State taxation of corporations: the evolving danger of attributional nexus.

State Taxation of Corporations: The Evolving Danger of Attributional Nexus

I. Introduction

A review of recent business and economic literature reveals a dramatic increase in the quantity and complexity of inter-firm relationships. This is evidently a result of the globalization of competition and commerce, the shifting of manufacturing overseas, and the advent of "hollow" network firms. What state tax dangers and opportunities are being created by this new world?

Every state, apparently, would like to tax all the income that any business earns anywhere in the world. Fortunately, constitutional principles require that there be a certain quantum of connection ("nexus") between a corporation(1*) and a state before that state may impose a tax, or impose an obligation to collect a tax, on that corporation. Historically, the requisite nexus was established through the corporation having its employees(2) or property(3) in the state or through the corporation being incorporated under the laws of the state. Unfortunately for many businesses, recent years have witnessed this "direct nexus" being augmented by socalled "attributional nexus."

Attributional nexus refers to a state's imposing its taxing jurisdiction on a corporation that has no direct nexus with the state solely because the corporation has an agency, alter ego, or unitary relationship([single dagger]) with a corporation (or other business or individual) that does have direct nexus with the state.(4) It is essential, therefore, for corporate tax planners to review the relationships between the corporation and other entities (whether they be customers, suppliers, agents, financing companies or just related entities) to determine whether the relationships may lead to increased state tax liability. The issues become most pronounced when related corporations are involved; such situations are the principal focus of this article.

To provide corporations with guidance relating to insulating themselves from, or planning for, state tax liability, this article will review four areas: the nature and history of the nexus requirement, the status of the agency approach, the status of the alter ego approach, and the status of the unitary approach. Constitutional provisions (and representative cases) will be stressed because the limited federal statutory protections (e.g., Public Law No. 86-272)(5) are subject to varying state interpretations, may change, and do not cover all taxes. In addition, it is generally good planning to assume that state taxing authorities will be as aggressive as legally permissible.

This article first argues that a careful review of the relevant Supreme Court cases reveals two distinct types of constitutional nexus requirements that must be satisfied to support state taxing jurisdiction. This approach effectively rationalizes all of the relevant judicial authority in this area. We then examine the issues of whether and how nexus can be attributed between corporations, citing relevant state decisions as illustrations.

II. What Is the Nexus Requirement?

A. Constitutional Framework

1. Introduction

Constitutional analyses of state taxing laws focus on two provisions of the federal Constitution: the Due Process Clause of the Fourteenth Amendment, and the Commerce Clause,(6) which reserves to Congress the right to regulate commerce between the states. Two relatively recent Supreme Court cases have outlined the requirements of these provisions.

In Complete Auto Transit, Inc. v. Brady,(7) the Supreme Court in 1977 established the current "four-prong test" that an application of state tax must pass in order to meet Commerce Clause requirements. The imposition of a state tax will be valid if: (1) there is adequate nexus between the corporation subjected to the tax and the particular state, (2) the tax is fairly related to the benefits provided the taxpayer by the taxing state, (3) the tax does not discriminate against interstate commerce, and (4) the tax is fairly apportioned.(8)

Three years later the Supreme Court in Mobil Oil Corp. v. Commissioner of Taxes(9) specified that for an application of state taxing jurisdiction to be constitutional under the Due Process Clause, there must exist (1) nexus or minimal connection between the taxing state and the activity from which the income is derived, and (2) a rational relationship between the income attributed to the taxing state and the interstate values of the enterprises.(10) The viability of these two constitutional requirements has recently been reconfirmed in D.H. Holmes v. McNamara.(11)

Viewing the Commerce and Due Process requirements together, two different nexus requirements can be discerned. First, there must be adequate connection between the state and the corporation upon which a tax or a tax collection requirement is being imposed. This may be called the "presence nexus" requirement because the focus is whether the foreign corporation can, in some sense, be said to be present within the taxing state. Second, there must be adequate connection between the state and the transaction, income, or property being taxed. This may be called the "transactional nexus" requirement. The future may see a merging of the two nexus requirements, through application of the "economic exploitation" concept, which essentially provides that a certain degree of transactional nexus automatically results in adequate presence nexus.(12)

Before discussing presence nexus, we must review transactional nexus to clarify the distinction between the two requirements. Several related areas will also be discussed to provide a firm foundation on which the attributional nexus issue can be analyzed.

2. Connection Between State and Transaction

The Supreme Court has decided a number of cases in which there existed sufficient connection between the corporation and the state (i.e., the presence nexus), but the income or transaction to be taxed lacked sufficient connection with the state (i.e., the transactional nexus). Under such circumstances, the tax imposition was not sustained.

An early case in this category is Connecticut General Life Insurance Co. v. Johnson,(13) a 1938 case involving a Connecticut corporation that conducted part of its life insurance business in California under license from that state. In addition, the corporation entered into contracts with other insurance companies (which were also licensed to do business in California) for reinsurance relating to policies issued to California residents. The reinsurance contracts were entered into in Connecticut, where the premiums were paid and where the losses, if any, were payable. California attempted to impose a tax on Connecticut General for its privilege of doing business within that state; the tax was measured by the gross insurance premiums received. The Supreme Court held that the tax was unconstitutional as applied to Connecticut General's reinsurance business, finding such application to be a violation of the Due Process Clause. The Court found that, although the presence nexus standard was met, the tax could not be sustained because there was insufficient transactional nexus (since California's connection with the reinsurance business was too remote).(14)

Six years later, the Court decided McLeod v. J.E. Dilworth Co.,(15) which involved a Tennessee seller and an Arkansas buyer, with Arkansas attempting to impose its sales tax on sales that, under state sales law, occurred in Tennessee. Although the Tennessee corporation was not qualified to do business in Arkansas and had no sales office or other place of business there, it arranged for some of its sales to be delivered to Arkansas by common carrier and had traveling salesmen who solicited orders there (which were accepted outside the state). While these facts (especially the presence of the salesmen in Arkansas) might have been adequate to establish sufficient presence nexus and therefore subject the Tennessee corporation to Arkansas's use tax jurisdiction (under the rationale of Northwestern States Portland Cement(16)), the actual sales transactions were found to have insufficient connection with Arkansas to permit that state to impose a tax on the sales.(17)

In 1954, the Supreme Court once again struck down imposition of a tax because of insufficient transactional nexus. Miller Brothers v. Maryland,(18) which concerned a use tax, remains one of the most important authorities in the area of state jurisdiction to tax foreign corporations. Miller Brothers involved a Delaware merchant that sold goods over-the-counter to Maryland residents. Maryland attempted to impose a use tax collection duty on the Delaware merchant, but the Court struck down Maryland's imposition of this duty as a violation of the Due Process Clause. Although the seller was not qualified to do business in Maryland, did no sales soliciting there and did not accept orders by mail or telephone, it did advertise through Delaware newspapers and radio stations (that reached Maryland residents) and mailed advertising circulars to Maryland residents who were past customers. Moreover, the seller delivered goods into Maryland using its own trucks.

Under modern standards, Miller Brothers could be deemed "present" in Maryland, owing to its systematic use of company trucks to deliver merchandise.(19) However, since Maryland apparently was attempting to impose sales and use tax responsibilities on Miller Brothers for its over-the-counter Delaware sales to Maryland residents (not merely for sales delivered into Maryland by its own trucks), it is clear that the transactional nexus requirement most definitely was not met.(20) Taxation of the over-the-counter sales in Miller Brothers failed the transactional nexus test as surely as California's taxation of reinsurance premiums failed that test in Connecticut General. There simply existed no adequate connection between the taxing state and the transactions in question. On the other hand, if Maryland had sought to require Miller Brothers to collect its use tax on deliveries into Maryland, there may have been sufficient transactional nexus but perhaps insufficient presence nexus (the sufficiency of presence nexus in a given case may depend upon the number of trips the taxpayer's vehicles make into the taxing state). This view is supported by the Court's finding "no invasion or exploitation of the consumer market" -- language that would appear properly within the province of presence issues. Thus, the case could be viewed as an instance where the taxing state failed both requirements of constitutional nexus -- presence and transactional nexus.(21)

In the 1965 case of American Oil Co. v. Neill,(22) the Court once again struck down a state's application of sales tax to a transaction occurring outside its borders, using logic reminiscent of that in Dilworth. The Court invalidated Idaho's attempt to collect a sales excise tax on gasoline sold in Utah for importation into Idaho. Although the Court purported to focus upon the "operating incidence"(23) of the tax, the plain fact is that while there was clearly sufficient presence nexus (the taxpayer regularly engaged in transactions within Idaho), all aspects of the sales transaction at issue took place outside of the taxing state. The taxing state simply had no basis for asserting that sufficient transactional nexus existed, although the Court left open the possibility that a use tax might have succeeded. The analysis illustrates the Court's willingness to dabble with jurisdictional notions founded upon the nominal object of a tax -- an approach not emphasized by the Court in later years.(24)

3. Traditional Connection Between State and Corporation

There have been few cases where adequate transactional nexus may have existed but where there was inadequate presence nexus. The Supreme Court case that most significantly addressed this situation is National Bellas Hess v. Department of Revenue.(25) That 1967 case involved Illinois's attempt to subject a Missouri seller to a use tax collection duty. National Bellas Hess's only connection with Illinois consisted of mail order catalog sales, with merchandise shipped into Illinois (merchandise was also shipped to destinations throughout the United States) by mail and common carrier. The Court held that Illinois could not constitutionally subject the Missouri seller to an Illinois use tax collection duty on such sales.

It is unclear from the language in the opinion whether the Court's decision rested upon Due Process or Commerce Clause grounds.(26) In any event, National Bellas Hess clearly had substantial transactional nexus with Illinois identical to that existing in other mail-order use tax cases where tax collection duties have been upheld. See General Trading v. Iowa State Tax Commission;(27) Sears, Roebuck & Co. v. Nelson;(28) Montgomery Ward & Co. v. Nelson.(29) What distinguishes National Bellas Hess from the other mail-order use tax cases is the fact that the company had no presence (such as a store or office) within the taxing state.

National Bellas Hess remains good law today, although it has increasingly come under attack from commentators, and a number of states have passed taxing statutes challenging its viability.(30) Under our analytical framework, requiring that there be both presence and transactional nexus, National Bellas Hess was correctly decided. As noted earlier, however, the Supreme Court may eventually merge the two nexus requirements by holding that a certain quantum of transactional nexus results in economic exploitation of a state's market and that this exploitation equates with presence.(31) In other words, the economic exploitation approach may lead to an abandonment of the presence nexus requirement. This, however, would represent an unjustified departure from established constitutional principles.

A very recent decision of the Supreme Court appears to supply some weight to the continuing validity of National Bellas Hess. In Goldberg v. Director of Illinois Department of Revenue,(32) the Court ruled that an excise tax imposed by Illinois on interstate telephone calls is constitutional. The Illinois tax applies to "the act or privilege of originating in this state or receiving in this state interstate telecommunications" and is imposed on all such calls charged to an Illinois service address. The Court found that the tax met all of the requirements for constitutionality under the Commerce Clause, but implied that only two states had a sufficient transactional nexus to tax the retail purchase of an interstate telephone call: (1) the state in which the billed-to service address is located; and (2) the state in which the call originates or terminates if the call is billed to an address in that state.

Citing National Bellas Hess, Justice Marshall added that "We doubt that states through which the telephone call's electronic signals merely pass have a sufficient nexus to tax that call.(***) We also doubt that termination of an interstate telephone call, by itself, provides a substantial enough nexus for a state to tax a call."(33) In other words, although it seems safe to assume that almost every state through which a call travels has adequate presence nexus with the transmitting company (because of the presence of the company's antennae, cables, employees, etc.) to require the company to collect a sales or use tax, adequate transactional nexus may exist in only two states. Moreover, the positive citing of National Bellas Hess in a unanimous opinion suggests the Court may be unwilling to overrule that decision in the near future.

4. The Two Nexus Requirements Need Not Be Related

Although it is clear that to impose a tax or tax collection requirement a state must have adequate connection with the corporation (presence) and the transaction must have sufficient connection with the state, these two connections are scrutinized independently. Most illustrative of this point is the Supreme Court's 1977 decision in National Geographic Society v. California Board of Equalization.(34) In that case, California sought to impose a use tax collection duty upon National Geographic with respect to direct mail-order sales made into California. National Geographic operated two advertising solicitation offices in California, but neither office performed any activities related to the mail-order sales. The Court held that there need not be any connection between the activity of the seller being taxed and the activity of the seller within the state, as long as there was some adequate nexus existing between the seller and the taxing state. Thus, the Court implicitly recognized that two separate nexus requirements exist. The Court simply said that no relationship between these two requirements need be found in order to subject a foreign corporation to tax. Such an approach had been strongly implied by the Court's earlier decisions in Sears(35) and Montgomery Ward,(36) where Iowa's application of a use tax collection duty upon the out-of-state mail-order sellers had been sustained because the sellers also operated retail stores within the state.

5. The Relationship of Tax Nexus to In Personam Nexus

Although the common law jurisprudential foundations of the jurisdictional nexus requirement presumably evolved from in personam jurisdictional principles, public policy has caused the two areas to develop somewhat independently. While long-arm jurisdictional standards may primarily be concerned with protecting the public from poorly manufactured products and wrongly breached contracts, tax jurisdictional standards are primarily concerned with protecting the public fisc and protecting local businesses from unfair external competition.

In general, the standards applicable to issues of tax jurisdiction have traditionally been slightly higher than those applicable to in personam issues, meaning that tax jurisdiction may be found wanting in a situation where in personam jurisdiction is clearly mandated.(37) The in personam area has, nonetheless, proved helpful by way of analogy to issues of tax jurisdiction, and for that reason a number of relevant in personam authorities are discussed in detail later in this article.

6. The Presence Nexus Requirement and Various Taxes

Is the constitutional presence nexus requirement that relates to a state's imposition of an income tax different from that which relates to a franchise tax measured by income? More significantly, are there any differences in the presence nexus limitation placed on states relating to their imposition of a tax directly on a corporation (such as an income or franchise tax) and the limitations relating to their imposition of a tax collection responsibility on a corporation (such as collecting and remitting use taxes)? Although historically there may have existed some differences, today there are few differences in the presence nexus requirements for imposing the various taxes or tax responsibilities.

A 1987 example of how the Supreme Court has come to ignore distinctions between types of taxes in rendering decisions on constitutional issues of tax jurisdiction is Tyler Pipe Industries v. Washington State Department of Revenue.(38) In Tyler Pipe, the taxpayer -- whose only contacts with the taxing state were through independent sales agents based outside Washington -- was subjected to the Washington business and occupation tax. The Court framed the nexus question as "whether the activities performed in this state on behalf of the taxpayers are significantly associated with the taxpayer's ability to establish and maintain a market for the sales."(39) The Court also implicitly addressed the question whether a different standard should apply to collection of a tax as opposed to direct imposition of a tax by citing National Geographic(40) and Scripto, Inc. v. Carson(41) in support of its reasoning on whether the in-state activities of "independent contractors" can be sufficient to subject a foreign corporation to tax. Both of those cases involved imposition of a tax collection duty, whereas Tyler Pipe involved imposition of a direct tax. For these purposes, at least, the Court had no difficulty ignoring the basic differences in the various taxes. In addition, the Court's increasingly utilized "market exploitation" approach to jurisdictional issues is not one which emphasizes distinctions based upon the type of tax involved in a given situation.(42) Thus, the Court has apparently abandoned some early flirtation with the idea of making a distinction between tax paying and tax collecting.

B. The Current Standard of Presence Nexus

We now return to the fundamental question: How much nexus must exist between a state and a corporation before the state can impose a tax(43) on that corporation?

The modern approach to presence nexus, utilizing a "minimum contacts" approach, can be traced to the 1945 seminal case of International Shoe v. Washington(44) The Supreme Court held that International Shoe, which employed salesmen in the State of Washington but which had no office or stock of goods in that state, could be subjected to Washington's unemployment insurance tax, overriding the taxpayer's claim that such an application of the tax violated the Due Process Clause. In addition, the Court held that International Shoe was subject to the jurisdiction of the Washington courts. With respect to application of the general jurisdictional test, the Court stated:

"Presence" in the state(***) has never been doubted

when the activities of the corporation there have not

only been continuous and systematic, but also give

rise to the liabilities sued on.(***) Conversely it

has been generally recognized that the casual

presence of the corporate agent or even his conduct of

single or isolated items of activities in a state in the

corporation's behalf are not enough to subject it to

suit on causes of action unconnected with the

activities there.(45) The Court then found that International Shoe's activities were sufficiently systematic and continued to allow Washington to exercise jurisdiction.(46)

Prior to International Shoe, the presence nexus standard in jurisdictional cases was functionally a "doing business" approach.(47) Since International Shoe, the "doing business" approach to constitutional questions of state jurisdiction over foreign corporations has been supplanted by the more malleable minimum contacts approach to presence nexus, which has itself been stretched to cover a significantly greater amount of territory (both literally and figuratively) than had been the case with the "doing business" approach. "Doing business," however, remains an applicable standard with respect to state statutory jurisdictional requirements (New York, for example, has established "doing business" as one of four statutory standards to be used in determining subjectivity to the state's corporation franchise tax.(48))

There have been a number of Supreme Court decisions which provide the framework for applying the International Shoe standard within the context of more general state tax jurisdictional disputes. Northwestern States Portland Cement Co. v. Minnesota(49) held that a foreign corporation could be subjected to a tax on net income on the basis of its having actively solicited business within the taxing state, even though those activities were exclusively undertaken in furtherance of interstate commerce. (Congress reacted to the Northwestern States decision by enacting Public Law No. 86-272,(50) which severely curtails states' ability to subject foreign corporations to net income taxes in certain situations where the corporations' in-state activities are essentially limited to solicitation.) A year after Northwestern States in 1959, the Court decided Scripto, Inc. v. Carson,(51) holding that a foreign corporation that engaged in solicitation activities within the taxing state through independent contractors could be subjected to a use tax collection duty. In 1964, the Court decided General Motors Corp. v. Washington(52) sustaining a Washington tax on the privilege of engaging in business activities within that state. The tax was imposed on unapportioned gross proceeds on orders forwarded from local dealers to GM's out-of-state offices, where such orders were accepted and filled from out-of-state sources. The Court held that the tax was "levied on the incidence of a substantial local business" conducted within Washington.(53) The Court emphasized that GM's operations within Washington were strongly connected with "the establishment and maintenance of sales, upon which the tax was measured."(54) GM's Washington contacts included one automotive division's small branch office in the state, the parts division's warehouses in Washington, about 40 employees resident or principally employed there, and other GM employees who periodically visited dealers in the state. By stressing the market-creating and exploiting activities of various GM divisions within Washington, the Court signaled that it would view a foreign corporation's connection with the taxing state in terms of its "bundle of corporate activity."(55)

The 1975 case of Standard Pressed Steel Co. v. Department of Revenue(56) addressed the question whether the taxpayer's activities within Washington were sufficient to meet Due Process and Commerce Clause requirements. In that case, the taxpayer had one full-time employee operating within the state, and the Court found that the lone local employee "made possible the realization and continuance of valuable contractual relations" between the taxpayer and its purchasers. Therefore, the state was justified, as in General Motors, in exacting a tax.(57)

Although the concept of "presence" should remain of paramount importance for due process analysis, the two Washington cases collectively suggest that the Supreme Court has adopted an interpretation of "minimum contacts" that emphasizes a foreign corporation's economic exploitation of a particular market. These cases may be the foundation for the development of the economic exploitation approach for merging the two nexus requirements.(58)

C. Property Basis for Presence Nexus

It is now appropriate to comment upon cases that discuss the presence of property as constituting the basis for presence nexus. As an umbrella category, the "property" cases encompass instances where foreign corporations have been subjected to tax on the basis of having property located within the taxing state.(59) These property cases do not include attribution of nexus between related entities, despite the fact a foreign corporation may, in a given instance, be subjected to taxation as a result of the actions of another party.

Of primary interest among these cases are those involving rental property that is physically brought into the taxing state by the lessee without the knowledge or approval (or dominion or control) of the lessor foreign corporation. An important decision in this area is American Refrigerator Transit Co. v. State Tax Commission,(60) a 1964 Oregon case involving the leasing of railroad cars that were interchanged onto various railroads operating in Oregon. The taxpayer lessor had no direct connection with Oregon, but its leased property, at times, traveled to, into, and through Oregon. The State attempted to impose a net income tax on the taxpayer by virtue of the occasional presence of the taxpayer's railroad cars in Oregon. In sustaining the tax, the Oregon Supreme Court stated:

The fact that plaintiff's cars are operated by

plaintiff's lessees (or their bailees) rather than by

plaintiff's own agents is not significant. Whether

the income derived from property located in a state

comes to the owner indirectly in the form of rent

under a lease or directly in the form of income from

its own use of its property, the source of the income

is the same, and it is the taxing state that has

provided the source by providing and maintaining

the economic setting out of which the owner reaps

its profit(***).(61) The importance of American Refrigerator Transit lies not only in the court's lenient approach toward the assertion of state tax jurisdiction, but also in the general affirmation of the principle that a foreign corporation may be subjected to taxation by a state on the basis of property over which the corporation has exhibited little or no control.

American Refrigerator Transit has not met with universal acceptance (and may be contrary to the Miller Brothers decision). In Wisconsin Department of Revenue v. Amerco Lease,(62) the Wisconsin Circuit Court held that a foreign corporation was not subject to the Wisconsin franchise tax because such corporation was not found to be doing business in Wisconsin. The taxpayer (a Nevada corporation) had entered into contracts outside Wisconsin to provide trucks, trailers, and auxiliary equipment to a sister corporation which then provided these vehicles and equipment to affiliated rental companies, some of which operated in Wisconsin. The taxpayer received a percentage of the gross rental income from the leased property. The Wisconsin Department of Revenue argued that American Refrigerator Transit supported its attempt to subject the Nevada corporation to tax, but the court distinguished that case on the ground the taxpayer was not "doing business" in Wisconsin under the applicable statute (representing a limitation on the coverage of the tax imposed by the statute itself, rather than by the Constitution). The court also emphasized the taxpayer's lack of control over where and in what manner the property at issue was used. Similar facts and analysis resulted in a similar conclusion in Marx v. Trucking Renting and Leasing Associates,(63) a 1987 Mississippi case.

A contrary approach to Amerco and Marx on roughly the same facts was taken by the Florida Department of Revenue in Technical Assistance Advisement No. 86(B)4--016,(64) in which an out-of-state bank that leased automobiles in Florida was deemed to be doing business in Florida and was required to pay the corporate income tax.(65) Another case which Amerco distinguished was Heftel Broadcasting Honolulu, Inc.,(66) which involved Hawaii's privilege tax assessments against foreign corporations, which through licensing agreements gave a Honolulu television station telecast rights for films. (The Hawaii tax was actually a levy on gross income from doing business in Hawaii.) The foreign corporations received income from the rental of film prints and the licensing of telecast rights (the films were shipped to the Honolulu television station). Under the licensing agreement, the station accepted responsibility for Hawaii taxes under the licensing agreement, and thus brought suit as a test case for all of the film lessors concerned. The court held that the presence and rental of the films constituted "economic activity" sufficient to meet the statute's "instate business activity" requirement. Special attention was paid by the court to the "continuing leasing of the telecast rights performable only in Hawaii for a rental charge."(67)

The result in Heftel can be traced to both the physical presence of the films within the taxing state and economic exploitation of the market. Such a dual approach was utilized in American Refrigerator Transit and will most likely continue to be utilized in jurisdictions where market exploitation is recognized as a viable theory under which foreign corporations can be subjected to tax.(68)

D. Unitary Apportionment 

Unitary apportionment issues relate to attributing income from two or more distinct business operations to various geographic taxing jurisdictions. While the seminal case of Butler Bros. v. McColgan(69) involved apportioning to a state income from multistate activities of a single corporation, the recent cases -- Mobil Oil Corp. v. Commissioner of Taxes,(70) F.W. Woolworth v. Taxation and Revenue Department,(71) Asarco, Inc. v. Idaho State Tax Commission,(72) Container Corp. of America v. Franchise Tax Board(73) -- have examined the apportioning to a state income from multistate and multinational activities of related corporate entities.

The application of unitary apportionment and combined reporting (one method of implementing unitary apportionment) often results in income nominally and legally earned by an entity that has no nexus with a state being attributed to an entity that does have such nexus. Thus, the relevant inquiry in the apportionment area is not whether adequate presence nexus exists (the income is attributed to an entity that presumably is present in the state), but rather whether there is adequate connection between the activities resulting in income earned by the non-present entity and the taxing state. A state may tax such income only if the activities of the in-state entity and the out-of-state entity are so intertwined that the unitary relationship itself serves as a conduit for taxing income that otherwise would be beyond the reach of the taxing state. In the apportionment context, the overriding concern is therefore transactional nexus.

Under current law a relationship will generally be found to be sufficiently unitary when the state can demonstrate that the company in question, although perhaps consisting of widely distributed divisions and subsidiaries, is appropriately viewed only as a whole. The party asserting the existence of a unitary relationship often must present a convincing argument (legal presumptions sometimes help) that there exists a connection between the integral parts that cannot be ignored for tax purposes. The nature of the underlying activity, not the form of business organization, constitutes the critical issue for purposes of determining the apportionment tax base.(74) Nor are a company's internal accounting methods binding on the taxing state, since separate accounting "may fail to account for contributions to income resulting from functional integration, centralization of management and economies of scale."(75) The Supreme Court has held, however, that a parent corporation's actual control, as opposed to mere "control potential," is a requirement for finding that a unitary business exists.(76) The degree of functional integration between sub-units of an enterprise can be reflected in a "continuous flow and interchange of common products."(77)

With respect to the question whether particular activities in a given case may constitute a unitary business, the Court has deferred to the judgment of state courts principally on factual issues while retaining the task of determining whether state courts have applied the proper standards and whether such courts have acted "within the realm of permissible judgment."(78) But in deciding whether a state court's decision is within such realm, the Court has specified a number of factors to be taken into consideration, namely: (1) the flow of capital resources from one entity to another (representing a flow of value, not a flow of goods); and (2) the managerial role played by one entity in the affairs of the other. The Court has emphasized that "mere decentralization of day-to-day management responsibility and accountability cannot defeat a unitary business finding."(79)

It is abundantly clear that a unitary relationship can be used to support a finding of adequate transactional nexus, in apportionment cases, between income nominally earned outside the state and the taxing state. The question whether the unitary approach is properly utilized to support a finding of adequate presence nexus in the jurisdictional context is considered in the next section.

III. Interpretations of Attributional Nexus

The Supreme Court has never decided a case involving "attributional nexus" in the area of tax jurisdiction. While Scripto, Inc. v. Carson(80) and its progeny involve attribution of presence nexus between independent contractors operating within the taxing state and the foreign corporation subjected to tax, our primary concern here is with attribution between related entities because of their relationship. In 1925, however, the Court decided an in personam jurisdiction case involving attribution of jurisdiction between related entities. In Cannon Manufacturing Co. v. Cudahy Packing Co.,(81) Cannon Manufacturing sued Cudahy (a Maine corporation) in North Carolina. Process was served in North Carolina upon an agent of a corporation related to Cudahy. The plaintiff argued that Cudahy was essentially doing business in North Carolina because Cudahy and the related corporation (which was admittedly subject to North Carolina jurisdiction) were "merged" (i.e., they were alter egos).(82) The Court rejected the merger argument, stating:

The existence of the Alabama company as a distinct

corporate entity is, however, in all respects observed.

Their books are kept separate. All transactions

between the two corporations are represented by

appropriate entries in their respective books in the

same way as if the two were wholly independent

corporations. This corporate separation from the

general Cudahy business was doubtless adopted

solely to secure to the defendant some advantage

under the local laws. * * * The corporate

separation, though perhaps merely formal, was real.(83)

The result in Cannon has been questioned by some latter-day commentators.(84) These commentators have observed that two separate jurisdictional questions actually are presented by Cannon. First, there is the issue of the type and quantity of contacts existing between the forum state and an entity to be subjected to its jurisdiction. This issue, of course, must be addressed in every jurisdictional case. But the second issue is one of attributional jurisdiction: whether such contacts pertaining to one entity may be regarded as applying equally to a second, related entity.(85) The discussion in the remainder of this article will focus on the latter issue as it relates to state taxing jurisdiction.

A. The Agency Basis for Attributional Nexus

1. Non-Tax Authorities

American Jurisprudence defines "agency" in the following manner:

The term "agency" means a fiduciary relationship 

by which a party confides to another the

management of some business to be transacted in the

former's name or on his account, and by which such

other assumes to do the business and render an

account of it. It has also been defined as the fiduciary 

relationship which results from the manifestation 

of consent by one person to another that the other

shall act on his behalf and subject to his control,

and consent by the other so to act. Thus, the term

"agent," in its legal sense, always imports

commercial or contractual dealings between two parties by

and through the medium of another.(86) This definition is necessarily general because the test for agency reflects the facts and circumstances of the given situation. Although it is very conceivable that different degrees of agency apply for different purposes,(87) there is no authority for distinguishing between "agency" in the general context and "agency" in the area of applying state tax statutes.

To start, it may prove beneficial to remark on several nexus cases, involving agency issues, which concern questions of in personam jurisdiction. Although the jurisdictional standard appears to be somewhat lower in the in personam context than in the taxation context, these cases shed light on the direction courts have been taking with respect to nexus issues in general.

One New York case of particular interest is Frummer v. Hilton Hotels International,(88) in which the plaintiff sustained personal injuries in a hotel in England operated by the defendant British corporation. The court held that the British corporate defendant was "doing business" in New York by virtue of its relationship with the Hilton Reservation Service, an entity which was, in fact, engaged in business in New York. The reservation service and the British corporation were owned in common by the other named defendants in the suit, which were themselves Delaware corporations engaged in business in New York. The duties performed by the reservation service on behalf of the British corporation included advertising, solicitation of business, acceptance and confirmation of reservations, publicity, and maintenance of contacts with travel agents and tour operators. The court found it significant that the reservation service "does all the business which Hilton (U.K.) could do were it here by its own officials."(89) Moreover, the fact that the reservation service was run on a "non-profit" basis for the benefit of the London hotel and other Hilton Hotels appeared to support the argument that the reservation service was not a freestanding entity. In distinguishing this case from authorities bearing on the issue of a parent company's liability for the acts of wholly owned subsidiaries, the court stated:

The "presence" of Hilton (U.K.) in New York, for

purposes of jurisdiction, is established by the

activities conducted here on its behalf by its agent, the

Hilton Reservation Service, and the fact that the

two are commonly owned is significant only

because it gives rise to a valid inference as to the

broad scope of the agency in the absence of an

express agency agreement.(90) With this statement, the court seemed to be saying that common ownership may imply that an agency relationship exists between two related entities. A significant issue, of course, is whether such an arrangement as existed here would have been adequate to subject the British entity to New York taxing jurisdiction. The "doing business" approach to jurisdiction was utilized in Frummer because the New York long-arm statute was inapplicable (because the cause of action arose outside of the state).(91) Thus, the court was forced to entertain the question whether personal jurisdiction may be obtained under "traditional" concepts of "doing business" or corporate "presence" within the state.

A 1980 federal case, in which New York law was applied, drew a significant distinction between the requirements of the agency theory of attributional jurisdiction and those of the alter ego theory. In Bellomo v. Pennsylvania Life Co.,(92) a former employee brought suit for breach of a stock option contract. The defendant-employer was a holding company (a Delaware corporation), which the plaintiff sought to subject to New York jurisdiction and venue on the basis of the New York activities of the defendant's subsidiaries. This argument was put forward in the alternative forms of an alter ego theory and an agency theory. The court found that:

The plaintiff has not established that the parent

and subsidiaries have so disregarded the formal

indicia of corporate separation that the latter are

"mere departments" or alter egos of the former. The

defendant has submitted evidence that its New York

subsidiaries maintain their own books, records, and

bank accounts, that their respective boards of

directors meet independently, and that "Pennsylvania

Life Company is not involved in the management of

the daily affairs of [the subsidiaries]."(93) The court proceeded to find that "[t]he evidence adduced by the plaintiff does, however, render it more likely than not that the New York subsidiaries act as the agents of the parent Pennsylvania Life."(94) Concluding that the subsidiaries essentially had been created by the parent to carry on business on its behalf, the court found the holding company to be subject to New York jurisdiction. See also McPheron v. Penn Central Transportation Co.(95)

A line of New York state cases applies an agency analysis as part of the test for determining whether the "corporate veil" should be pierced. In Astrocom Electronics, Inc. v. Lafayette Radio Electronics Corp.,(96) an agreement was entered into respecting delivery of depth finders, some of which were not paid for because they were defective. Suit was brought, but one of the defendants argued that it was not party to the relevant transaction. The court stated that a parent corporation using a subsidiary for transaction of the parent's business (as distinct from the subsidiary's business) may be held liable for the acts of the subsidiary under general agency principles. The determinative factor, according to the court, "is whether the subsidiary corporation is a dummy for the parent corporation."(97) See also Port Chester Electric Construction Corp. v. Atlas;(98) Rapid Transit Subway Construction Co. v. City of New York;(99) Berkey v. Third Avenue Ry.;(100) Walkovszky v. Carlton.(101)

2. Tax Authorities

In the tax area, agency represents an approach to attributional nexus with roots in the nineteenth century. In People v. American Bell Telephone Co.,(102) the New York Court of Appeals was faced in 1889 with whether a foreign corporation should be subjected to state taxation on the basis of its "doing business within the state" by virtue of such corporation's relationship with local corporations, to which the foreign corporation had leased equipment. The court held that the outcome depends on the actual character of the business carried on, not from the existence of unexercised powers reserved to the foreign corporation in contracts with the local corporations, nor from any of the natural or contractual rights to carry on business in New York. American Bell was found not to be carrying on business in New York within the meaning of the taxing statute because the "business" was carried on by the local companies in their own right and not in any sense as agents for their corporate parent American Bell. This case stands for the important proposition that the business of a corporation "can in no legal sense be said to be that of its individual stockholders."(103) Furthermore, the court found that the owner of a patented article -- who has simply licensed or leased the use of it to another for the purpose of carrying on a trade or business -- may not be made liable to taxation upon the theory that he is carrying on the business.(104)

Thus, this early case (which still represents good law) directly addressed the agency theory of attributing nexus to an out-of-state entity based upon that entity's relationship with local entities which were unquestionably subject to state tax jurisdiction.(105) Several relatively recent state tax authorities have also addressed the issue of attributing one entity's presence nexus to a related entity because an agency relationship exists between the entities.

In Hauserman,(106) a 1985 New York advisory opinion, an Ohio corporation rented a showroom-sales office in New York to display the products of, and act as sole sales agent for, a related Canadian corporation. Both the Ohio corporation and the Canadian corporation were found to be subject to the New York State corporation franchise tax. The Canadian corporation retained ultimate control over the operations conducted at or out of the New York showrooms, including the hiring and firing of individuals. The State Tax Commission found that the maintenance of the New York showroom-sales office exceeded the statutorily prescribed minimum activities protected by Public Law No. 86-272, and that the office was, in effect, maintained by the Canadian corporation via the Exclusive Sales Representative Agreement between it and the Ohio corporation.(107) The Commission regarded the Canadian corporation's ownership of furniture held as samples at the New York showrooms as "purely ancillary to its solicitation and, therefore, does not of itself give rise to a basis for taxation."(108) Moreover, the Commission rejected the argument that the Ohio corporation was an independent contractor with relation to the Canadian corporation, citing the Canadian corporation's control of the U.S. entities and the fact that such entities represented only one principal(109) (thereby failing to meet the requirements for expanded protection under Public Law No. 86-272). Clearly, the Canadian corporation was subjected to New York taxation in this ruling on the basis of its agency relationship with related entities doing business in New York, as evidenced by the terms of the Exclusive Sales Representative Agreement. It is not clear whether the same conclusion would have been reached had the corporations been unrelated.(110)

In Western Acceptance Co. v. Department of Revenue,(111) a foreign corporation asserted that it was not doing business in Florida for purposes of corporate taxation on the ground that it would not have been considered to be doing business for purposes of applying a different (non-tax) statute.(112) The court rejected the taxpayer's contention in decisive fashion. This 1985 Florida case concerned a Delaware corporation, having a principal place of business in Kansas, which was not authorized to do business in Florida but was a wholly owned subsidiary of an auto supply company actively conducting business in Florida. The role of the Delaware corporation was to provide financing for various customer purchases in stores either owned by the parent corporation or by independently owned dealer stores; it owned no property other than cash and receivables, had no offices or employees in or out of Florida, and utilized the offices, property, and employees of the parent corporation in conducting its business.

The court held that the Delaware corporation was actually doing business in Florida through its parent corporation (which functioned as its agent for these purposes), finding that "but for" the parent's activities on behalf of its subsidiary, the subsidiary could not have "otherwise conducted any business or earned any income."(113) The court cited numerous authorities for the proposition that a "broader meaning" is to be given the term "doing business" when that term is applied to a taxing statute as opposed to a corporate qualification statute.(114) (The taxpayer had cited the standards of the latter as justification for its asserted non-taxable status.) The effect of all of the combined acts of the corporation in question was considered by the court in reaching its conclusion. It was found that a receivables purchase agreement entered into by the parent and the subsidiary formalized the agency relationship existing between the two corporations, and that credit was actually extended to customers serviced by a Florida dealer or company store located in Florida.(115) This case demonstrates the distinction on the state statutory level between various levels of "doing business." It also illustrates circumstances under which a kind of symbiotic relationship may be found to exist between related corporations that will result in a foreign corporation being subjected to tax.

There are a number of agency cases that do not involve related entities but in which courts have nevertheless seen fit to attribute nexus between in-state agents and out-of-state principals. These cases resemble the U.S. Supreme Court case of Scripto, Inc. v. Carson(116) in their general outlines and can be contrasted with the foregoing related-entity agency cases. They also reveal how courts have been increasingly willing to find that an agency relationship exists between unrelated entities.

The very recent California case of Scholastic Book Clubs, Inc. v. State Board of Equalization(117) provides a good illustration of how state courts have seen fit to apply agency theories against foreign corporations. The appellant was a New Jersey corporation engaged in mail-order book sales. It had no physical facility, bank account, or regular employees in California, and conducted its business by distributing its catalogs by mail to teachers and librarians in elementary and high schools throughout the United States. The teachers took orders for the books from their students and forwarded payment and order forms to Scholastic Book Clubs. California claimed that the foreign corporation was required to collect use tax on its California sales. The court found that the teachers were acting as implied agents of the foreign corporation and, by virtue of this de facto agency relationship, that Scholastic Book Clubs was a "retailer engaged in business in this state and making sales of tangible personal property"(118) under the California use tax statute.

Interestingly, the case presented an opportunity for the court to decide which Supreme Court precedent (Scripto or National Bellas Hess) should apply. The court found Scripto to be more compelling with regard to Scholastic Book Clubs' operations because the teachers served "the same function as did the Florida jobbers in Scripto."(119) In drawing the analogy, the court cited the fact that the teachers earned "bonus points" from Scholastic Clubs with respect to the sales made; these, the court stated, were similar to the commissions earned by the jobbers in Scripto.(120) Moreover, National Bellas Hess was distinguished on the ground that the students here were not solicited directly through the mail and, indeed, could only order books through a local intermediary (the teacher).(121) The decision in Scholastic Book Clubs reasonably reflects the trend of states attempting to expand the impact of Scripto and limit the scope of National Bellas Hess to the latter's particular set of facts.

A 1988 New York State advisory opinion, Giftmaster, Inc.,(122) dealt with issues of nexus and agency in the context of both the New York State corporation franchise tax and the New York State sales and use tax. An out-of-state producer of airline catalogs was held exempt from the franchise tax on the ground its New York activities were limited to solicitation of orders that were filled by shipment or delivery from a point outside the state, thereby qualifying for protection under Public Law No. 86-272.(123) In contrast, the corporation was held subject to New York sales and use taxes because it qualified as a "vendor" under the New York statute.(124) Some of the catalogs were distributed by airline personnel to passengers boarding aircraft in New York. The airline was found to be an "independent contractor," sharing in the revenues from the catalog-related sales on a commission basis.(125) As an independent contractor, the airline essentially served as the foreign corporation's agent in New York for the solicitation of business, providing a sufficient nexus between the state and the foreign corporation to satisfy both constitutional and statutory jurisdictional requirements.

Another issue is whether a particular state can tax the intangible income of a foreign corporation because of the existence of an agency relationship. In Chemical Realty Corp. v. Taxation Division Director,(126) New Jersey attempted to impose its corporate income tax upon a New York corporation that generated interest and other income from loans secured by New Jersey realty. Without delving into the issue of "business situs" of the intangible, the 1983 case addressed the constitutional nexus issue, holding that "only if plaintiff's relationship to the lead institutions in the [real property loan] participation agreements amounted to an agency relationship could the required nexus exist. An examination of the facts shows that this was not the case."(127) The court noted that the "same due process principles" apply in both sales and use tax situations and corporate income tax situations (citing National Bellas Hess).(128) The court reasoned that, in the absence of an agency relationship with an entity present in New Jersey, the U.S. Supreme Court would require the New York corporation to have a physical presence in New Jersey to support the imposition of the New Jersey tax (the court compared the result of American Refrigerator Transit with other state cases as well as National Bellas Hess).(129)

The foregoing authorities amply illustrate that the distinction between agency theories and alter ego theories is often a finely drawn one -- one that may not be critical to the jurisdictional analysis in a particular case. But it is clear that certain courts have gone to some effort in order to develop this distinction.

B. The Alter Ego Basis for Attributional Nexus

Alter ego theories of jurisdiction, in general, reflect an approach to jurisdictional issues resembling very closely the general corporate law concept of "piercing the corporate veil."(130) The requirements for veil-piercing have been described in detail by a large number of non-tax cases. A few of them are reviewed below.

1. Non-Tax Authorities

Fisser v. International Bank(131) was a 1960 breach of contract case. The U.S. Court of Appeals for the Second Circuit cited an older New York State case, Lowendahl v. Baltimore & Ohio R.R.,(132) which summarized the requirements with respect to the "instrumentality" rule (a common approach to veil-piercing). In order for the corporate shield to be disregarded another person or entity must generally demonstrate:

(1) Control, not mere majority or complete stock

control, but complete domination, not only of finances,

but of policy and business practice in respect to

the transaction attacked so that the corporate

entity as to this transaction had at the time no

separate mind, will or existence of its own; and

(2) Such control must have been used by the

defendant to commit fraud or worse, to perpetrate the

violation of a statutory or other positive legal duty,

or a dishonest and unjust act in contravention of

plaintiff's legal rights; and

(3) The aforesaid control and breach of duty must

proximately cause the injury or unjust loss

complained of.(133)

In another Second Circuit case, Boryk v. de Havilland Aircraft Co.(134) the court decided an issue of in personam jurisdiction involving the relationship between an airplane manufacturer (a British corporation) and its Delaware-incorporated subsidiary, which was authorized to do business in New York. The court held that the British corporation was subject to New York in personam jurisdiction, citing the 1965 New York Court of Appeals case of TACA International Airlines v. Rolls-Royce for the proposition that

in determining whether a corporation has engaged

in activities in the state, it is immaterial whether

these are conducted through a branch or through a

subsidiary corporation, even though the latter's

formal independence has been scrupulously 

preserved.(135) See also Sears, Roebuck & Co. v. Nelson(136) (a tax case holding that a taxpayer cannot avoid the burden of taxation by compartmentalizing its operations; the reasoning in Boryk goes beyond Nelson).

TACA International Airlines v. Rolls-Royce(137) involved the question whether Rolls-Royce of England, Ltd. was doing business in New York through Rolls-Royce, Inc. as its separately incorporated department or instrumentality. The court held that the British corporation was, in fact, doing business in New York, citing the British corporation ownership of all the stock of a Canadian corporation that owned all the stock of the U.S. corporation.(138) The three companies had some directors in common, and the technical training of employees, as well as the creation of all sales literature, was undertaken by the British corporation. The U.S. corporation apparently functioned merely as an importer of Rolls-Royce products into the United States. "All of the net income of Rolls-Royce, Inc., goes to Rolls-Royce of Canada and appears in that company's balance sheet. As affected by the other operations of the Canadian company it then appears in the balance sheet of Rolls-Royce, Ltd."(139) The court added:

Rolls-Royce's manufacturing in England, plus the

distribution, sales and servicing of its famous

automobiles and aero engines throughout the world, is

carried out by the English parent company and 16

subsidiaries, including those in Canada and the

United States. These scattered subsidiary

companies are all wholly owned by the English

corporation, all are set up like the English company in auto

and aero divisions, all are controlled from England,

all are in major part staffed from England and

important policies are arrived at in frequent

conferences in England, New York and elsewhere attended

by various officials of the various corporations.(140) The court found that Rolls-Royce, Inc. was a "mere department" of the British corporation, citing Rabinowitz v. Kaiser-Frazer Corp.,(141) in which service of process on an officer of a subsidiary corporation doing business in New York is adequate to subject foreign parent corporation to New York jurisdiction. TACA might also be viewed as an early example of imposing jurisdiction under the unitary theory.

2. Tax Authorities

Turning to authorities in this area dealing specifically with issues of tax jurisdiction, an older case which may be considered an "alter ego" decision is Minnesota Tribune Co. v. Commissioner of Taxation.(142) In that 1949 Minnesota case, a corporation was established for the purpose of holding the controlling interest in the Minnesota Tribune Company and electing members to the board of directors of the latter corporation. The holding company was not qualified to do business in Minnesota, but did maintain its corporate books and records in that state. The issue was whether the holding company was properly subject to the Minnesota corporate franchise tax as a result of "doing business" within the state. The Minnesota Supreme Court established that if the activities of the holding company in question amounted to more than mere passive holding of the stock and the distribution of dividends, the holding company may be found to be "doing business" in the state.(143) The holding corporation was organized in Delaware, but its primary purpose was to control the directors and officers of the newspaper company to the exclusion of other stockholders.(144) Thus, the corporation was "doing business" within Minnesota.

Minnesota Tribune arguably involves "direct nexus" because all of the holding company's "activities" and its office and records were maintained in Minnesota. The reasoning of the court, however, seems to reflect a legitimate concern with questions of both alter ego and agency in that the holding company effectively utilized its control of the board of directors of the lower-tier entity to achieve its own purposes. The case thus represents an early example of the courts finding an exception to the general doctrine that mere ownership of stock is insufficient for taxation, in favor of examining an entity's actual utilization of its control over an in-state entity.

A recent New York State advisory opinion, Spencer Gifts,(145) concerned a New Jersey corporation whose only connection to New York was through mail order sales. The New Jersey corporation was a wholly owned subsidiary of a corporation that owned another corporation that operated retail stores in New York. The Tax Commission held that the mail order corporation was not required to collect New York State sales and use tax. No agency relationship was assumed to exist between the sister corporations, so the analysis focused on alter ego principles. The Tax Commission found that the "totality of the circumstances" did not justify the finding of an alter ego relationship in this case.(146)

In the opinion, the advisory opinion described the alter ego approach and implied that the same analysis might apply to a unitary approach to jurisdiction:

[In] order to invoke this alter ego doctrine, the

parent corporation must dominate the finances,

policy and business practices of the controlled

corporation. * * * Indicia such as common officers

and directors, common officers and telephone

numbers between corporate entities are relevant

but are not sufficient by themselves to show that

one corporation is the alter ego of another.

Consideration must also be given to factors such as the

degree of overlap of personnel, the amount of

business discretion displayed by the corporations,

whether the entities operate independently of each

other, whether the parent corporation owns all or

most of the stock of the subsidiary and whether the

parent corporation causes the incorporation of the

subsidiary. * * * Also significant is whether the

corporations trade under their own names and

whether they hold themselves out to the public as

separate and distinct businesses. * * * Note that

while many of the cases relating to this alter ego

doctrine concern parent and subsidiary

corporations, this same reasoning should be applicable to

affiliated corporations, i.e., corporations owned by

a common parent. * * *(147)

Another recent New York State advisory opinion, Bottiglieri,(148) was a sales tax case involving a corporation organized to do business in another state, which was a wholly owned subsidiary of a corporation qualified to do business in New York. The question was whether the subsidiary could be required to collect and remit New York State sales and use taxes on property delivered to destinations within New York State. The subsidiary was a direct marketer having no property or other presence in New York and did not solicit sales in the state in any manner. The subsidiary's New York customers ordered merchandise through a brochure produced by the parent corporation, received the goods via commercial carrier or the U.S. mail, and made payment directly to the subsidiary. The parent was a foreign corporation selling club memberships, entitling members to purchase discounted merchandise, to individual customers and members of unrelated organizations. Employees of the parent entered the state from time to time to service and solicit memberships. The parent formed a network of over 100 vendors that agreed to sell their merchandise at discount prices to club members. The parent took telephone inquiries from club members but did not accept orders, merely referring the customers to suppliers, with the subsidiary company constituting one of the suppliers. The parent corportion produced and mailed brochures advertising the club's merchandise to the members.

The advisory opinion held that the subsidiary was subject to New York State sales tax on the basis of its alter ego relationship with the parent, stating:

Thus, Subsidiary sells tangible personal property

to New York destinations but disclaims nexus

because it has no presence in the State, while Parent,

although it has employees entering the State for

service and solicitation, appears to lack nexus for

sales tax purposes because it makes no sales in the

State. Were the soliciting and selling activities

conducted by a single entity nexus would be

established between it and New York State. * * *

Allowing the separate entity rule here would obviously

produce inequitable consequences.(149)

The Bottiglieri opinion is interesting because it involves a situation where the parent's contacts with a state were essentially attributed to a subsidiary that itself lacked the direct contacts with that state necessary for subjecting it to tax. This is the converse of the more usual situation in which an in-state subsidiary's contacts are attributed to the out-of-state parent. Another interesting facet of Bottiglieri is that, independently, each entity would have apparently lacked adequate nexus. (Note that the parent, by itself, lacked adequate nexus for sales tax purposes; if an income tax had been asserted instead, it is probable that the parent would have been subject to state jurisdiction on its own; this distinction arises because of the differing statutory requirements pertaining to each tax.(150))

In Harfred Operating Corp.,(151) a New York State advisory opinion applied an alter ego approach in holding that two foreign corporations operating in New Jersey were also subject to New York sales and use tax, on account of the New York presence of their parent holding corporation and sister corporation (which actively conducted business in New York). In the opinion, the "taxpayer" was a Delaware corporation, which was a wholly owned subsidiary of a holding company (itself incorporated in Delaware), engaged in retail merchandising of fur garments in New York and New Jersey. The taxpayer contributed its New Jersey operations to a new corporation X in exchange for the corporation X stock, which was then distributed to the parent holding company. The parent holding company also formed an additional Delaware corporations to engage in retail merchandising of fur garments in New Jersey. Thus, the parent holding corporation directly owned 100 percent of the taxpayer corporation and corporations X and Y, respectively. The officers and directors of the subsidiary corporations were the same individuals. After accomplishing this corporate realignment, the taxpayer conducted merchandising in New York, while the other two subsidiary corporations operated in New Jersey. The New York sales and use tax regulations specify that a "vendor" will be considered to maintain a place of business within the state if he, directly or through a subsidiary, has a store, salesroom, etc., within the state.(152)

Under the regulations, both the taxpayer and the parent holding company were each maintaining a place of business in New York and qualified as vendors there. But because of the nature of the relationship existing between the sister subsidiaries, and between the subsidiaries and the parent corporation, corporations X and Y were found to be subject to tax in New York by virtue of the presence in New York of the taxpayer and the parent corporation.(153) In reaching this conclusion, the advisory opinion noted that the compensation of the three subsidiary corporations' directors and officers was handled by the parent holding company and, further, that there was sharing of administrative services and joint advertising by the corporations. Although the actual "operations" of the three sister corporations were conducted independently, this was inadequate to overcome the substantial evidence of linkage between the corporations. The real basis for the advisory opinion holding in this matter, however, appears to be the motive of management in setting up the separate New Jersey corporations "as a means to make sales in New Jersey to New York residents in order to avoid collecting New York tax."(154) Moreover, the operating companies were held out to the public as one entity.(155) Assuming the advisory opinion findings are adequate, as a matter of equity it may have been appropriate to apply the alter ego doctrine to subject the New Jersey corporations to New York tax.

Two New Jersey cases, Avco Financial Services Consumer Discount Co. One v. Director, Division of Taxation(156) and CIT Financial Services Consumer Discount Co. v. Director, Division of Taxation,(157) also illustrate how the alter ego doctrine has been used by a state to subject foreign corporations to tax on the basis of the relationship of those corporations to others doing business in the state. As with other cases in this area, the reasoning possibly supports a unitary approach to presence nexus. The earlier of these two cases, CIT, most clearly employs the alter ego doctrine. The taxpayer in that 1982 case was a Pennsylvania corporation engaged in the business of making consumer loans. Some of these loans were made to New Jersey residents, although the corporation's place of business was located in Pennsylvania, and all loans were effected in Pennsylvania. The corporation occasionally sent its employees into New Jersey to collect on delinquent loan payments. The Tax Court found CIT to be engaged in business within New Jersey principally on the basis of the corporation's connection with two sister corporations operating directly in New Jersey. These related corporations utilized a computer processing system operated by a common parent corporation. Loan payments made to an office of a related entity were processed through the computer system as if such payments had been made directly to the actual creditor-entity. The entire management arrangement demonstrated that the parent corporation did not treat the lower-tier corporations as separate entities in any meaningful sense and, in fact, the sister corporations did not hold themselves out to the public as functionally separate entities. Thus, the court found a de facto merger to have occurred between the plaintiff and its sister corporations doing business in New Jersey.(158)

A perhaps more interesting case was Reader's Digest Association v. Mahin,(159) in which a foreign corporation that engaged directly in mail order sales relating to Illinois residents, but which had no other direct connection with Illinois (except for publishing a monthly magazine that was exempt from Illinois use tax), was found to be subject to Illinois use tax collection requirements primarily on the basis of its relationship with a subsidiary corporation having a Chicago office. The subsidiary operating out of Chicago was engaged in the business of door-to-door sales of phonograph record players and albums and also solicited advertising for the parent corporation's "Reader's Digest" magazine on a contract basis. Two other subsidiary corporations involved in this case each had salesmen residing in Illinois, but were not licensed to do business in Illinois.

The court based its holding of the parent corporation's susceptibility to Illinois use tax on two general grounds. First, the plaintiff corporation derived "certain promotional benefits" from Illinois advertising which it undertook directly throughout the year.(160) Second, the activities and presence of the Chicago-based subsidiary apparently were enough to subject the parent corporation to tax.(161) The subsidiary solicited advertising in Illinois for the plaintiff's magazine. The plaintiff argued that such solicitation for an exempt publication was insufficient for taxing the sale of the plaintiff's books and albums in Illinois, but the court rejected the plaintiff's argument. Specifically, it held that Nelson v. Montgomery Ward & Co.(162) supported a finding that the activities undertaken on behalf of the parent's magazine by the Chicago-based subsidiary could not properly be separated from the parent's direct sales of books and albums through the mail in determining whether the parent was subject to Illinois use tax on such sales. The court reasoned, as follows:

Through its solicitors in the State of Illinois,

plaintiff would be liable for use-tax collection on its

magazine sales, absent its exemption. However,

this exemption does not extend to other products,

i.e., books and albums, sold to Illinois residents.

Considering the full benefits flowing to plaintiff's

aggregate business from its resident solicitors and

local advertising, we find without further

examination of the other subsidiaries an adequate basis for

use-tax liability.(163)

The logic of Reader's Digest flows from the U.S. Supreme Court's National Bellas Hess(164) opinion. In National Bellas Hess, Illinois was prohibited from applying the use tax collection duty to a foreign mail-order seller. In Reader's Digest, there existed a foreign mail-order seller, but one having at least one wholly owned subsidiary operating on its behalf in Illinois. Still, the court's reasoning is suspect. The subsidiary operating in Illinois conducted business on behalf of the parent corporation by soliciting advertising for the parent's tax-exempt publication. With respect to this activity, the subsidiary could correctly have been viewed as an agent of the parent corporation. But the result in this case is clearly proper only if the subsidiary is viewed as an alter ego of the parent. In addition to the Montgomery Ward case, the court cited Scripto in support of subjecting the parent corporation to Illinois tax. These two cases, however, each lack a key element existing in Reader's Digest -- namely, that no related corporations were involved in Scripto or Montgomery Ward. In Scripto, a Georgia corporation was found liable for Florida use tax on the basis of having utilized independent agents in Florida for solicitation purposes. In Montgomery Ward, the corporation operated in separate departments, one of which filled orders by mail; the court in that case found that the mail order operation could be required to collect use tax on the basis of the existence of 29 Montgomery Ward retail stores operating directly in Iowa.(165) But in Reader's Digest, the court seemed to be saying that use of a subsidiary corporation as an agent for one purpose will suffice for viewing the subsidiary as an agent for all purposes in determining whether the parent corporation is subject to state tax jurisdiction. Without explicitly finding that the two corporations had "merged" for jurisdictional purposes, the court proceeded to treat them as if they were, in fact, a single entity.

Although there has been a definite trend on the part of the courts to look through artificial corporate distinctions, it is indeed surprising that the court in Reader's Digest did not present a more coherently reasoned opinion on this point. Scripto and Montgomery Ward may well support the result in Reader's Digest, but they do not necessarily compel that result.

C. The Unitary Basis for Attributional Nexus

We now turn our attention toward describing an emerging area of attributional nexus doctrine -- one that can rightly be labeled "controversial." The "unitary business" approach has long been utilized in tax apportionment cases to subject corporate income to state taxation. Only recently, however, has it been applied to issues of tax jurisdiction.(166) Whatever the ultimate fate of the "unitary" approach to attributional nexus, it currently stands as a third avenue of advance (alongside the agency and alter ego doctrines) for state tax collectors to attempt to assert their authority over foreign corporations.

The use of a unitary analysis respecting issues of state tax jurisdiction has not been generally adopted.(167) West Virginia is attempting to be on the cutting edge of applying this jurisdictional theory,(168) but a review of the two West Virginia cases emphasizing the unitary approach suggests that the theory may not prove durable enough to win wider acceptance. In essence, the unitary approach to jurisdiction goes beyond the unitary approach to apportionment because, instead of merely attributing income between related entities for purposes of establishing a tax base, unitary jurisdictional theory holds that far-flung related entities may themselves be subjected to a state's jurisdiction strictly on the basis of having a working or management relationship with an entity operating within the taxing state. This theory differs from the agency and alter ego approaches in the sense that the out-of-state entities subjected to tax need not either (a) have directed that the instate entities undertake action on their behalf within the taxing state, or (b) have effectively merged their identities with the in-state entities.(169) Under unitary jurisdictional theory, an out-of-state entity could presumably be subjected to tax in a state with which it has no direct connection nor even an indirect connection, save for its role in the overall "unitary-business." Such a concept at first blush seems suspect in light of the constitutional limitations that have been applied to more conventional jurisdictional approaches. With the development of the "market exploitation" concept within Due Process theory, however, state taxing authorities may succeed in making greater use of the unitary approach to jurisdiction in the future.(170)

In Armco, Inc. v. Hardesty,(171) the West Virginia Supreme Court of Appeals first established the unitary approach as a foundation for asserting jurisdiction. Armco was an Ohio corporation qualified to do business in West Virginia. The corporation operated through a number of divisions, four of which are relevant to the case. Two of the relevant divisions had established offices and major business operations within West Virginia, whereas the other two merely engaged in sales solicitation within the state. Armco contended that the operations of its several divisions connected with West Virginia should be viewed separately, and that, when viewed separately, such divisions did not have a substantial nexus with West Virginia. The court upheld the West Virginia business and occupation tax respecting Armco, citing a number of recent apportionment cases in support.(172) Applying the unitary analysis found in the apportionment cases to determine that Armco was a unitary business, the court concluded:

In the present case, we believe that where a unitary

business, such as Armco, has a substantial nexus

in this State through its qualifying to do business

in this State, and engaging in operations such as

coal mining and sales of metal products, we are not

required to separate the activities of its various

divisions doing business in this State and treat

them separately for purposes of determining

whether in isolation they have a sufficient

connection to this State to warrant the imposition of a

business and occupation tax. The taxpayer is a

unitary business corporation conducting its

business activity under one corporate umbrella. We can

see no distinction between this situation and the

unitary business concept used in General Motors

Corp. v. Washington * * * or Exxon Corp. v.

Wisconsin Dept. of Revenue * * *.(173)

Although the outcome in Armco was unsurprising, the analysis of the West Virginia Supreme Court of Appeals did break new ground in the area of jurisdictional theory.(174) The U.S. Supreme Court's General Motors decision does stand as persuasive authority for the West Virginia Supreme Court's position, but General Motors did not apply a unitary approach per se.(175) The importance of Armco lies in the West Virginia Supreme Court's willingness to fuse the unitary factors described in the U.S. Supreme Court's Mobil and Exxon opinions with the General Motors mandate that divisional distinctions be discounted.(176) The most recent West Virginia application of this brand of jurisdictional analysis, however, goes an important step beyond Armco.

The lower court in Ashland Oil, Inc. v. Rose(177) quotes the West Virginia Supreme Court's Armco opinion at length in holding that Ashland Oil was a unitary business and that all its West Virginia sales were subject to the state's tax jurisdiction. But there is an important distinction to be made between Ashland's situation and that of Armco. Ashland was comprised of five subsidiary companies operating through 30 divisions.(178) The Ashland court, however, appeared totally oblivious to any differences existing between the two cases:

As Armco was determined to be a unitary business,

so, too, is Ashland a unitary business. Both

engaged in the production of natural resources. Both

sold products in the State, and both taxpayers

admitted that at least some of their sales were subject

to taxation by the State of West Virginia. There is a

sufficient nexus between Ashland and the State of

West Virginia to allow the State to tax Ashland's

business activities within the State.(179) Unfortunately, the lower court's statement is rather conclusory and lacking in analytical depth. Because Ashland Oil involved related corporations, rather than divisions, the application of the Armco analysis to Ashland Oil represents a clear extension of unitary jurisdictional theory. Perhaps this extension is natural, in light of the trend toward looking through corporate forms in order to apply state tax jurisdiction based upon a less formalistic economic analysis. Nevertheless, just as "piercing the corporate veil" may not be appropriate in a given liability matter, formal distinctions between related corporations should not alwasy be disregarded for jurisdictional purposes. The Ashland Oil opinion itself does not provide sufficient facts or legal analysis to draw an appropriate conclusion about whether the existence of separate corporations should have been ignored in that case.(180) Time will tell whether the Ashland Oil approach will become a generally accepted rationale for states to impose their taxing jurisdiction on foreign corporations.

IV. Conclusion

Current constitutional constraints on state corporate taxation can properly be viewed as including a requirement that two types of connection exist between the taxing state and a foreign corporation: transactional nexus and presence nexus. Recently, states have attempted to establish presence nexus through attributing presence between related corporations. Alternatively, some states are attempting to use the economically oriented market exploitation approach to jurisdiction, which serves to blur the distinction between the two types of connection; this has provided state taxing authorities with a vehicle for avoiding some of the more difficult factual inquiries demanded by traditional approaches to establishing "presence." There appears to be no legal or overriding policy justification for abandoning the constitutional presence nexus requirement.

Are states justified in exercising jurisdiction over a foreign corporation where the presence nexus requirement is merely based on attribution? In some extraordinary cases, attributional nexus may be justified. In many cases, however, states seem to be exceeding constitutional limits.

It is essential that the individual identity and integrity of corporations be respected; the corporate entity concept is integral to the American legal and economic system. Basic common law principles of agency and alter ego analysis apply in determining tax jurisdiction. These principles require an extremely close or specially defined relationship between entities before one is deemed to be the agent or alter ego of the other.

Unitary relationships do not equate with either agency or alter ego situations. In a unitary business, each entity may deal with other entities in the group at arm's length and the individual corporate existences may be maintained. The validity of utilizing the unitary approach with respect to issues of jurisdiction is a radical departure from fundamental common law concepts and seems very difficult to support legally.

In sum, there appears to be no justification for allowing states to ignore basic jurisprudential concepts in asserting their jurisdiction over foreign corporation. For the moment, it is enough to note that the Supreme Court's approach to these jurisdictional issues appears considerably more restrained than that of many state taxing authorities, and that a cautious approach to such complicated legal and factual issues is warranted.

(*)Numbered notes are printed at the end of this article.

([single dagger])The use of a unitary relationship to establish jurisdiction over a corporation is not the same as the accepted use of a unitary method of accounting to determine the appropriate income to be attributed to a corporation over which a state already has jurisdiction.

Footnotes

(1)The Supreme Court of the United States in the seminal case of Miller Brothers v. Maryland, 347 U.S. 340 (1954), defined the quantum of connection meeting the constitutional due process requirement as "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." 347 U.S. at 344-45. (2)See, e.g., International Shoe Co. v. Washington, 326 U.S. 310 (1945); Standard Pressed Steel Co. v. Washington Department of Revenue, 419 U.S. 560 (1975). (3)See, e.g., American Refrigerator Transit Co. v. State Tax Commission, 395 P.2d 127 (Ore. 1964). (4)See Matter of Joyce, Inc., Slip Op., California Board of Equalization (Nov. 23, 1966), discussed in note 167, infra. (5)Public Law No. 86-272, passed by Congress in 1959 in response to the Supreme Court's holding in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959), severely limits the ability of states to impose net income taxes on foreign corporations. Under Public Law No. 86-272, for example, a state could not subject a foreign corporation merely engaged in "solicitation" within the state to a tax on net income. (6)U.S. Const., art. I, [section] 8, cl. 3. (7)430 U.S. 274 (1977). (8)Id. at 287. (9)445 U.S. 425 (1980). (10)Id. at 436-37. (11)108 S.Ct. 1619 (1988). (12)In other words, if a corporation has significant transactions with persons in a state, the corporation will be deemed to be present in that state. (13)303 U.S. 77 (1938). (14)Id. at 80-82. (15)433 U.S. 327 (1944). (16)358 U.S. 450 (1959). (17)322 U.S. at 330. (18)347 U.S. 340 (1954). (19)The "presence" aspect of Miller Brothers was recently alluded to in the Missouri case of Burke & Sons Oil Co. v. Director of Revenue, 757 S.W.2d 278 (W.D.Mo. 1988), where the court determined that a Kansas entity was not subject to a Missouri use tax collection duty because of insufficient presence in that state. The Kansas entity made deliveries into Missouri using both common carrier and its own vehicles, but such activity was found not to constitute an "invasion or exploitation of the consumer market" in Missouri, largely because a relatively small percentage of the Missouri deliveries were made by company trucks. (20)347 U.S. at 341. (21)Id. at 347. (22)380 U.S. 451 (1965). (23)Id. at 455. (24)See also Norton Co. v. Department of Revenue, 340 U.S. 534 (1951), in which the Court asserted that the "impact" of a sales or use tax differs from that of a gross receipts tax applicable to a vendor and that as a result authorities in the former area were "not controlling" with respect to the latter. But see Tyler Pipe Industries v. Washington State Department of Revenue, 483 U.S. 232 (1987). (25)386 U.S. 753 (1967). (26)See id. at 756. The Court found the Due Process and Commerce Clause tests to be "similar" and that the "two claims are closely related." Despite the Court's continuing recognition of such similarities -- see Amerada Hess Corp. v. Director, Division of Taxation, 57 U.S.L.W. 4418 (1989), where the Court confirmed that the nexus test under the Due Process Clause is identical to that under the Commerce Clause -- the theoretical underpinnings of the two clauses differ greatly, and this distinction remains especially important in light of the accelerating pressure to overrule National Bellas Hess through legislation. A determination that the case was ultimately decided on Due Process grounds would render it impossible to overturn by legislative enactment alone; such would require a decisive shift in attitude on the part of the Supreme Court itself. (27)322 U.S. 335 (1944). (28)312 U.S. 359 (1941). (29)312 U.S. 373 (1941). (30)As of May 1989, the following states had adopted anti-National Bellas Hess legislation: Arkansas, California, Connecticut, Florida, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, New York, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, and West Virginia. See also McCray, Overturning Bellas Hess: Due Process Considerations, 1985 BYU Law Review 265.

In the recent case of Cally Curtis, Co. v. Groppo, Super. Ct. No. 319654, J.D. Hartford (March 31, 1989), a Connecticut court upheld the appellant's claim that it was not required to collect Connecticut use tax pursuant to National Bellas Hess principles. The corporation was incorporated in California and had its office in California. Its only contacts with Connecticut patrons were through trade shows in other states at which catalogs were distributed to patrons, mailing lists, and referrals. Catalogs were mailed to Connecticut customers. An interesting twist in the case resulted from the corporation's practice of not only selling films through the mail, but also renting them through the mail. The State argued that National Bellas Hess was distinguishable because of this fact; however, the court did not find the State's argument compelling, perhaps because Connecticut law specifies that rental or leasing of tangible personal property is a "sale." The argument put forward by the State in this case (namely, that the existence of rental property within the state represents a constitutionally adequate basis for asserting tax jurisdiction) closely resembles that which prevailed in the important Oregon case of American Refrigerator Transit Co. v. State Tax Commission, 395 P.2d 127 (Ore. 1964). The viewpoint of the Connecticut court on this issue reflects that of a number of courts in other states. (31)See, McCray, supra note 30, at 286. Cases are currently pending in both California and Alabama involving attempts by those states to subject out-of-state institutions to tax and collection requirements on the basis of credit card transactions involving state residents. If the states prevail in their arguments, such an outcome may reflect a triumph of "market exploitation" analysis over more traditional approaches to jurisdictional issues. Such a result, however, would not necessarily imply that National Bellas Hess is moribund. See Direct Marketing Association v. Bennett (E.D. California), Complaint for Equitable Relief and Declaratory Judgment (filed Aug. 19, 1988); Alabama v. Credit Card Companies (Circuit Ct., Montgomery County, CV88-288-G), Memorandum Brief in Support of Motion for Summary Judgment (filed Nov. 17, 1988). (32)109 S.Ct. 582 (1989). (33)Id. at 589-90. (34)430 U.S. 551 (1977). (35)312 U.S. 359 (1941). (36)312 U.S. 373 (1941). (37)See McCray, supra note 30, at 269, et seq., citing Freeman v. Hewitt, 329 U.S. 249 (1946), and other cases. See also Three Kinds of Doing Business, 23 Corporation Journal 163 (1962), for a general discussion of the various levels of doing business. (38)97 L.Ed.2d 199 (1987). (39)Id. at 215-16. (40)430 U.S. 551 (1977). (41)362 U.S. 207 (1960). (42)Cf. General Motors Corp. v. Washington Department of Revenue, 419 U.S. 560 (1977) with National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), and Scripto v. Carson, 362 U.S. 207 (1960). (43)Or, in light of the discussion in the text, impose a tax collection duty on a foreign corporation. (44)326 U.S. 310 (1945). (45)Id. at 317. (46)Id. at 320. (47)McCray, supra note 30, at 269, et seq. (48)N.Y. Tax Law [section] 209.1; 20 NYCRR [section] 1-3.2(a)(1). (49)358 U.S. 450 (1959). (50)Codified as 15 U.S.C. [section] 381. (51)362 U.S. 207 (1960). (52)377 U.S. 436 (1964). (53)Id. at 439. (54)Id. at 447. (55)Id. (56)419 U.S. 560 (1975). (57)Id. at 562. (58)Such an approach differs from one focused upon economic "incidence." The latter formulation relates to the party upon whom the burden of a particular tax falls economically; "incidence," as an issue, concerns the ultimate question of "who" is affected by the tax. By contrast, "economic exploitation," as an issue, concerns "what" may constitute sufficient activity within (or relationship with) a state to justify the taxation of such activity. Although the Court has recently emphasized economic exploitation theory, it has placed no systematic emphasis of economic incidence theory. An early example of the Court's hinting at an economic exploitation approach can be found in Norton Co. v. Department of Revenue, 340 U.S. 534 (1951), where the Court held a Massachusetts corporation subject to an Illinois gross receipts tax on the bulk of its sales to Illinois residents, stating that "Petitioner has not established that such services as were rendered by the Chicago office were not decisive factors in establishing and holding this market." (59)The California and Alabama credit card cases now pending add a new twist to conceptions of "property" as constituting a separate basis for jurisdiction over foreign corporations. See note 31, supra. (60)395 P.2d 127 (Ore. 1964). (61)Id. at 131. (62)Wisc. CCH Tax Reporter [Mathematical Expression Omitted] 202-952 (Circuit Court, Dane County, Mar. 16, 1988), aff'g Wisc. Tax Appeals Commission (July 1, 1987). (63)520 So.2d 1333 (Miss. 1987). (64)Fla. CCH Tax Reporter [Mathematical Expression Omitted] 201-938 (Fla. Dept. Revenue, Aug. 13, 1986). (65)The court in Amerco (unlike the Florida opinion) expressly noted that it was interpreting the Wisconsin franchise tax and not the Wisconsin corporate income tax, implying that it might have reached a different result if the latter tax had been at issue. (66)554 P.2d 242 (Haw. 1976). (67)Id. at 247. (68)See 395 P.2d at 130-31. But cf. Marx v. Trucking Renting and Leasing Assoc., 520 So.2d 1333 (Miss. 1987), where the Mississippi Supreme Court held that the presence of leased equipment within the state was insufficient to meet constitutional nexus requirements. See also Boeing Equipment Holding Co. v. Tennessee State Board of Equalization, Slip Op. (Tenn Ct. App., Western Sect. 1987), appeal dismissed (Tenn. Jan. 17, 1989). (69)315 U.S. 501 (1942). (70)445 U.S. 425 (1980). (71)458 U.S. 354 (1982). (72)458 U.S. 307 (1982). (73)463 U.S. 159 (1983), rehearing denied, 464 U.S. 909 (1983). (74)Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. at 440. (75)Exxon Corp. v. Department of Revenue, 447 U.S. 207 (1980). (76)Asarco, Inc. v. Idaho State Tax Commission, 458 U.S. at 323. (77)Id. at 330 n.24. (78)Container Corp. of America v. Franchise Tax Board, 463 U.S. at 179-80. (79)Id. at 180 n.19. (80)362 U.S. 207 (1960). (81)267 U.S. 333 (1925). (82)Id. at 335. (83)Id. at 335, 337. (84)See Brilmayer & Paisley, Personal Jurisdiction and Substantive Legal Relations: Corporations, Conspiracies and Agency, 74 California L. Rev. 1 (1986). (85)Id. at 4. (86)3 Am. Jur.2d, Agency [section] 1. (87)The standards for subjecting foreign entities to tax jurisdiction may differ from those applicable to in personam jurisdiction in a given case. Extrapolating from this fact, one may postulate that an agency relationship that proves adequate for subjecting a foreign entity to tax on the basis of attributional nexus may prove inadequate on both constitutional and statutory grounds for subjecting the same entity to in personam jurisdiction. Agency principles do not necessarily apply uniformly across the entire spectrum of human activity, and the agency relationship itself may, in fact, be limited to a specific context. Although it may seem inconsistent to claim that an agency relationship exists for purposes of establishing one type of derivative jurisdiction but not for another, an assertion of de facto agency in a jurisdictional case merely represents a vehicle for claiming subjectivity to a particular jurisdiction. The ultimate issue to be decided remains whether the entity in question has sufficient contact with the jurisdiction to justify extension of the state's power over the entity. By claiming that a foreign entity is subject to jurisdiction by virtue of an implied agency relationship with a domestic entity, one is essentially saying that the foreign entity's activities qualify it as subject to the state's jurisdiction, not simply because the foreign entity maintains some relationship with the domestic entity, but rather because the activities of the foreign entity give rise to such an implied relationship. Viewed in this manner, it is somewhat less than surprising that such activities should be found adequate for meeting the standards of one type of jurisdiction but inadequate for meeting the standards of another. (88)19 N.Y.2d 533 (1967). (89)Id. at 537. (90)Id. at 538. (91)Id. at 536. See N.Y. CPLR 302 (Subd.[a], par. 1). (92)488 F. Supp. 744 (S.D.N.Y. 1980). (93)Id. at 745. (94)Id. (95)390 F. Supp. 943 (D. Conn. 1975). (96)63 A.D.2d 765 (N.Y. 3d Dept. 1978). (97)Id. at 766. (98)40 N.Y.2d 652 (1976). (99)259 N.Y. 472 (1932). (100)244 N.Y. 84 (1926). (101)18 N.Y.2d 414 (1966). (102)117 N.Y.241 (1889). (103)Id. at 255. (104)Id. at 242 (syllabus). (105)But cf. American Refrigerator Transit, discussed in Part I.C., supra, in which the Oregon Supreme Court found a lessor foreign corporation subject to Oregon net income tax on the basis of owning property temporarily located within Oregon. (106)TSB-A-85(26)C(N.Y. State Tax Commission, Oct. 21, 1985). (107)Id. at 4. (108)Id. (109)Id. (110)But see, e.g., Scripto, Inc. v. Carson, 362 U.S. 207 (1960), discussed in Part I.B., supra. (111)472 So.2d 497 (Fla. App. 1st Dist. 1985). (112)Id. at 502. (113)Id. (114)Id. (115)Id. at 504. (116)362 U.S. 207 (1960). (117)Calif. CCH Tax Reporter [Mathematical Expression Omitted] 401-700 (Ct. Appeal, 1st Dist. 1989). (118)Id. at 25,419, quoting Cal. Rev. & Tax Code [section] 6203. (119)Id. at 25,420. (120)Id. (121)Id. at 24,421. (122)TSB-A-88(50)S (Oct. 13, 1988), N.Y. CCH Tax Reporter [Mathematical Expression Omitted] 252-306. (123)See note 5, supra, for discussion of the significance of Public Law No. 86-272. (124)N.Y. Tax Law [section] 1131(1). See also N.Y. Sales and Use Tax Regulations [section] 526.10(e). (125)N.Y. CCH Tax Reporter [Mathematical Expression Omitted] 252-306, at 16,298. (126)5 N.J. Tax 581 (Tax Ct. 1983). (127)Id. at 614. (128)Id. at 606. (129)Id. at 610-11. (130)See Brilmayer & Paisley, supra note 84, at 14. (131)282 F.2d 231 (2d Cir. 1960). (132)247 App. Div. 144 (1936), aff'd, 272 N.Y. 360 (1936). (133)282 F.2d at 238, citing 247 App. Div. at 157. (134)341 F.2d 666 (2d Cir. 1965). (135)Id. at 668. (136)312 U.S. 354 (1941). (137)15 N.Y.2d 97 (1965). (138)Id. at 100. (139)Id. at 101. (140)Id. (141)Id. at 102, citing 302 N.Y. 892 (1951). (142)37 N.W.2d 737 (Minn. 1949). (143)Id. at 740. (144)Id. at 739. (145)TSB-A-86(37)S (Sept. 18, 1986). (146)Id. at 6. (147)Id. at 5. (148)TSB-A-88(20)S (Mar. 2, 1988). (149)Id. at 4. (150)Compare N.Y. Tax Law [section] 1101 with N.Y. Tax Law [section] 209. (151)TSB-A-86(28)S (Jul. 18, 1986). (152)20 NYCRR 526.10(c). (153)TSB-A-86(28)S, at 5. (154)Id. (155)Id. (156)494 A.2d 788 (N.J. 1985). (157)4 N.J. Tax 568 (N.J. Tax Ct. 1982). (158)N.J. CCH Tax Reporter [Mathematical Expression Omitted] 201-026, at 10,428. (159)255 N.E.2d 458 (Ill. 1970). (160)Id. at 460. (161)Id. (162)312 U.S. 373 (1941). (163)255 N.E.2d at 460. (164)386 U.S. 753 (1967). (165)312 U.S. at 375. (166)The distinction between apportionment, where income is subjected to tax, and jurisdiction, where entities are subjected to tax, is an important one for purposes of this discussion. (167)In Matter of Joyce, Inc., Slip Op., California Board of Equalization (Nov. 23, 1966), the California Board of Equalization appeared to express a position rejecting the concept of unitary tax jurisdiction over entities. The issues presented in the case concerned whether Joyce was engaged with other related corporations in a unitary business, and if so, whether Public Law No. 86-272 precluded the California Franchise Tax Board from determining Joyce's franchise tax liability by combining the unitary net income of Joyce with the other corporations and allocating a portion of the income to California according to the ratio of California property, payroll and sales of all the corporations to their total property, payroll and sales. The Board of Equalization stated:

Power to apply formula allocation

pursuant to section 25101 of the

Revenue and Taxation Code is not

authority to tax a group of

corporations as a unit or to include all of the

California income in the measure of

the tax of one of the corporations.

The power is given to ascertain the

income of a particular taxpayer

within this state. * * * Accordingly,

when two or more entities conduct a

portion of a unitary business in the

state, it is necessary, after the portion

of the income from the unitary

business attributable to the state is

determined, to make a further

apportionment between the entities of the group

to determine the tax liability of each.

* * * [T]he net income which

appellant as part of the unitary group 

derived from sources within this state

was includible in the measure of tax,

whereas the net income of [the parent

corporation] derived from sources

within this state was not includible. The essence of the Board's reasoning in Joyce, therefore, appeared to be that a unitary relationship does not give rise to jurisdiction over related entities not otherwise subject to that state's taxing power. (168)The U.S. Supreme Court has not addressed issues of unitary jurisdiction. The Court's recent Amerada Hess opinion concerned unitary apportionment issues. (169)Thus, theoretically, a unitary approach to jurisdiction may cast a significantly wider net over foreign corporations and their activities than the other jurisdictional theories do. (170)In a recent Connecticut filing, SFA Folio Collections, Inc. v. Bannon, Super. Ct. No. 87-0338611 (J.D. Hartford - New Britain), the State Department of Revenue Services is seeking to subject out-of-state mail-order sellers to use tax collection requirements. The Department has put forth a "unitary nexus" argument in the case, reflecting the fact that the taxpayer has an affiliate which operates a retail store in Connecticut. It appears that this theory of "unitary nexus" may not resemble closely the West Virginia formulation, however, because the facts indicate that an alter ego approach to jurisdiction in the Connecticut case is more justifiable (or at least more easily articulated). See 63 Connecticut Bar Journal at 34 (Feb. 1989). (171)303 S.E.2d 706 (W. Va. 1983). (172)E.g., Exxon Corp. v. Wisconsin Department of Revenue, 447 U.S. 207 (1980), Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980), and Commonwealth Edison Co. v. Montana, 453 U.S. 609 (1981). (173)303 S.E.2d at 714. (174)The Armco focus on ignoring intra-corporate distinctions was, however, strongly hinted at by the U.S. Supreme Court's decision in Norton Co. v. Department of Revenue, 340 U.S. 534 (1951), discussed in notes 24 and 58, supra. (175)303 S.E.2d at 711. See General Motors Corp. v. Washington, 377 U.S. 436, 441 (1964). (176)303 S.E.2d at 712. (177)W. Va. CCH Tax Reporter [Mathematical Expression Omitted] 200-333 (W.Va. Circuit Ct., Kanawha County, 1988). (178)W.Va. CCH Tax Reporter [Mathematical Expression Omitted] 200-333, at 10,619. (179)Id. (180)In fact, the opinion consists primarily of a restatement of operative language from the West Virginia Supreme Court's Armco decision (see note 171, supra).

Arthur R. Rosen is State and Local Tax Counsel of Roberts & Holland, a law firm with offices in New York City and Washington, D.C. Mr. Rosen was formerly the Deputy Counsel of the New York State Department of Taxation and Finance and has held executive tax management positions at Xerox and AT&T. He is a past chairman of the Committee on State and Local Taxes of the American Bar Association's Tax Section and is a member of the Executive Committee of the New York State Bar Association and the National Association of State Bar Tax Sections. Marc D. Bernstein is a member of the New York bar. He received his undergraduate degree in political science and economics from the University of California at Los Angeles and J.D. and M.B.A. degrees from Columbia University. Mr. Bernstein was formerly associated with Roberts & Holland; he is currently studying politics in Washington, D.C.