It is very hard to find guidance about the issue of nexus related to local taxes, like city and county taxes. These cases involved this complicated issue – where and what type of local tax (sales or use) is due on retail sales when the seller and purchaser are located in different local taxing jurisdictions. The taxpayer hired independent contractors to deliver and set up mobile homes that it sold during the audit period. Local tax was collected only on those mobile homes that were delivered into a local jurisdiction where the taxpayer had a business location (traditional nexus). Although the Administrative Law Judge disagreed with the controlling Yelverton decision, he was obliged to follow it.

i. Crown Housing Group, Inc. v. Alabama Dept. of Rev., Docket No. S. 06-399 (Dept. of Rev., Admin. Law Div. July 26, 2007); Diversified Sales, Inc. v. Alabama Dept. of Rev., CCH ¶ 201- 229 (Dept. of Rev., Admin. Law Div. Sept. 4, 2007).

(a) In two recent decisions, the Alabama Department of Revenue has called into question which legal standard should govern intrastate nexus, a standard set by Yelverton’s. In Crown Housing, the taxpayer sold mobile homes in counties in which it had neither a sales outlet nor salesmen operating, which under Yelverton’s meant that it was not liable for the local tax. The Department of Revenue, however, assessed a number of taxes, including local (county-level) sales and use tax. The taxpayer appealed other taxes that were imposed, but not the local tax.

(b) Although not appealed, the ALJ nevertheless analyzed whether the local tax was appropriately imposed “to give the Taxpayer guidance for the future.” The ALJ stated that he would have followed Yelverton’s, under which the tax should not have been imposed, but went on to express his disagreement with the conclusion of Yelverton’s.

(c) In addition to disagreement with certain interpretations of state statutes, the ALJ disagreed with Yelverton’s constitutional nexus analysis. In particular, the ALJ believed that the “‘physical presence’ due process nexus standard . . . was no longer applicable when the case was decided in 1997.” According to the ALJ, the U.S. Supreme Court held in Quill that “the test is only whether the taxpayer had ‘fair warning’ that its activities may subject it to the tax in the jurisdiction.” Because Yelverton’s standard—requiring salesmen in the local jurisdiction for tax nexus—is “clearly contrary” to Quill, it should be rejected.

(d) If the ALJ’s standard were followed, the taxpayer in Yelverton’s would have been subject to the sales tax. It “purposefully avail[ed] itself of the benefits of an economic market in the forum” when it made numerous sales and delivered merchandise to customers in the taxing county. These substantial activities in the county “clearly [would have given] it fair warning that it would be subject to the County’s taxing jurisdiction sufficient to satisfy due process.”

(e) Diversified Sales, the second case, differed only in that the taxpayer did appeal the imposition of local sales tax. The ALJ held that although the tax applied as a matter of state law, the taxpayer lacked nexus under Yelverton’s: it had neither a sales outlet, nor salesmen soliciting orders, in the jurisdiction at issue. Quoting in its entirety the nexus analysis from Crown Housing, the ALJ again expressed his disagreement with Yelverton’s, but applied it nonetheless.

B. In-State Personnel

1. Independent Contractors , Sales Representatives, and Manufacturing Representatives.

This is another application of the rule that in-state representatives, even if not direct employees of the out-of-state vendor, can create nexus. The Alabama Administrative Law Division relied heavily upon Tyler Pipe Indus. v. Washington State Dep’t of Revenue, 107 S. Ct. (1986).

a. ALABAMA

i. Graduate Supply House v. Ala. Dept. of Rev., CCH ¶ 201-244 (Ala. Dept. of Rev. Admin. Law Div. Nov. 20, 2007).

(a) The Department of Revenue imposed local use and rental tax on the taxpayer, which was based in Mississippi and rented graduation caps and gowns in Alabama. The taxpayer “did not own property or have direct employees in Alabama.” Employees of another company (Balfour), however, measured students in Alabama, submitted orders to the taxpayer, and received a commission in turn. The taxpayer challenged the Department’s conclusion that it had nexus with Alabama.

(b) The Administrative Law Division affirmed the Department’s conclusion that nexus existed. The ALJ looked to Tyler Pipe Industries v. Washington State Dept. of Rev., 107 S. Ct. 2810 (1987), for its nexus standard. He held that “nexus is established in a state if the activities of an independent contractor or an agent acting on behalf of an out-of-state taxpayer in the state are significantly associated with a taxpayer’s ability to establish and maintain a market in the state.”

(c) The taxpayer argued that the Balfour employees were not its representatives, but Balfour’s. The ALJ disagreed, finding that the Balfour reps were “de facto or implied agents of the Taxpayer.” They performed activities on behalf of the taxpayer in Alabama and received a commission for doing so. Because these “de facto” agents allowed the taxpayer to establish and maintain its business in Alabama, Tyler Pipe was satisfied.

(d) The ALJ also found an alternative basis for concluding that nexus existed. He observed that “[t]he Taxpayer owned the caps and gown while they were being rented in Alabama, and it derived substantial income from the presence of the caps and gowns in Alabama.” The “physical presence” of the taxpayer’s “income-producing property” also established nexus for Commerce Clause purposes.

b. FLORIDA

Although on first reading, this advisory from the Florida Department looks like an extension of the “economic nexus” decisions in Landco, MBNA, and Capital Bank, it is really a traditional “agents in the state create nexus” point of view.

i. Technical Assistance Advisement, No. 07C1-007, CCH ¶ 205–125 (Fl. Dept. Rev. Oct. 17, 2007).

(a) An ano nymous taxpayer sought guidance regarding whether it had nexus with Florida for corporate income tax purposes. The taxpayer’s home office and “processing facilities” were all located outside Florida. The taxpayer, however, authorized vendors to process transactions for the taxpayer’s products and services on the internet using personal computers. Although the taxpayer insisted the vendors were not its agents, the Department of Revenue found that the vendors “do bind the Taxpayer.” The taxpayer was also licensed as a “payment instrument seller” with the Florida Office of Financial Regulation.

(b) The Department opined that nexus existed. It noted that the Taxpayer “does not have a direct physical presence in Florida.” This did not control, because the Department took the position that physical presence was not required to impose corporate income tax, citing Lanco, Inc. v. Division of Taxation, 908 A.2d 176 (N.J. 2006), cert denied, No. 06-1236 (U.S. June 18, 2007) and MBNA America Bank v. Tax Comm’r of West Virginia, 640 S.E. 226 (W.Va. 2006).

(c) The presence of “licensed agents” operating on the taxpayer’s behalf was “sufficient to create corporate income tax nexus, for without these vendors, the Taxpayer could not operate its business in Florida.” The Department also observed that the taxpayer “has made a purposeful direction towards the Florida market” by obtaining a seller’s license from the state, and that it benefited from the orderly market conditions provided by the state.

c. VIRGINIA

i. Ruling of Commissioner, P.D. 07-163, 2007 Va. Tax Lexis 165, Dep’t of Tax (Oct. 17, 2007).

(a) The out-of-state vendor sold chemical products to customers in Virginia and had the products delivered into Virginia by common carrier. The vendor and the customer paid an independent agent to witness the delivery of the chemicals to the customer in Virginia. The out-ofstate vendor did not maintain property, have payroll, or solicit sales in the State.

(b) The vendor did not have a sufficiently substantial presence in Virginia to require it to collect sales tax. The use of the common carrier to deliver chemicals could not create nexus and neither did the independent agent. Since the vendor and its customer shared the cost of the agent and the agent was acting for the benefit of both principals, the agent was independent and, thus, insufficient to create nexus.

C. Printer’s Nexus

Many states have statutory “safe harbors” for printers and their business activity with customers within a state. Utah is one of those states, in which there is a safe harbor for sales and use tax found in Utah Code Ann. § 59-7-102. This advisory also focuses in on the concept of out-of-state interstate commerce transactions.

1. Advisory Opinions

a. UTAH

i. Utah State Tax Commission, Private Letter Ruling, Opinion 07-0004, CCH ADMN-RUL, STATE-ARD, ¶ 400-550 (Oct. 29, 2007).

(a) An out-of-state insurance company requested an opinion concerning various printing fact patterns and whether contracting with an in-state printer and delivering the resulting products in state and out of state created sales tax nexus. The printed products consisted of monthly statements, disclosure documents, and similar printed materials.

(b) The Commission ruled that Utah sales tax is due on items shipped to Utah customers when the Utah printer performs the printing and provides the paper/supplies. Utah sales and use tax is not applicable to printed materials shipped to non- Utah customers, provided the printed material and all pre-press material are shipped outside Utah. Utah sales and use tax is due on items shipped to Utah customers, while items shipped to non-Utah policyholders are not taxable, even when the out-of-state insurance company provides the paper and the Utah printer performs printing only. When printed materials are first sent to the out-of-state insurance company’s headquarters, then reshipped to Utah customers, the insurance company is liable for use tax on these printed materials.

D. Affiliate Nexus

This is a very important interpretation of the concept of “agency nexus,” finding that mere distribution of advertising coupons by the in-state retail store did not create nexus for the out-of-state internet affiliate.

1. Agency Nexus

a. CALIFORNIA

i. barnesandnoble.com LLC v. State Bd. of Equalization, Case No. CGC-06-456465 (Cal. Super. Ct Sept., 7 2007).

(a) Barnesandnoble.com (“bn.com”), an online seller of books, music, and movies, had no property or payroll in California, accepted orders outside of California, and delivered products via common carrier from locations outside of California. Booksellers, on the other hand, operated retail establishments in California and was bn.com’s sister company. For about one month in 1999, Booksellers enclosed coupons for bn.com in its shopping bags without charging bn.com a fee. The Board of Equalization determined that the inclusion by Booksellers of bn.com’s coupons in Booksellers’ shopping bags constituted “selling” by bn.com, making it a “retailer engaged in business in the state,” and liable for use tax. Bn.com challenged this ruling in state court and filed a motion for summary judgment.

(b) The court ruled for bn.com. The Board’s basis for assessing tax was (1) that Booksellers acted as bn.com’s agent and (2) engaged in “selling” on bn.com’s behalf. Although the court agreed that under California law, handing out coupons constituted selling, it found that Booksellers did not act as bn.com’s agent.

(c) The critical issue to the court regarding the agency question was whether Booksellers had authority to bind bn.com. It found that Booksellers’ authority was limited to “the passive distribution of coupons,” so an agency relationship was not established. “Booksellers had no input in creating the coupon program . . . . had no authority to adjust the terms of the coupon . . . . could not accept returns of books purchased [with the coupons] . . . . did not solicit sales and could not accept orders for [the taxpayer].” Because bn.com lacked any agent in California, it was not a retailer engaged in business in the state and not liable for registration and collection of tax.

(d) The fact the companies shared a common name and jointly benefited from the “increased . . . reputation” brought about by the coupons was not sufficient to show an agency relationship. Nor did the fact Booksellers did not pass out coupons for other companies during the tax year affect the agency analysis.

(e) Finding no statutory grounds that justified the imposition the tax, the court did not reach the constitutional “substantial nexus” issue.

E. Voluntary Registration and Incorporation

There are no surprises in this case, deciding adversely against the Bank on state statutory as well as Commerce Clause grounds.

1. Incorporation in a State.

a. DELAWARE

i. Lehman Bros. Bank v. State Bank Comm’r, 2007 WL 3276846 (Del. 2007).

(a) Lehman Brothers owned a federal savings bank; the bank’s “home office” and lone retail branch were located in Delaware. Delaware imposes a bank franchise tax, which is imposed on 100% of income if the bank is domiciled in the state. For tax years 2000 through 2003, the bank filed as a Delaware bank, but claimed deductions for income earned outside of the state. The Tax Commissioner disallowed these deductions finding they were not supported by evidence.

(b) In response to the disallowance, the bank submitted amended returns, now asserting that it was not domiciled in Delaware. The Commissioner was not convinced. It also held that because the bank had no branches outside Delaware, it could not apportion its income for franchise tax purposes. The Superior Court affirmed, and the bank appealed to the Supreme Court of Delaware.

(c) The court affirmed the imposition of the tax. It agreed that the bank was domiciled in Delaware. This conclusion was based on the fact the bank’s lone retail branch was located in Delaware, and the fact that its federal charter stated that the bank’s home office was located in Delaware.

(d) Because the Delaware Code only allowed income to be apportioned to other “branches,” of which the bank had none, the tax was to be imposed on the full measure of the bank’s income, regardless of where it was sourced. Thus, the fact that the bank had employees outside the state was irrelevant for apportionment purposes.

(e) The court rejected the bank ’s constitutional arguments as well. In addition to apportionment and consistency arguments, the bank argued that “no rational relationship exists between the tax imposed by Delaware, and the income taxed . . . [that was] earned from activities conducted outside Delaware.” The court held that the bank had “the requisite minimum contacts with Delaware: the Bank’s home office and the Bank’s sole banking office were both located in Wilmington, Delaware.” Further, the bank received many benefits from the state—such as police and fire protection—which also caused the tax to pass due-process muster.

F. Doing Business In The State

1. State Law Definitions

a. IOWA

i. America Online, LLC v. Iowa Dept. of Rev., No. CV 6482, CCH ¶ 201-218 (Iowa 5th Dist. Ct. Sept. 18, 2007).

(a) AOL, the taxpayer, provided internet connectivity and informational content services to customers in Iowa. To connect with AOL’s network, Iowa members called local telephone numbers. Calls then entered a “modem hotel,” where they were converted from analog into digital, and routed to AOL’s private phone system. The call then traveled to AOL’s data center in Virginia, where “authentication” of the call had to take place before any connection with the Virginia data center would be allowed. This was not the only contact between the taxpayer and Virginia: AOL approved all membership applications in Virginia; AOL’s servers were located in Virginia; and Virginia law governed AOL’s terms and conditions of service and membership. The Iowa Department of Revenue assessed sales and use tax on AOL’s provision of internet and informational services. AOL appealed to state district court.

(b) The court reversed the imposition of sales and use tax. Under state law, communication service was provided in Iowa “only if both the points of origination and termination of the communication are within the borders of Iowa.” The court ruled that “the complete end-to-end communication” did not occur within Iowa.

(c). Most significant to the court was the fact that “AOL servers actually make the disconnection of the AOL service when a customer requests such a disconnection from AOL.” “This undisputed fact,” the court observed, “is specifically contrary to the Director of Revenue’s conclusion that there is no termination of the communication similar to a traditional telephone call.” Among other things, the court also pointed out that “in order to connect to the AOL service, a connection must be made with AOL servers in . . . Virginia.” Because the communication began in Iowa, but terminated outside of Iowa, the service was not taxable as a matter of Iowa law.

b. MARYLAND 

The appellate court was not persuaded that AT&T was a “common carrier” for purposes of the assessed sales and use tax. It held that it was a co-vendor of 900-number service.

i. AT&T Commc’ns of Md. v. Comptroller of Treasurer, 932 A.2d 748 (Ct. Spec. App. Md. 2007).

(a) Following an audit of tax years 1992 through 2001, the Maryland Comptroller of the Treasury assessed AT&T for over $5 million in sales and use tax for 900-number telecommunications services (e.g., pay services for sports scores or date lines) conducted over AT&T’s network. AT&T argued it was not the vendor, but that the information providers were and, hence, that it was not liable for the collection of the tax. The Comptroller upheld the assessment, as did the Tax Court and the state circuit court. AT&T appealed the circuit court’s decision.

(b) The Court of Appeals upheld the imposition of the tax. AT&T argued that as to 900-number services, it acted merely as a common carrier for the “information provider” and could not be held liable for sales-and-use tax collection. The court disagreed, but noted that even if AT&T were a common carrier, it had sufficient connections “including payroll and property” to create nexus with the state.

(c) The court held that AT&T was a “covendor” of the 900-number service, and not a common carrier. The court pointed out that, among other things, AT&T reviewed the content of the calls and the advertisements placed by the information providers and also provided billing and collection services to the providers. Thus, rather than provide common-carrier service, “AT&T, acting in cooperation with the out-of-state content providers, performed multiple acts that helped create the service.”

(d) The court, looking to National Bellas Hess, agreed that if AT&T had acted as a common carrier, it would not have been liable for the tax. But because AT&T was more than a common carrier, it was jointly liable as a co-vendor with the information providers for the collection of the tax.

c. MISSOURI

i. Letter Ruling No. LR3993, Missouri Dept. of Rev., CCH ¶ 202-756 (Aug. 16, 2007).

(a) According to the facts presented to the Department of Revenue, the prospective taxpayer sold durable medical products (like wheelchairs and ramps) to Missouri customers. The taxpayer generated its sales leads from an out-of-state location, but maintained warehouses and administrative offices in the state. It pointed out that these locations were closed to the public. Products were delivered to the warehouses, then to the consumer via the taxpayer’s vehicles.

(b) The Department ruled that the taxpayer had nexus with Missouri, but that the specific products were statutorily exempt from sales and use tax, so long as they were purchased by or on behalf of a person with disabilities.

d. SOUTH CAROLINA 

i. SC Revenue Ruling #07-3, 2007 WL 2834556, Dep’t of Revenue (Sept. 25, 2007).

(a) This ruling provides guidance from the Department concerning what activities create sales and use tax nexus with the state. The ruling began as a series of responses to surveys conducted by two national publications as to whether or not certain types of business activities, by themselves, create sales tax nexus. South Carolina compiled its survey responses and released them to the public.

(b) The ruling identifies approximately 30 factual scenarios in which the Department expressed a “yes” or “no” answer as to whether the described conduct created sales tax nexus. Of note, South Carolina indicated that an out-of-state retailer selling tangible personal property in-state and using a common trade name with or receiving services from an affiliated in-state retailer creates nexus. In response to whether a retailer that sells over the Internet or by catalog has nexus merely through the existence of an in-state affiliated company, the Department did not answer “yes” or “no,” but instead said the “answer depends on the facts and circumstances.”

e. TEXAS

i. Comptroller of Public Accounts adoption of new rules governing nexus for state franchise tax, effective Jan. 1, 2008, 32 Texas Register 6282, available from Lexis at 32 TexReg 6282, Dep’t of Revenue (Sept. 25, 2007).

(a) The Comptroller of Public Accounts adopted a new regulation providing examples of activity that creates nexus for franchise tax purposes. The new regulation, 42 TAC § 3.586, says that a “taxable entity is subject to franchise tax in this state when it has sufficient contact with this state to be taxed without violating the United States Constitution.”

(b) Of note, the regulation gives the following examples of activity creating franchise tax nexus: “delivering into Texas items it has sold;” “investigating, handling or otherwise assisting in resolving customer complaints in Texas;” “doing business in any areas within Texas, even if the area is leased by, owned by, ceded to, or under the control of the federal government;” and “sending materials to Texas to be stored awaiting orders for their shipment.”

f. VIRGINIA

i. Ruling of Commissioner, P.D. 07-181, 2007 Va. Tax Lexis 190, Dep’t of Tax (Nov. 21, 2007).

(a) The taxpayer was an energy services corporation that assisted customers in reselling excess generation capacity back to the energy grid. The taxpayer owned and managed a computer software application that allowed its customers to sell their excess generation. The taxpayer employed a salesperson in Virginia to promote and sell the taxpayer’s services.

(b) The Commissioner ruled that the taxpayer was not a “dealer” under Virginia law and, thus, had no obligation to collect sales tax, because the taxpayer did not offer tangible personal property for sale at retail and merely facilitated the sale of excess generation capacity between two parties through its software application.