solicits sales of tangible personal property or services that are subject to New York sales tax may
be presumed to be soliciting business through a representative if such person enters into an
agreement with a New York resident, under which the resident refers potential customers to the
person for consideration (i.e. a commission). The presumption of taxability exists if the person
generates more than $10,000 through such referrals during the last four quarterly sales tax periods.
One fact pattern in which this presumption may exist is where the person is an Internet retailer
actively encouraging New York residents with Web sites to advertise for the Internet retailer in
return for a commission on sales resulting from the advertising link. The presumption may be
rebutted in cases where the representative did not engage in any solicitation in New York that would
result in nexus under constitutional standards.93 In cases where the presumption is not rebutted, the
person must register as a vendor for purposes of the New York sales tax, and must collect and remit
sales tax on all of its New York sales.
[2] Memorandum Creates “Amnesty” Period For Sellers Subject to the Presumption
The Department’s memorandum notes the general rule that any business located outside New York
that solicits sales of tangible personal property or services subject to the New York sales and use tax
through a New York representative is required to register as a vendor, and must obtain a New York
State Certificate of Authority.94 The Department then discusses the effect of the newly created
presumption on this general rule. While direct arrangements with New York residents clearly
give rise to the presumption, in the memorandum, the Department highlights situations
where indirect arrangements can lead to the presumption as well. The Department declares
that resident representatives that indirectly refer potential customers to a seller’s Web site (either
through its own Web site or a third-party intermediary’s Web site) will create the presumption of
taxability for the seller. Further, a seller entering into agreements with third-party intermediaries that
enter into agreements with New York representatives of the seller also creates the presumption of
taxability for the seller. However, a simple agreement to place an advertisement on a New York
representative’s Web site does not give rise to the presumption of taxability.
A seller who cannot overcome the presumption that they are subject to the New York sales tax may
receive, in essence, a limited amnesty period, if five separate conditions are met:





93
94
The business, as of April 23, 2008, is subject to the presumption of taxability as discussed in
the memorandum;
Other than the business having New York representatives soliciting in the state on behalf of
the business, the business is not otherwise required to register and collect for the New York
sales tax;
The business was not registered for New York sales tax at any time between July 23, 2007
and April 23, 2008;
The business was not registered for sales tax when it made the sales for which it was subject
to sales tax; and
The business actually registers in New York and begins to collect and remit the sales tax
from its New York customers by June 1, 2008.
N.Y. TAX LAW § 1101(b)(8)(vi).
N.Y. TAX LAW § 1101(b)(8)(vi); N.Y. COMP. CODES R. & REGS. tit. 20, § 526.10(a)(3).
22
[a] New York Provides Examples of the Application of this Rule
The Department’s technical memorandum contains helpful examples in understanding what types of
vendors will be subject to the presumption. The general import of these examples is that an out-ofstate vendor that utilizes one or more New York based third-party businesses for referral based
business, creates a presumption of taxability where greater than $10,000 of gross receipts are
generated during four quarterly sales tax periods and such in-state business is compensated on a
commission basis. Note, however, the out-of-state vendor may rebut the presumption of taxability if
the New York based business does not otherwise engage in any other means of solicitation of New
York customers on behalf of the out-of-state vendor.
In contrast, the technical memorandum contains one example where the presumption would not
apply. In that example, an Internet-based retailer of gardening tools and supplies with New York
state customers enters into agreements with several organizations to place online advertisements on
their Web sites which direct the user to the retailer’s Web site. The retailer pays these organizations a
set fee based on the number of clicks on these advertisements, regardless of whether sales are made.
Since the retailer’s agreement is merely placing advertising on the organizations’ Web sites, the
retailer is not presumed to be a New York vendor.95
[b] Amazon’s Response
In response to the enactment of the new rule, Amazon.com is pursuing litigation in New York,
claiming that the rule is unconstitutional for a number of reasons. According to the Amazon lawsuit,
under a Commerce Clause argument, the rule imposes sales tax obligations on vendors that do not
have actual physical presence or in-state representative soliciting sales on its behalf in New York,
violating the Quill 96 standard.97 Further, Amazon has claimed that the statute violates the Due
Process Clause because the statute is impermissibly vague and overbroad (due to the “indirect”
referral standard), and the presumption of taxability is effectively irrebuttable.98 Finally, Amazon has
argued an Equal Protection Clause violation, as it appears that this statute was specifically targeted at
Amazon.99
[c] Commentary Regarding New York’s Remote Seller Rule
As can be seen from the examples, a slight change in facts can make all the difference in whether or
not a vendor of a taxable item in New York ultimately will be subject to New York sales tax
registration, collection and remittance obligations. As the Amazon case is likely to take a substantial
amount of time to resolve, similarly situated parties who currently are not registered for purposes of
the New York sales tax may have to consider the offer contained in the memorandum, and
potentially fight for refunds at a later date if the statute eventually is deemed to be unconstitutional.
Since the New York sales tax arguably has a broader reach than many other state sales tax statutes,
the new rule is likely to have extensive impact. New York taxes sales of tangible personal property
TSB-M-08(3)S, Example 4.
Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
97 Summons and Verified Complaint, Amazon.com, LLC and Amazon Services, LLC v. New York State Department of
Taxation and Finance, para. 41-46, pp. 12-14.
98 Id. at para. 47-52, pp. 14-16.
99 Id. at para. 53-58, pp. 16-17.
95
96
23
and enumerated services. Therefore, the new law is applicable to vendors of services that are subject
to the New York sales and use tax. As an example, vendors of taxable information services are likely
to be impacted by the new rule.
[d] New York Voluntary Disclosure Agreements for Out-of-State E-Commerce Retailers
That Use In-state Representatives to Solicit Sales
On November 9, 2007, the New York State Department of Taxation and Finance issued a
memorandum to explain the sales tax registration and collection requirements for out-of-state ecommerce retailers that use independent contractors, agents or other representatives within the state
to solicit sales or to make or maintain a market for their products or services.100 The memorandum
concluded that businesses located outside New York soliciting sales of taxable tangible personal
property or services through representatives located in New York were required to register as
vendors and had to obtain a Certificate of Authority for New York sales tax purposes. According to
the Department, the memorandum was intended to clarify current policy and did not reflect any
change in requirements for vendors doing business in the state. If an out-of-state business should
have been registered based solely on the information contained within this memorandum, but was
not registered, the Department stated that it would not assess any prior sales taxes due or any civil or
criminal penalties or interest for failure to collect and remit any prior sales tax due, if the business
registered and began collecting sales tax by December 7, 2007. However, the Department withdrew
this memorandum on November 15, 2007.101
[3] California State Board of Equalization (SBE) Information Paper 6/18/08
News reports about nexus issues in New York and Texas102 caused the SBE to receive numerous
inquiries regarding when an out-of-state company was required to collect sale or use tax on sales of
products shipped into California. As a result of such inquiries the SBE released an Information
Paper.
California Revenue and Taxation Code (CRTC) §6203 describes activities which constitute being
“engaged in business in this state” for purposes of sales/use tax nexus in California. If a seller has
sufficient business presence, CRTC §6203 requires that seller to register with the SBE and collect tax
on sales to California.
100
101
TSB-M-07(6)S, New York Department of Taxation and Finance, Nov. 9, 2007.
TSB-M-07(6.1)S, New York Department of Taxation and Finance, Nov. 15, 2007.
The SBE, in its Information Paper, referenced the Texas Comptroller’s examination of Amazon’s business presence
Texas regarding whether Amazon should collect Texas sales and use tax on shipments into Texas. A local Texas
property tax jurisdiction had gotten confused about whether or not Amazon owned a warehouse in its local taxing
jurisdiction. That information got picked up by a local newspaper and then the misunderstanding grew. Subsequently
it was found that an affiliated separate legal entity, rather than Amazon, owned the real property in Texas. Once the
Texas Comptroller’s office got the information that Amazon really did not own any real property such as a warehouse
in Texas, that resolved the matter since Texas seeks to follow the Quill case requirements for sales/use tax nexus. With
regard to Texas, an out-of-state seller does have nexus for sales/use tax nexus purposes for Texas if they own, rent, or
lease equipment in Texas such as a server. However, an out-of-state seller paying a third-party to host a web page or
web site on the third-party’s server will not create nexus because that is the purchase of a data processing service (and
not considered to be the rental or lease of the server). In general, two taxability letter rulings from the Texas
Comptroller (9802118L and 9806518L) cover Texas’ policy regarding remote sellers.
102
24
Under California statute, certain retailers are considered “engaged in business” in California and are
thus required to collect the California use tax on sales made to California consumers:
1. Any retailer maintaining, occupying, or using, permanently or temporarily, directly or
indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of
distribution, sales or sample room or place, warehouse or storage place, or other place of
business.
2. Any retailer having any representative, agent, salesperson, canvasser, independent
contractor, or solicitor operating in this state under the authority of the retailer or its
subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders
for any tangible personal property.
3. Any retailer deriving rentals from a lease of tangible personal property situated in this
state.103
Out-of-state companies that are not “engaged in business” in California are not required to collect
use tax on shipments into California.
[C] Recent Developments
[1] Virginia, Corporate Income Tax Nexus & Merchandise Returns
The Virginia Department of Taxation ruled that even though a taxpayer, who is an out-of-state
retailer, does not directly perform activities that would exceed the protections afforded by P.L. 86272, the return of its merchandise through an affiliated retailer could exceed that protection. (Read,
agency/affiliate nexus.)
The taxpayer's Virginia customers were able to return merchandise purchased through mail order and
via the Internet to the in-state stores of a retailer affiliated with the taxpayer.104 The Department
noted that the taxpayer's website does not advertise that returns are accepted at retail stores, and
instead instructs them to ship such merchandise directly to its distribution center located outside
Virginia. The affiliated retailer accepts returns from unrelated parties as well as the taxpayer so long
as the returned merchandise is carried by the retail store. When merchandise sold by the taxpayer, but
not carried by the affiliated retailer, is returned to a retail store, such merchandise is sent to the
taxpayer's customer service center located outside Virginia where a refund is issued by the taxpayer.
Customers regard for the mail order or Internet seller is enhanced by the availability of a place to
return merchandise locally. However the affiliated retailer provides a local shipping point for
the taxpayer's returned merchandise not carried in the retail store, which it does not provide
to unrelated third parties.
[D] Non-Traditional Remote Seller Issues
103
104
CRTA §6203(c).
Virginia Public Document Ruling 08-168, 09/11/2008.
25
Remote seller issues come into play in many industries and in many common transactions. For
example:

In the energy industry (gas pipelines, electric energy grids) where ownership of the
energy commodity changes hands in interstate commerce;

For cooperatives where the member/patrons have an equitable interest in the inventory
of the cooperative but which do not manage or control the cooperative;

When an advertiser instructs a printer of advertising materials to directly ship the printed
advertisement to a potential customer;

Health care supply providers which team with national retailers to dispense their
healthcare products;

In the complex transactions between pharmacy benefit management companies and
retail pharmacies where the “ownership” of the customer or the prescription transaction
is not at all clear; and

Software and non traditional software vendors where downloaded or web portal activity
used as part of professional service delivery involves a license of software, and may
involve hardcopy maintenance and update disks.
While this is not an all inclusive list, it is a representative example of the type of industries and
transactions that present significant, unresolved, nexus and other tax questions. Because these
transactions arise from general business models and are not designed by tax departments or
envisioned by the drafter of tax legislation many of the tax issues resulting form these transactions
often come as a surprise to taxpayers and tax authorities alike.
[1] Evolution of Drop Shipment Transactions
In recent years, due to the increasing complexity of business models, the increased use of ecommerce, more sophisticated supply chain relationships, the rise of dual branding and multi-channel
retailers, a broader, and more complex, set of transactions may, arguably, fit within the context of
“drop shipment” transactions.
For example:

Pharmacy Benefit Management Transactions: The Pharmacy Benefit Management
company (PBM) contracts with large employers to manage employ benefit plans
pertaining to prescription drugs. For non-mail order transactions, the PBM coordinates
between the plan sponsor, the insurance carrier and the retail pharmacy chains to
provide seamless service to fulfill the prescription needs of the plan participant (the
covered employee). When the plan participant goes to a retail pharmacy to fill a
prescription, the point of sales system and/or other EDI platforms, interface with the
PBM’s adjudication system (a software system (or systems) that identify the plan
participant, their medical profile, potential generic substitutes, and the predetermined
26
co-payment amount) and validates the transaction. Although the PBM may underwrite
the transaction (guarantee payment to the retail pharmacy) it often does not take title to
TPP (the prescription drugs). Several question arise:


o
Is this the performance of a service, the sale of TPP, or a mix of both?
o
Depending on the outcome of the above is the transaction taxable or exempt in
the appropriate jurisdiction?
o
Should the transaction be reported gross (the total amount (value) of the
prescription filled) or net (the net amount the PBM will receive after
reimbursing the retail pharmacy)?
o
Does the contractual requirement to underwrite the transaction constitute
equitable105 or legal title106?
Healthcare supply transactions: A provider of certain non-prescription healthcare
supplies (program sponsor) solicits customers to join a supply purchasing program
based on the provider’s ability to provide the customer with certain healthcare supplies
at a low cost and at locations convenient to the customer. To fulfill this obligation the
sponsor creates a “retail network” (under specified terms regarding the pricing of
supplies to be dispensed) that will accept the sponsor’s customers. Once customers
enroll to be a member of the program the customer places an order with the program
sponsor and can go into a number of national retailers, unrelated to the program
sponsor and obtain their healthcare supplies. On receipt of the order: (1) the sponsor
bills the customer’s insurer (typically the purchase is a covered healthcare expense); (2)
the sponsor bills the customer for the non-covered amount; (3) the customer goes into a
member of the retail network and picks up their healthcare supplies; (4) the sponsor
pays the retailers (typically at wholesale prices) for the supplies dispensed; and (5) the
inventory at the retailer always belongs to, and is under the control of, the retailer until it
is handed to the customer.
o
Is there “flash title” ownership of the healthcare supplies by the program
sponsor?
o
Is there agency or attributional nexus between the program sponsor and the
members of the retail network?
o
Is there joint-liability on the sales tax implications of the transactions?
Energy industry transactions: The transportation of many energy commodities (natural
gas, oil and electricity) occur through national and international transportation systems
(pipelines or electric grids). Typically, a producer or seller of such an energy commodity
places the commodity into an interstate transportation system with the contractual
obligation the sell the commodity to a buyer when the product reaches a certain
105
In general, equitable title (ownership) speaks to ownership rights that are respected in equity short of the
possession of legal title. For a generally applicable definition of equity see Gilles v. Department of Human
Resources Development, 11 Cal. 3d 313 Cal. Rptr. 374, 380, 521 P.2d 110 (Cal. 1974).
106
Legal title is the formal right of ownership of property typically evidenced by a written instrument such
as a deed, bill of sale, contract or other evidence of title.
27
destination within the transportation system.107 Often, the transportation system (the
pipeline or grid) is owned by a third party unrelated to either the buyer or seller. Does
the contractual transfer of the energy commodity from seller to buyer within a state (or
sub-jurisdiction) where the seller does not have any other business contacts cause the
seller to have nexus and therefore make the seller subject to income or sales taxes?
Specific tax-related questions implicated include:

o
Do such “transfer of title” transactions create substantial presence for income
tax purposes?
o
Does the presence of a energy commodity constitute “physical presence” in the
jurisdiction, when physical control is in the custody of a common carrier,
thereby constituting nexus for sales tax purposes?
Cooperative scenario: Under the Internal Revenue Code (“IRC”) most cooperative
structures108 are not taxable. Instead their patron/members109 are taxable, from an
income tax perspective, with respect to their patronage dividends.110 Many, although not
all, cooperatives consolidate volume purchasing benefits for similarly situated, but not
necessarily related,111 member/patrons in order to achieve savings. The difference
between the gross purchases made out of a cooperative by the patrons of the
cooperative and the actual cost of the goods (the putative “profit” of the cooperative) is
dividended to patrons based on what and how much they purchased and the discount(s)
the cooperative was able to achieve based typically on volume. As such, typically, a
cooperative has no income that is not distributed to patrons. Accordingly, under the
IRC, the cooperative is typically not a tax paying entity but, instead, its patrons are taxed
on the dividends received from the cooperative.112 The state income tax issues arise if
the cooperative operates in a jurisdiction(s) where its members/patrons do not have
nexus. Specifically:
o
Does the patron/member’s equitable title in property that will ultimately be
distributed to them or, alternatively their “flash title” interest in a particular
inventory pool give the patron/member nexus in a state where the cooperative
operates or, alternatively, stores the goods in question?
o
Is there an agency or attributional nexus relationship between the cooperative
and the patron?
107
Another common transaction pattern within the energy industry is for a company to acquire title of a
certain amount of a commodity within a transportation system and immediately resell that commodity to a
buyer while the commodity is present within a given state (or other sub-jurisdiction), often, where neither
the seller nor the purchaser does not have nexus. See, for example, Wascana Energy marketing (U.S.), Inc.,
New York Division of Tax Appeals, Administrative Law Judge Unit, Amended DTA No. 817866, August
8, 2002.
108
For purposes of this discussion, all references to the taxation of cooperatives, concerns cooperatives
taxed under Subchapter T of the Internal Revenue Code (“IRC”) §§1381-1388.
109
In general a “member” of a cooperative is a person owning a legal interest in the cooperative entity. A
“patron” is a person who is a “patron” (i.e. does business with the cooperative). For purposes of
Subchapter T see, IRC §1388(a).
110
IRC §1382(a),(b) and (d).
111
For tax purposes, related parties are generally defined under IRC §1563 (affiliated groups). IRC § 267
(related party loss disallowance rules), or IRC §318 (ownership attribution rules).
112
IRC § 1382(a) and (c).
28
Is this an all inclusive list of the types and forms of drop shipment and pseudo-drop shipment
transactions currently occurring? No. But this list is a reasonable list of examples of how diverse,
complex and common these types of transactions have become within our economy.
29