|
|||||
|
|||||
Search Software Personal Help |
By Alan Zheutlin, CPA The New York Court of Appeals recently held that a Vermont vendor was
required to collect New York use tax on its taxable retail sales to New
York customers because it has sufficient physical presence in New York
(In the Matter Orvis Company, Inc., N.Y. Ct. of Appeals, Nos. 138
and 139, June 14, 1995). Orvis Company, Inc. (Orvis) is located in Vermont and sells both retail
and wholesale camping, fishing, and hunting equipment; casual and outdoor
clothing; food; and various gift items. During the period under review,
its retail sales were almost entirely through mail-order catalog purchases
shipped from Vermont by common carrier or the U.S. Postal Service. In addition,
Orvis also sold merchandise at wholesale to New York retail establishments.
The New York Appellate Division (the Appellate Division) had ruled that
Orvis need not collect use tax on their taxable retail sales to New York
customers because Orvis lacked a substantial physical presence in New York.
The New York Court of Appeals (the Appeals Court) did not agree with
the Appellate Division. Although Orvis did not 1) maintain, lease, or own
any office, distribution house or any place of business in New York; 2)
own any tangible property, real or personal, in New York; 3) have a telephone
listing in a New York directory; 4) have New York resident agents or representatives;
or, (5) approve orders in the state, the Appeals Court ruled that visits
by the Orvis sales personnel to their New York retail store clients was
sufficient presence to require collection of New York use taxes. Sales
personnel for Orvis visited approximately 19 retail store clients (wholesale
customers) an average of four times a year during the three-year audit
period from 9/1/77 to 8/31/80. Approximately 15% of the $1 million to $1.5
million of Orvis sales to New York were to wholesale customers. The Appeals
Court determined that these visits to wholesale customers were direct solicitation
of all retail customers despite Orvis' affidavit that the visits were only
to discuss shipments and displaying of products. Notably, the Appeals Court,
in reaching its conclusion, relied on the U.S. Supreme Court language in
National Geographic Society v. California Bd. of Equalization, 430
U.S. 551 (1977) and opined that the necessary vendor presence in the taxing
state to require use-tax collection from customers located in the state
need not directly relate to the taxed activity. The Appeals Court decision in Orvis, requires Orvis to collect
use tax on mail-order catalog sales to New York customers, although Orvis'
limited presence in New York is related only to its wholesale sales. The Appeals Court has interpreted the Quill Corp. v. North Dakota,
504 U.S. 298 (1992) decision to mean that the physical presence nexus standard
is met when the vendor has property or conducts economic activities in
the taxing state. After Orvis it will be more difficult for mail-order companies
who have any presence in New York to avoid collecting use tax on taxable
sales to New York customers. In addition, other states may attempt to adopt
the nexus standard endorsed by the Appeals Court in Orvis and as
applied to mail-order companies. * By Andre Montero, CPA Two recent decisions by the N.Y. Court of Appeals make it more difficult
for vendors to avoid collecting sales or compensating use taxes on out-of-state
sales. These decisions have implications for both New York Corporations
that ship out of state and for foreign corporations that ship to customers
within New York. The first case involved Orvis Corporation, a well-known Vermont-based
company that sells hunting, fishing, and camping equipment. That case is
discussed in detail in the previous article by Alan Zheutlin. The state
argued successfully that, although the visits to retailers had no connection
to Orvis's catalog sales, they gave the company sufficient presence in
the state to make its catalog retail sales subject to compensating use
tax. Since the company did not charge sales or use taxes when the sales were
made, it must absorb what is probably a large tax liability. Following
the court's logic, the way for Orvis to avoid the tax in the future would
be to either stop visits or stop selling to retailers within New York State.
The second case also involved a Vermont-based company. Vermont Information
Processing sold computer software and hardware to beverage distributors
in New York State. Products were delivered by either common carriers or
the U.S. Mail. Its employees visited New York customers to give instructions
on the use of its software and occasionally to help install the computer
systems. As in the Orvis case, the court ruled that these visits constituted
a sufficient presence to require the company to collect compensating use
taxes. One way Vermont Information Services may have been able to avoid
having a presence in the state would have been to use independent contractors
to assist the customers. Of course, the contractors must be truly independent
and not considered employees. It is also not certain how the court would
have viewed this situation. The states have been limited in their ability to tax foreign corporations
by both the Commerce Clause and the Fourteenth Amendment to the Constitution.
The U.S. Constitution states in part that, "No State shall, without
the consent of the Congress, lay any imposts or duties on imports or exports."
A state may require a foreign (out-of-state) corporation to collect
use tax only if that business has a nexus with the state. The definition
of "nexus" has evolved over several U.S. Supreme Court decisions.
The dictionary defines nexus as "a means of connection; bond or
link." The U.S. Supreme Court in several decisions has given a legal
meaning to this definition. In the 1967 National Bellas Hess decision,
the Court explicitly made the requirement that the vendor must have some
physical presence in the taxing state. This requirement still exists. How
much constitutes "some" was addressed in later cases. In Complete Auto Transit v. Brady, (1970), the Supreme Court
issued four standards that lower courts may use to judge the constitutionality
of a state tax on interstate commercial activity. These four standards,
subject to refinements in later court cases, still constitute the prevailing
test used by the courts. First, the company's activities must have a substantial
nexus with the taxing state. Second, the tax must be fairly apportioned.
Third, the tax must not discriminate against interstate commerce. Fourth,
the tax must be fairly related to the services provided by the state. Two refinements were made in the National Geographic Society v. California
Board of Equalization (1977) case. First, the court ruled that the
required nexus with the taxing state need not necessarily be directly related
to the activity being taxed. This explains why the employee visits to wholesale
customers in the Orvis case made the unrelated catalog sales subject to
tax. The second refinement is that the court required the physical presence
in the state need not be "substantial" but simply more than the
"slightest presence." In the 1992 case Quill Corp. v. North Dakota, the court affirmed
the requirement that the vendor have a physical presence in the state,
although it came to this conclusion for different reasons than those given
in the Bellas Hess case. The most recent decision of the Supreme
Court is the 1995 case of Oklahoma Tax Commission v. Jefferson Lines
Inc. Here, the court confirmed the doctrine that physical presence
need not be substantial but only that it must be more than the "slightest
presence." The New York Court of Appeals relied on this decision in
both the Orvis and Vermont Information Processing decisions.
Mail order is estimated to be a $200 billion a year industry with much
of that amount escaping either sales or use taxes. Because of the staggering
amount of taxes involved, states can be expected to continue taking an
aggressive approach to requiring foreign vendors to collect tax. Until
the U.S. Supreme Court issues definitive rules, the only safe harbor may
be to avoid any physical presence within the state. Any visits, even for
unrelated business, may leave a company in court arguing over the definition
of "slightest presence." The safest approach is to register and
collect the tax, but in the highly competitive mail-order business, charging
sales tax when your competitors do not could result in drastically reduced
sales. This is especially true because mail-order customers are not accustomed
to paying sales tax. On the other had, failure to collect taxes when the
company is later found to have a physical presence in the state can have
disastrous financial results. * State and Local Editor: Interstate Editor: Contributing Editors: Leonard DiMeglio, CPA Steven M. Kaplan, CPA DECEMBER 1995 / THE CPA JOURNAL
The
CPA Journal is broadly recognized as an outstanding, technical-refereed
publication aimed at public practitioners, management, educators, and
other accounting professionals. It is edited by CPAs for CPAs. Our goal
is to provide CPAs and other accounting professionals with the information
and news to enable them to be successful accountants, managers, and
executives in today's practice environments.
©2009 The New York State Society of CPAs. Legal Notices |
Visit the new cpajournal.com.