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An exegesis of the Multistate Tax Commission nexus guideline: the physical presence requirement.

Introduction

A. Background

In order for a state to impose a sales or use tax collection obligation on a taxpayer, the Commerce Clause of the United States Constitution requires that the taxpayer must have a "substantial nexus" with the state.(1)(*) Unfortunately the Supreme Court has not provided a precise definition of this key term. For example, in Quill Corp. v. North Dakota,(2) the leading Supreme Court case addressing "substantial nexus," the Court held a taxpayer whose only contact with a taxing state was the delivery of goods through common carrier and the licensing of software to customers residing in the taxing state did not have "substantial nexus." In reaching its decision, the Court explained that the bright-line physical presence requirement announced in National Bellas Hess, Inc. v. Department of Revenue of Illinois(3) -- which prohibits a state from imposing use tax collection obligations on out-of-state sellers that have no physical presence in the state -- is consistent with the "substantial nexus" requirement. Quill also hinted that a taxpayer may lack "substantial nexus" with a taxing state, even though it maintains the "minimum contacts" necessary to satisfy the Constitution's Due Process Clause.(4)

Thus, while Quill provides good general guideposts and teaches that "substantial nexus" requires physical presence, the precise nature of the physical presence is unknown. Consequently, it should be no surprise that this uncertainty has produced significant litigation and a variety of interpretations by the state courts around the country

In an effort to establish a uniform standard for determining when an out-of-state taxpayer has "substantial nexus" with a state for sales and use tax purposes, the Multistate Tax Commission (MTC)(5) promulgated a guideline entitled "Nexus Guideline for Application of a Taxing State's Sales and Use Tax to a Remote Seller."(6) Although the MTC's Guideline is denominated a "discussion draft" and has not been formally approved by the MTC or any of its member states, it illustrates some of the current thinking on the subject of "substantial nexus" and evidences where the MTC and the states are moving on this critical issue.

B. Overview

The Guideline is divided into two basic sections: (1) the Guideline statement, which is itself divided into Commerce Clause and Due Process Clause components, and (2) an Examples Section, which illustrates what does and does not constitute "substantial nexus" under the Guideline. The focus of this article is on the Commerce Clause component of the Guideline -- most specifically, the Guideline's definition of "physical presence."

The Commerce Clause component of the Guideline states that "substantial nexus" exists where "an out-of-state business or its representative is, or is deemed to be, physically present in the taxing State."(7) The Guideline lists nine activities that create or are deemed to create "physical presence" within the taxing state.(8) Owing to subject matter overlap, these nine activities fall into six classifications:

(1) the existence of real or tangible personal property

located within the taxing state;

(2) the existence of intangible property located within

the taxing state;

(3) the retention of representatives or employees

within the taxing state;

(4) the performance or rendering of services within

the taxing state;

(5) the maintenance of telecommunication linkages

within the taxing state; and

(6) the existence of other "activities" within the taxing

state.

This article analyzes each of these activities in light of the controlling case law to determine whether such "physical presence" in fact creates "substantial nexus," as it has been defined by the courts. The article is intended to identify the relative strengths and weaknesses of the Guideline, as well as to provide a better understanding of current "substantial nexus" law.

General Observations

The objective of the Guideline -- to apprise businesses of the restrictions against sales and use taxation that exist as a result of the "substantial nexus" requirement of the Commerce Clause -- is certainly commendable. The Guideline. however, falls short of its goal for three reasons.

First the Guideline's definition of "physical presence" is more expansive than a majority of courts have found. Secondly,. the Guideline asserts broader taxing jurisdiction than sanctioned by Quill by failing to recognize the brightline physical presence requirement. Lastly, the Guideline destroys the distinction between the Due Process requirement of "minimum contacts" and the Commerce Clause requirement of "substantial nexus." Thus, the Guideline is inconsistent with Quill, representing an unjustified attempt by states to expand their taxing jurisdiction and to increase tax revenues. Adoption of the Guideline in its current version promises to create more confusion than it would eliminate and, for this reason, should cause the member states of the MTC to reject it.

Nevertheless, there are some aspects of the Guideline's "physical presence" definition that are consistent with the current sales and use tax jurisprudence. Consequently, some provisions of the Guideline have the potential to eliminate some of the uncertainty in this area. The MTC should focus on these because they would be useful for the business community.

Analysis of the Guideline's Physical Presence Provisions

A. Real or Tangible Personal Property in the Taxing State

The first Guideline provision states that ownership of real or tangible personal property in the taxing state is sufficient to create "physical presence" and, therefore, "substantial nexus." In general, courts have held that ownership of real or tangible personal property consistently located or maintained within the taxing state is sufficient to create "substantial nexus." For instance, in National Geographic Society v. California Board of Equalization,(9) the Supreme Court held that the taxpayer's maintenance of two offices in California to solicit advertising for its D.C.-based magazine created "substantial nexus" with California and. thus, justified the State's imposition of a use tax on the taxpayer's unconnected mail-order activities in California.

1. Physical Presence Unrelated to the Activity Being Subject to Tax

In the wake of National Geographic, courts have found that "substantial nexus" is satisfied, even if the ownership of the property is unrelated to the business or sale at issue. For example, in Steelcase, Inc. v. Director, Division of Taxation,(10) the taxpayer maintained a warehouse in New Jersey, but used it for purposes unconnected with the transactions at issue. Nevertheless, the court still found "substantial nexus" because the taxpayer had a physical connection with New Jersey. Similarly, in Time, Inc. v. Massachusetts Commissioner of Revenue,(11) a tax tribunal held that mail-order sales by Time's Time-Life Books Division were properly taxable because Time operated an unrelated news bureau in Massachusetts and also employed individuals in Massachusetts to solicit advertising for some of its publications.

Since the first Guideline provision does not specify that the property ownership must be connected with the activity in question, it is consistent with Steelcase and Time.

2. Temporary In-State Presence

Courts have generally found that the temporary presence of the taxpayer's property in the taxing state, even if transitory in nature, creates "substantial nexus" when the taxpayer exercises rights or powers incident to ownership but only when the taxpayer itself has a permanent presence in the state.(12)

For example, in Central Transportation, Inc. v. Tracy,(13) a shipper's processing of its own business equipment and supplies in Ohio generally consumed a few minutes, and in all cases less than a few hours. Nevertheless, the court found "substantial nexus" and imposed a sales and use tax on the goods because such an exercise of rights over property was significant enough to create "substantial nexus" with Ohio. Similarly, in Vinmar, Inc. v. Harris County Appraisal District,(14) Vinmar, a Texas corporation, purchased plastic resin for export to foreign customers. After it purchased the resin, it held the product in its warehouse until import clearances could be obtained. Vinmar's exercise of control of resin, albeit temporary, was sufficient to create "substantial nexus."

This line of cases, however, does not support a nexus finding when there is no permanent presence in the state of the owner of the property. Thus, the Guideline overreaches in this area.

3. Presence Limited in Character or De Minimis in Nature

Courts have refused to find "substantial nexus" when the presence of property in the taxing state is limited in purpose, or when the ownership interest in merely "technical" or de minimis in nature.(15) In Cally Curtis Co. v. Groppo,(16) for instance, the court held an out-of-state company that sold and leased industrial films and videotapes for personnel training did not have "substantial nexus" with the taxing state (Connecticut), even though it technically owned property in the state during the three-day period in which customers could "preview" the film prior to purchase. The court found that such de minimis property ownership was insufficient to create nexus.

While the Guideline defines "physical presence" to exclude de minimis activities, its definition of de minimis incorporates the "slightest presence" standard rejected in Quill and National Geographic. Thus, taking a different position from controlling law, the Guideline adopts a much broader definition of "substantial nexus" than justified under the case law.(17)

B. Intangible Personal Property in the Taxing State

The second and fifth Guideline provisions essentially provide that maintenance of intangible personal property in the taxing state is sufficient to create enough "physical presence" to justify imposition of sales or use tax. Examples of this type of activity include licensing of trademarks service marks, copyrights, patents, franchises, or other intellectual property rights within the taxing state.

The MTC bases this provision on the South Carolina Supreme Court's decision in Geoffrey, Inc. v. South Carolina Tax Commission.(18) But even though the Geoffrey court held that licensing intangibles for use in the state created "substantial nexus" for income tax purposes, it did not hold that licensing created "substantial nexus" for sales and use tax purposes. In fact, the court specifically recognized that Quill's bright-line "physical presence" requirement applies to state sales and use taxes, but not to income taxes.

Furthermore, in Quill, the Supreme Court stated that "[the taxpayer's] licensing of software [in the taxing state] does not meet the 'substantial nexus' requirement of the Commerce Clause [because] National Geographic expressly rejected a slightest presence standard of constitutional nexus."(19) Consequently, the second and fifth Guideline provisions go too far in invoking Geoffrey to expand the "physical presence" test.

C. Representatives or Employees Retained in the Taxing State

The third, fourth, and sixth Guideline provisions basically state that "physical presence" exists when a business has representatives or employees in the taxing state. As a general proposition, these Guideline provisions are consistent with decisions finding "substantial nexus" when an out-of-state business retains agents, including independent contractors, in the taxing state on a permanent basis.(20)

In Tyler Pipe Industries, Inc. v. Washington Department of Revenue, for instance, the Supreme Court held "the crucial factor governing nexus is whether the activities performed in [the taxing state] on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in the [taxing state] for the sales."(21) Consequently, the Court found that Tyler Pipe's in-state sales representative and independent contractor created "substantial nexus" with Washington because the representative resided in Washington and "acted daily on behalf of Tyler Pipe in calling on its customers and soliciting orders."(22)

Further, in Scripto, Inc. v. Carson,(23) the Court found that 10 independent contractors "conducting continuous local solicitation in [the taxing state] and forwarding the resulting order" to the taxpayer created "substantial nexus." And while the Court later described Scripto as representing "the furthest constitutional reach to date of a State's power to deputize an out-of-state retailer as its collection agent for a use tax,"(24) that case remains good law today.

1. Unpaid Representatives

a. Majority Rule. Notwithstanding Scripto, a majority of courts have refused to find "substantial nexus" when the representative is an unpaid volunteer because the representative is not an agent. For example, in Pledger v. Troll Book Clubs, Inc.,(25) Troll sold educational books and materials by mailing catalogs to teachers nationwide. The teachers distributed order forms, collected money, and distributed books to children who placed orders, but the teachers were not compensated by Troll. The Arkansas Supreme Court held that the relationship between Troll and the teachers was not an agency relationship because: (1) Troll did not have the right to control the teachers, (2) Troll paid no compensation to the teachers, and (3) the teachers were acting on behalf of the children, and not on Troll's behalf. Without the formal agency relationship, there could be no "substantial nexus."(26)

b. Minority Rule. On the other hand, California courts have adopted an opposing, but distinctly minority view. In Scholastic Book Clubs, Inc. v. California Board of Equalization,(27) the court held that sales of educational books to children through the use of unpaid teachers volunteers was sufficient to create "substantial nexus" based on the theory that the teachers were agents. Moreover, the court also found that Scholastic's economic exploitation of the market, through the use of teachers, created "substantial nexus."

The broad California rule is the exception to the majority unpaid volunteer rule -- an anomaly. Nevertheless, because the MTC Guideline defines "representative" as "any individual or entity that solicits sales, conducts business, or provides services in the taxing State on behalf of an out-of-state business," it is more consistent with the California rule than the majority rule. This is another reason the MTC Guideline is criticized as an attempt by the member states to increase their sales and use tax jurisdiction.

2. Trade Show Nexus

The courts are split on whether attendance at local trade shows or seminars is sufficient to create nexus. In In re: * * *,(28) the unnamed taxpayer was a Louisiana corporation whose only contact with Texas was through general mail-order catalogues, and participation in at least two trade shows where it exhibited, but did not accept orders for its products. Despite the taxpayer's minimal contact with Texas, the tax tribunal found "substantial nexus."

On the other hand, in Share International, Inc. v. Florida Department of Revenue,(29) the taxpayer, Share, was a Texas mail-order corporation, whose representatives displayed and sold its products at an annual three day seminar in Florida. These same representatives, acting on behalf of a separate affiliated corporation, were also in charge of arranging, coordinating, and conducting the seminar itself. The court, relying on Quill and National Bellas Hess, stated:

It appears clear...that an out-of-state seller whose

only connection with customers in the taxing state

is by common carrier or mail cannot be required to

collect and remit tax on sales to residents of the

taxing state, and that out-of-state sellers who

maintain a continuing presence in the state by one

or more full-time or part-time employees can be

required to collect and remit such a tax. [This

case, however,] does not present either factual situation.(30)

Consequently, while the court ultimately concluded that "the presence in [Florida] for approximately three days of each year of Share employees and products...does not establish a substantial nexus which will permit the state to impose on Share the duty to collect and remit taxes on mail-order sales to Florida residents,"(31) the court asked the Florida Supreme Court to certify the case for appeal. The Florida Supreme Court did so, and a decision is pending.(32)

Despite the uncertainty with respect to trade show nexus, the Guideline takes the sweeping position that the maintenance of any representative in a state, which presumably includes a representative at a trade show, creates the requisite "physical presence" to establish sales or use tax liability.

3. Affiliate Nexus

The Guideline also apparently accepts the concept of "affiliate nexus," under which an out-of-state business has nexus because a related corporation is present in the taxing state. Specifically, the Guideline provides that a business is "physically present" if "a division or other business segment of an out-of-state business [is physically present in the taxing state], regardless of whether the in-state corporate division or business segment performs activities related to the out-of-state business' sales activities." No court. however, has ever found "substantial nexus" because of affiliate nexus.

For example, in Current, Inc. v. California Board of Equalization,(33) the taxpayer was a subsidiary of Deluxe Corporation. While Deluxe maintained significant physical presence in California, the taxpayer itself was a Delaware mail-order corporation, which maintained all of its employees and facilities in Colorado. The court rejected the argument that the corporate affiliation between the taxpayer and Deluxe created "substantial nexus." The court based its decision on the fact that the taxpayer and Deluxe did not have integrated operations and management, were organized and operated as separate entities, and neither was the alter ego or agent of the other.

In Bloomingdale's By Mail Ltd. v. Commonwealth Department of Revenue,(34) the Pennsylvania Supreme Court refused to find "substantial nexus" for an out-of-state mail-order seller based on the presence of in-state retail stores operated by its parent company. The court indicated that affiliate nexus requires proof of agency or corporate piercing.

Every other court that has considered the issue of affiliate nexus has held that the in-state presence of a commonly owned corporation, standing alone, is insufficient to create constitutional nexus.(35) Based on this unbroken line of precedent, the MTC should properly eliminate any mention of affiliate nexus in the Guideline.

D. Performance or Rendering of Services in the Taxing State

The ninth Guideline provision takes the broad view that the performance or rendering of services in the taxing state creates "physical presence" and, therefore, "substantial nexus." Courts, however, have generally been reluctant to find "substantial nexus" solely on the ground that out-of- state employees have visited the taxing state to provide repair or other services relating to sales not otherwise subject to sales or use tax. Consequently, this is yet another instance of where the Guideline adopts a broader view than the current Commerce Clause jurisprudence has allowed.

For instance, in Lands' End, Inc. v. California State Board of Equalization,(36) a pre-Quill decision, a court held that Lands' End, a traditional mail-order seller with no permanent physical presence in California, did not have "substantial nexus" with California, even though its buyers occasionally visited California vendors and its representatives occasionally attended, inter alia, trade shows in California. After Quill, the appeal in this case was dismissed as moot.

On the other hand, supporters of the Guideline may argue that in Orvis Co. v. Tax Appeals Tribunal,(37) the New York Court of Appeals held that, although the Quill "physical presence" requirement entails demonstrably more than the slightest presence, the requisite presence need not be substantial. After all, the court specifically stated that "physical presence may be manifested by presence...of [a] vendor's property or economic activities...performed by [a] vendor's personnel or on its behalf [in the taxing state]."(38) And even though the Orvis sales persons who traveled into New York could not bind Orvis and all orders were approved in Vermont, the court found that such activity, coupled with the fact that Orvis's annual sales to New York customers varied from $1 million to $1.5 million, "would presumptively suffice as a nexus to impose a use tax collection responsibility [on Orvis]."(39)

Likewise, in the companion case of Vermont Informatoion Processing, Inc. v. Tax Appeals Tribunal, which had been consolidated with Orvis on appeal, Vermont Information Processing (VIP) had entered New York on 41 occasions to fulfill "hardware and software sales agreements [which] obligated [VIP] to provide a charge-free visit...at a customer's site in New York if problems necessitating the visit occurred within the first 60 days of installation."(40) Accordingly, the court found this was sufficient evidence to establish "substantial nexus."

Nevertheless, the Orvis dissent would have held that neither VIP's nor Orvis's activities created "physical presence." In fact, the dissenting opinion correctly points out that the majority's decision contradicts the Quill brightline approach by essentially adopting a "slightest presence" standard. Thus, although Orvis does support the Guideline's position on this issue, it is clearly inconsistent with Quill.

E. Telecommunication Linkage Within the Taxing State

The seventh Guideline provision states that maintenance "in the taxing State by private contract, and not by purchase from a common carrier in the common carrier's status as a common carrier, [of a] telecommunication linkage that permits the out-of-state business to establish and maintain a market in the taxing state" creates physical presence, and therefore justifies the imposition of a sales or use tax. While there are no cases discussing this possible source as establishing "substantial nexus" with the taxing state, this activity is analogous to the common-carrier line of cases where courts have held "substantial nexus" is not satisfied.(41) Furthermore, because Quill explicitly adopted a bright-line "physical presence" requirement, and held that delivery of goods into a state is not enough to create "substantial nexus,"(42) it is questionable that maintenance of a telecommunications linkage is sufficient to create "substantial nexus," at least in the absence of actual "physical presence."

F. Other Activities in the Taxing State

Under the eighth Guideline provision, "physical presence" is created when a taxpayer "engages in other 'activities' in the taxing State that constitute a physical connection with the taxing State, including, without limitation, the conclusion of the taxable sale in the taxing State." The Guideline also provides examples of other "activities" that also create "physical presence," including: (1) occurrence in the taxing state of a taxable sale, and (2) more-than-isolated invocation of the taxing State's courts or public records recording systems.(43)

1. Occurrence or Conclusion of a Sale in the Taxing State

One court has held that concluding a sale in the taxing state makes the out-of-state business subject to the state's sales tax provisions, but only when the seller personally delivers the goods into the taxing state. In In re Monroe Distributing, Inc.,(44) the taxpayer -- an Ohio corporation engaged in the business of selling and servicing video games -- maintained no New York locations, but it did consummate a significant number of its sales in New York. The taxpayer routinely concluded these sales by making deliveries of its products into New York by means of its own trucks. The New York tax tribunal found that these deliveries created "substantial nexus" for sales tax purposes because the taxpayer delivered merchandise into and, at the same time, completed sales in New York.

But because the courts have always held that no nexus is created when a common carrier delivers the goods, as opposed to the taxpayer delivering the goods, the Guideline has again adopted a broader position than the courts have been willing to accept.

2. Voluntary Acts of Registration or Incorporation

The Guideline asserts that voluntary acts of registration or incorporation are sufficient to create "physical presence." Such a position, however, clearly contradicts state court decisions. For example, in In re New Milford Tractor Co.,(45) the taxpayer, which was a Connecticut corporation with its sole place of business in Connecticut, voluntarily registered as a "sales tax vendor" under New York law. The court refused to find that registration alone was a sufficient basis for finding nexus, or that it constituted a "waiver" of Commerce Clause protection. Both conclusions were based on prior New York cases which analyzed actual physical contacts with the state and ignored the taxpayer's having registered as a vendor under the same statute.(46)

And even though some may argue that there is authority to support the Guideline's position that registration alone may be enough to create "physical presence,"(47) such authority is inconsistent with Quill, which plainly requires a finding of actual "physical presence" in the taxing state.

Conclusion

While the MTC's desire to provide clarity and uniformity on the issues of "substantial nexus" and "physical presence" is laudable, the Guideline in its current form is seriously flawed. First, its expansive definition of "physical presence" extends state sales and use tax jurisdiction beyond the reach allowed by the courts. Second, it fails to adequately comply with recent precedent, including Quill's bright-line "physical presence" test. Before the Guideline can achieve its worthy objective of bringing uniformity in the area of state sales and use taxation, its defects must be corrected. Otherwise, its adoption will create more confusion than it will eliminate.

(*) Footnotes are printed beginning on page 295.

Notes

(1) Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). (2) 504 U.S. 298, remanded to 487 N.W.2d 598 (N.D. 1992), reh'g 500 N.W.2d 196 (N.D.), cert. denied, 114 S. Ct. 173 (1993). (3) 386 U.S. 753 (1967). (4) Quill, 504 U.S. at 313. (5) The Multistate Tax Commission is an auditing agency created by compact among the member states. (6) Multistate Tax Commission, Nexus Guideline for Application of a Taxing State's Sales and Use Tax to a Remote Seller (Jan. 25, 1995) (hereinafter cited as "Guideline"). The MTC anticipates issuing a revised version of the Guideline in the summer of 1996, but the changes are primarily designed to make the Guideline more user-friendly, and no significant substantive changes are expected. Telephone Interview with Paull Mines, General Counsel, Multistate Tax Commission (May 14, 1996). an article in a forthcoming edition of The Tax Executive will discuss the differences between the current Guideline and the updated Guideline.

Interestingly, the Guideline would become moot if Congress passed legislation allowing states to impose use tax collection duties on out-of-state businesses regardless of their nexus with the state. Quill specifically stated that Congress was free, under its Commerce Clause powers, to establish such guidelines. Such legislation was introduced in October 1995, but no further action has been taken. Consumer and Main Street Protection Act of 1995, S. 545. 104th Cong., 1st Sess. (1995). The bill's sponsors argue that Quill provides unfair advantages to out-of-state sellers who escape tax collection duties, while in-state sellers do not. Thus, the bill, if enacted, would authorize states to impose use tax collection duties on out-of-state sellers. (7) Guideline at 3 (emphasis added). In whole, the Guidelines provides: Substantial nexus, or nexus based upon the requirements of the Commerce Clause, for possible appliction of the taxing State's sale or use tax is satisfied, when:

(1) an out-of-state business or its representative is, or is deemed

to be, physically present in the taxing State; or

(2) an out-of-state business purposefully directs business activities

into the taxing State or regularly ir systematically solicits

business in the taxing State, either directly or through a

representative [i.e., "minimum contacts" nexus is satisfied],

and the application of the taxing State's sales and/or use tax

does not unduly buren the interstate commercial activities of

the out-of-state business. (8) Guideline, supra note 6, at 4-5. In whole, the Guideline states that an out-of-state business is, or is deemed to be, physically present in the taxing State for possible application of that State's sales or use tax when the business engages in one or more of the following activities beyond a de minimis level:

(1) owns, leases, uses, or maintains real or tangible personal

property located in the taxing State; or

(2) has any interest in, or a right to use, intangible property

that is used in the taxing State, while retaining, in the case

where the out-of-state business is the grantor with respect to

the use of the intangible property in the taxing State, an

interest therein; or

(3) retains in the taxing State an in-state representative or

representatives, including independent contractors, who solicit

or conduct business or perform services on behalf of the

out-of-state business; or

(4) retains a representative or representatives who own, lease,

use or maintain real or tangible property in the taxing State

and the representative uses the property to represent the

out-of-state business in the taxing State; or

(5) retains a representative or representatives who has any interest

in, or a right to use, intangible property that is used in

the taxing State, while retaining, in the case where the

representative or representatives are the grantor with respect

to the use of the intangible property, an interest therein

and the representative uses the intangible property to

represent the out-of-state business in the taxing State; or

(6) retains a representative or representatives who in turn retain

an in-state representative or representatives, including

independent contractors, who solicit or conduct business or

perform services on behalf of the out-of-state business or on

behalf of the first level representative and the representation

of the first level representative by the lower level representative

pertains to first level representative's representation

of the out-of-state business; or

(7) maintains in the taxing State by private contract, and not by

purchase from a common carrier in the common carrier's

status as a common carrier, [a] telecommunication linkage

that permits the out-of-state business to establish and maintain

a market in the taxing State; or

(8) engages in other "activities" in the taxing State which constitute

a physical connection with the taxing State, including,

without limitation, the conclusion of the taxable sale in

the taxing State; or

(9) performs or renders services in the taxing State. Guideline, supra note 6, at 4-5. (9) 430 U.S. 551 (1977). (10) No. 07-2606-90 (N.J. Tax Ct. Apr. 5, 1993). See also Solo Cup Co. v. Director, Division of Taxation No. 07-14-1301-91 (N.J. Tax Ct. Apr. 5, 1993) (similar to Steelcase, though Solo Cup Co. also maintained independent representatives and sales persons in New Jersey). (11) 1993 Mass. Tax LEXIS 17 (Mass. App. Tax. Bd. Jul. 23, 1993). (12) See, e.g., PPG Industries, Inc. v. Tracy, 659 N.E.2d 1250 (Ohio 1996) (upholding use tax on pace cars that were stored in taxing state when not at races or when being repaired); Norandex, Inc. v. Limbach, 630 N.E.2d 329 (Ohio 1994) (maintaining control over manufacturer's "sample kits" for about ten days until they were sent to branch sales offices creates "substantial nexus"); Big Boy's Toy, Ltd. v. Limbach, 597 N.E.2d 76 (Ohio 1992) (storing and repairing boat in Ohio for about a month sufficient to create "substantial nexus," when taxpayer had also used the boat in Ohio on four occasions). (13) 649 N.E.2d 1210 (Ohio 1995). (14) 890 S.W.2d 493 (Text Ct. App. 1994). (15) But see Collins v. J.C. Penney Co., 461 S.E.2d 582 (Ga. App. 1995) (finding "substantial nexus," even though taxpayer did not physically control materials shipped into the state, because the taxpayer had the right to control the materials); Comfortably Yours, Inc. v. Director, 640 A.2d 862 (N.J. Super. 1994) (stating that imposition of a use tax on mailers shipped into the state by an out-of-state shipper at the direction of an in-state corporation did not violate any Commerce Clause prohibition); Midwest Found. Independent. Physicians Association. v. Tracy, 658 N.E.2d 263 (Ohio 1996) (holding that an in-state physician's right to control magazines that it ordered an out-of-state publisher to ship into the state created "substantial nexus"). (16) 572 A.2d 302 (Conn.), cert. denied, 111 S. Ct. 77 (1990). See also Direct Marketing Association v. Bennett, No. Civ. S-88-1067, 1991 U.S. Dist. LEXIS 10736 (E.D. Cal. Jul. 12, 1991) (holding that sales of merchandise with money-back guarantees were not "sales on approval," and therefore, did not create "substantial nexus") Cargill, Inc. v. Tracy, No. 91-G-827, 1994 Ohio Tax LEXIS 1751 (Ohio B.T.A. Oct. 14, 1994) (holding that minor repairs and safety inspections on leased rail cars traveling in interstate commerce did not constitute "substantial nexus" with Ohio) (appeal accepted by the Ohio Supreme Court; oral arguments were heard on Mar. 19, 1996). (17) Many states have enacted "printer's nexus" safe-harbor legislation, which provides in part that nonresident corporations shall not be deemed to have nexus with a state by virtue of that nonresident's: (1) retention of an in-state printer, (2) storage of tangible personal property at an in-state printer's plant, when that property is used in the printing process, and (3) visitation to an in-state printer's plant. See, e.g, Fla. Stat. Ann. [sections] 212.0596; Ind. Code Ann. [sections] 6-2.5-8-11; Ky. Rev. Stat. Ann. [sections] 139.340(2); Ohio Rev. Code Ann. [sections] 5741.17(A)(4); Penn. Act No. 21, ch. 9, [sections] 1 (June 30, 1995); Tenn. Code Ann. [sections] 67-6-203(b); Texas Admin. Code tit. 34, [sections] 3.546(c)(1]); Utah Code Ann. [sections] 59-7-102; Va. Code Ann. [sections] 58.1-612(D); Wis. Stat. [sections] 1.23(3)(a) - (b) (however, Wisconsin's safe harbor is much narrower than most states). Consequently, the Guideline is moot as to activity that falls within the safe harbors created by such legislation. (18) 437 S.E.2d 13 (S.C.), cert. denied, 114 S. Ct. 550 (1993). (19) Quill, 504 U.S. at 315 n.8. (20) See, e.g, In re * * *, No. 32,349, 1995 Tex. Tax LEXIS 38 (Text Comptroller Jan. 30, 1995) (holding that practice of sending employees to Texas for multiple customer training sessions that were two to three days in length created "substantial nexus"). But see Care Computer Systems, Inc. Arizona Department of Revenue, 1995 WL 331507 (Ariz. B.T.A. Apr.4, 1995) (holding that customer visitation by one salesperson per year to Arizona was insufficient to establish "substantial nexus," even though the salesperson had 180 transactions for $385,000 of income), appeal granted, Ariz. Super. Ct., No. 95-00642; Talbot's Inc. v. Arizona Department of Revenue, 96 STN 4-4 (Oct. 12, 1995) (holding that Talbot's construction activities of a retail store did not create nexus for its mail-order division because nexus was not substantial); Commissioner v. Kelly- Springfield Tire Co., 643 N.E.2d 458 (Mass. 1994) (sales representative's regular activity in Massachusetts to solicit orders for taxpayer did not create "substantial nexus" because the taxpayer did not maintain an office in the state, all orders were accepted outside the state, and all orders were shipped into the state by a common carrier). (21) 483 U.S. 232, 250 (1987) (citation omitted), on remand, 749 R2d 1286 (Wash.), cert. denied, 486 U.S. 1040 (1988). (22) Id. at 249. See also Carapace, Inc. v. Limbach, 1993 Ohio Tax LEXIS 950 (Ohio B.T.A. May 28, 1993) (finding enough "physical presence" to constitute "substantial nexus" where an out-of-state seller utilizes an in-state representative to provide sales support services to in-state dealers, even though the representative does not directly procure sales). (23) 362 U.S. 207 (1960). (24) National Bellas Hess, 386 U.S. at 757. (25) 871 S.W.2d 389 (Ark. 1994). (26) See also Freedom Industries, Inc. v. Tracy, No. 92-N-597, 1994 Ohio Tax LEXIS 2025 (Ohio B.T.A. Dec. 12, 1994) (holding that "substantial nexus" could not be found with proof of something less than agency); Troll Book Clubs, Inc. v. Tracy, No. 92-J-590, 1994 Ohio Tax LEXIS 1374 (Ohio B.T.A. Aug. 19, 1994). (27) 207 Cal. App.3d 734 (Cal. Ct. App. 1989); accord Educational Reading Service Book Fairs, Inc. v. California Board of Equalization, No. A058304 (Cal. Ct. App. Aug. 31, 1993) (unpublished) (relied on Scholastic), petition for review denied, Cal. Sup. Ct. (28) No. 30,661, 1994 Tex. Tax LEXIS 252 (Text Comptroller May 17, 1994). (29) 667 So.2d 226 (Flat App. 1 Dist. 1995), review granted, 668 So.2d 602 (Flat 1996). (30) Id. at 240. (31) Id. (emphasis added). (32) 668 So.2d 602 (Flat 1996). All parties have filed briefs, and oral arguments were heard on Apr. 3, 1996, but as of July 1, 1996, a decision was still pending. For the latest information, call the Clerk of the Florida Supreme Court at (904) 488-0125 and request information on Case No. 86-481. (33) 29 Cal. Rptr.2d 407 (Cal. App. Ct. 1994). (34) 591 A.2d 1047 (Pa. 1991), aff'g 567 A.2d 773 (Pa. Commw. Ct. 1989), cert. denied, 112 S. Ct. 2299 (1992); accord The Country Shop, Inc. v. Limbach, No. 90-K-90 (Ohio B.T.A. Jan. 15, 1993); SFA Folio Collections, Inc. v. Bannon, 585 A.2d 666 (Conn.) cert. denied, 111 S. Ct. 2839 (1991). (35) See SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, cert. denied, 111 S. Ct. 2839 (1991); SFA Folio Collections, Inc. v. Tracy, 73 Ohio St.3d 119 (1995). (36) No. 620135 (Cal. Super. Ct. Jan. 18, 1991). See also L.L. Bean, Inc. v. Commonwealth Department of Revenue, 516 A.2d 820 (Pa. Commw. Ct. 1986) (mail-order seller that sent representatives into taxing state on very limited basis to inspect merchandise and police trademark did not have "substantial nexus"). (37) Orvis Co. v. Tax Appeals Tribunal; Vermont Information Processing, Inc. v. Tax Appeals Tribunal, 654 N.E.2d 954 (N.Y.), cert. denied, 116 S. Ct. 518 (1995). (38) Id. at 961. (39) Id. (40) Id. at 962. (41) See, e.g., Quill, 504 U.S. 298 (1993). (42) Id. at 314-16. (43) The Guideline also provides other examples, such as: (1) advertising through local newspapers, television, or radio stations, and (2) maintenance of an in-state telephone number, both of which courts are unlikely to find create "substantial nexus." (44) No. 808812, 1994 N.Y. Tax LEXIS 580 (N.Y. D.T.A. Oct. 6, 1994). (45) No. 808563, 1994 N.Y. Tax LEXIS 498 (N.Y. D.T.A. Sept. 1, 1994). (46) See In re Franklin Mint Corp. v. Tully, 463 N.Y.S.2d 566 (N.Y. App. Div. 1983) (not using voluntary registration as a factor its "substantial nexus" determination), aff'd, 463 N.E.2d 621 (N.Y. 1984); In re Aldens, Inc. v. Tully, 404 N.E.2d 703 (N.Y.) (relied on physical presence, not voluntary registration, to find "substantial nexus"), appeal dismissed, 449 U.S. 802 (1980). (47) See, e.g., New York State Department of Taxation and Finance Advisory Opinion, TSB-A- 94(53)(S) (Dec. 20, 1994) (incorrectly concluding that nexus requirement was satisfied even though there was "no physical presence in the State of New York"). But see Dunhall Pharmaceutical, Inc. v. Tracy, No. 94-T-1340, 1995 Ohio Tax LEXIS 1289 (Ohio B.T.A. Oct. 27, 1995) (holding that registration under a state statute which requires all sellers to collect sales and use taxes creates "substantial nexus," in a case where the taxpayer's representatives were present in the taxing state); New Jersey Division of Taxation Bulletin (S&U-5) (indicating mail-order businesses must register and collect tax if the vendor has "any place of business in New Jersey" or "has employees working in [New Jersey] or owns any business property [in New Jersey]").

MARYANN B. GALL is a partner in the Tax Group at Jones, Day, Reavis & Pogue in Columbus, Ohio, and is a frequent speaker at educational programs sponsored by Tax Executives institute. RICK J. GIBSON is an associate in Jones Day's Columbus office.
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Author:Gibson, Rick J.
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Date:Jul 1, 1996
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