State support for MTC's aggressive positions wanes.
MTC's Position on Attributional Nexus
The bulletin relies largely on Scripto, Inc. v. Carson, 362 US 207 (1960), and Tyler Pipe Industries, Inc. v. Washington Dep't of Revenue, 483 US 232 (1987), to support the MTC's position that an independent contractor's warranty repair services create nexus for an out-of-state seller. In these decisions, the Supreme Court held that solicitation activities of in-state independent contractors created nexus for use tax collection obligations (Scripto) and the payment of gross receipts tax (Tyler Pipe). The Court reasoned in both cases that the activities performed by the independent contractors were significantly tied to the out-of-state seller's ability to establish and maintain a market.
Bulletin 95-1 concludes that instate repair services performed by third parties also create nexus. However, the bulletin fails to acknowledge that the independent contractors in Scripto and Tyler Pipe were, in fact, representatives for out-of-state companies. An example included in the bulletin indicates that nexus is created by services performed under a warranty that requires the customer to seek authorization from the computer seller before seeking repairs from a third party. Because the example notes that the seller first determines whether the problem can be solved over the telephone, the authorization appears to be required, at least in part, to assure that repairs are necessary. This is distinguishable from a situation in which a third-party repairer is authorized by the computer seller on an ongoing basis to make warranty repairs subject to the seller's control and specifications. Under the MTC's example, the third-party repairer is not acting as the computer seller's representative for establishing and maintaining a market for the seller in the taxing state. Thus, the services should not constitute nexus.
Application of the Bulletin to P.L. 86-272
The MTC bulletin summarily concludes that third-party warranty repair services exceed protected solicitation under P.L. 86-272, and do not constitute activities entirely ancillary to the solicitation of orders. P.L. 86-272 is a Federal statute that limits states' powers to impose income taxes on an out-of-state seller of tangible goods. In general, a state may not impose income tax on an out-of-state seller whose instate activities are limited to the solicitation of orders, as long as the orders are sent out of the state for approval and the goods are shipped or delivered from a point outside the state. Furthermore, nonsolicitation activities will not result in the loss of P.L. 86-272 protection provided the activities are de minimis. Although the bulletin does not say so, it would appear that the MTC believes warranty repair services constitute a mixed sale of tangible personal property and services not protected by P.L. 86-272. Moreover, the bulletin provides that warranty repair services cannot be a protected de minimis activity. In Wisconsin Dep't of Revenue v. William Wrigley, Jr. Co., 505 US 214 (1992), the Supreme Court provided that de minimis activities are those that, taken together, establish only a "trivial additional connection with a taxing state." The MTC reasons that warranty repair services cannot be de minimis; they constitute a regular and systematic business activity conducted pursuant to company policy, and are directed to the establishment and maintenance of an in-state market. However, this position ignores the factual nature of the question and should not be resolved so summarily.
Bulletin 95-1 represents the MTC's continuing aggressive interpretation of substantial nexus and narrow reading of both Quill Corp. v. North Dakota, 504 US 298 (1992), and P.L. 86-272. As represented by the MTC's proposed substantial nexus guidelines distributed last year, the MTC reads Quill as narrowly targeting only mail-order sellers whose contacts with a state are strictly limited to the use of common carriers or the U.S. mail; any other form of contact (e.g., third-party warranty repair services) represents substantial nexus, according to the MTC.
Given California's influential role in the MTC, its rejection of Bulletin 95-1 may cause other states to rethink their adoption of the bulletin. In some states, the position taken in the bulletin could constitute a change in law and could therefore be challenged as an unauthorized administrative action. Nonetheless, the SBE's withdrawal of Bulletin 95-1 is evidence that taxpayers, through intense industry and political pressure, can have a positive influence on the direction of administrative tax policy in a state.
FROM JEFFREY A. FRIEDMAN, CPA,J.D., AND MARIANNE EVANS, CPA, J.D., LL.M., Washington, D.C.
RELATED ARTICLE: TTA: Just a Reminder
As was announced in the most recent Tax Division Newsletter, beginning with the August issue, the AICPA will institute a $24 annual charge to Tax Section members for the print version of The Tax Adviser. This nominal charge was selected as the best alternative to assure continuation of TTA as a monthly publication. (The charge contrasts with $71 per year for non-Section AICPA members and $98 for non-AICPA subscribers.)
For those who do not need a library copy of TTA, but still wish access to its features, the magazine will continue to be available at no added cost to all Tax Section members on Accountants Forum (as it has been since January).
Tax Section members will have an opportunity to indicate their choice on their dues bill this summer: either pay the extra $24 and receive 12 print issues plus access to the online version, or at no additional cost have free
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||Multistate Tax Commission|
|Publication:||The Tax Adviser|
|Date:||Jun 1, 1996|
|Previous Article:||New applications of the integrated plant doctrine to sales and use tax manufacturing exemptions.|
|Next Article:||Final regs. clarify basis and distribution issues, but leave unanswered questions.|