Can a seller have nexus with a state – so as to be obligated to collect and remit that state’s sales and use taxes – only in connection with certain sales that seller makes into that state? In this article, the authors explore the concept that only certain transactions may be subject to that obligation, depending on the extent of the seller’s connection with that state.
Originally published in State Tax Notes, July 3, 2017.
Oral argument before the Ohio Supreme Court took place on May 3 in the three cases challenging Ohio’s Commercial Activity Tax (CAT) nexus standard. Crutchfield, Inc. v. Testa, Case No. 2015-0386; Mason Cos. Inc. v. Testa, Case No. 2015-0794; Newegg, Inc. v. Testa, Case No. 2015-0483. Ohio imposes its CAT on a business that has more than $500,000 in annual gross receipts in the state, even if the business has no physical presence in the state. These three taxpayers have challenged this standard as violating the Commerce Clause substantial nexus test.
The oral argument in the cases proceeded as expected. The majority of the time for both parties was taken up by questions from the bench. Several judges quizzed the taxpayers’ counsel about the assertion that no business was conducted in Ohio. The judges focused on activities such as products being received by customers in Ohio and software being placed on customers’ computers in Ohio to facilitate ordering or to track customer activity in Ohio. The taxpayers’ counsel vigorously disagreed with this construction of the facts – noting that whatever happened in Ohio, all of the taxpayers’ actions occurred elsewhere. He stated that the activities called out by the judges were no different than receiving and reviewing a catalog in the state.
The taxpayers’ counsel repeatedly cited to Tyler Pipe as the controlling law in this case – noting that before a state could impose a tax on a business, that business had to do something in the taxing state (or have something done on its behalf) that helped it establish and maintain a market in the state. According to the taxpayers’ counsel, it was not enough that a market exists in the taxing state; the taxpayer had to be doing something in the taxing state. He asserted that the taxpayer conducted no business activities in the state and thus Tyler Pipe prevented the state from imposing the CAT on them. This became the taxpayers’ mantra throughout the argument. (more…)
After a quarter of a century, the school book nexus cases continue to proliferate, delight and mystify. The latest installment in the saga is from Alabama. Scholastic Book Clubs, Inc. 2931 v. State Of Alabama Department Of Revenue, Ala. Tax Tribunal, Dkt. No. S. 14-374 (March 25, 2016). Like the other cases, the question addressed is whether a vendor with no property or employees in the state nevertheless has nexus for sales tax collection purposes because of the activities of unrelated, and uncompensated, teachers in the state. Like all of the other cases, these teachers received unsolicited catalogs from the vendor and could either discard the materials or distribute them to their students. Like all of the other cases, if a teacher elected to distribute the materials, the teacher collected completed order forms and payments from the students and mailed the order and payments to the vendor. Like all of the other cases, the teacher distributed the order once received to the individual students that placed orders. Also, like all of the other cases the vendor provided bonus points to teachers based on the dollar amount ordered. The vendor intended the bonus points be used to purchase additional classroom materials – either from the vendor directly or through gift cards to another retailer.
In reaching its decision, the Alabama Tax Tribunal (the Court) restricted its analysis to the historical Quill physical presence standard. While noting that on the same facts courts in other states have been severely split on the issue of whether physical presence existed for such a vendor, the Court determined that the opinions finding physical presence were more persuasive. The Court quoted at length from Scholastic Book Clubs, Inc. v. Comm’r of Revenue Servs., 38 A.3d 1183 (Conn. 2012).
As with most of the other bookseller cases in which a court found substantial nexus existed, the Alabama Tax Tribunal focused on the Scripto language negating the importance of labels such as “agent,” “independent contractor,” and “representative.” This is a red-herring, as the correct analysis should be that regardless of the label, on whose behalf were the teachers acting. Evidence was introduced that the teachers were acting on behalf of their students, not the vendor. The Court, however, assumed this bedrock issue away by finding that regardless of on whose behalf the teachers were acting, because the teachers’ activities were substantially associated with Scholastic’s ability to establish and maintain a market in the state, this result was sufficient to establish physical presence for the vendor. According to the Court, it did not matter that the teachers did not receive any type of compensation from the vendor and did not intend to benefit the vendor. The only thing that mattered to the nexus analysis was that at the end of the day, the teachers were important to Scholastic’s maintenance of a market in the state.
But that cannot be the correct analysis. Otherwise, any advertising campaign that relied on word-of-mouth (and similarly any viral marketing campaign) would establish nexus [...]
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