The CPA Journal

Personalized Delivery Service Creates Representational Nexus

By Sheldon H. Laskin

A Maryland trial court has ruled in a declaratory judgment case after trial that Furnitureland South, a North Carolina furniture dealer, must register and collect Maryland use tax on the sale of furniture for delivery in the state of Maryland [Comptroller of the Treasury v. Furnitureland South, Inc., et al., Circuit Court for Anne Arundel County, Case No. C-97-37872 OC (August 13, 1999)]. The court ruled that activities performed within the state by Royal Transport, Furnitureland’s primary carrier, established a Maryland nexus under the commerce clause of the U.S. Constitution. Of particular interest in this ruling is the trial court’s definition of a common carrier for purposes of applying the safe harbor established by National Bellas Hess, Inc. v. Department of Revenue [386 U.S. 753 (1967)] and Quill Corp. v. North Dakota [504 U.S. 298 (1992)].

Facts

Furnitureland is a nationwide retailer of furniture and home furnishings located in North Carolina that does not collect Maryland use tax on its sales into Maryland. It has had more than $100 million annual gross sales since 1996. Furnitureland has no showrooms or other facilities outside of North Carolina and neither owns nor leases real property in Maryland. Furnitureland does not advertise within Maryland, although it does advertise on its website and delivery trucks. Nor does Furnitureland have any employees, agents, or representatives in Maryland that solicit or take orders.

Since 1991, Royal Transport has acted as Furnitureland’s primary carrier for interstate delivery. Royal has both common and contract carrier authority from the Interstate Commerce Commission (ICC). Furnitureland initially funded Royal’s operations and was the source of its rolling stock; it also provided Royal with rent-free office space in Furnitureland’s distribution center. Furnitureland is essentially Royal’s only customer. Nevertheless, the two companies have no common stockholders, directors, officers, or employees.

Furnitureland makes all delivery arrangements at the time of sale. Typically, a customer makes a one-third deposit with Furnitureland and Royal collects the balance upon delivery. Furnitureland generates “driver trip sheets” for Royal, which identify the delivery stops, the order in which the deliveries are to be made, the time period (in three- to six-hour increments) during which each delivery should be made, and the C.O.D amount due on each sale. Furnitureland informs customers of the delivery arrangements. Although Royal assigns the drivers for each trip, these drivers generally follow the itineraries prepared by Furnitureland. The drivers consult with Furnitureland before making changes to itineraries and Furnitureland provides work orders for furniture repairs for each assigned trip. Until the time of delivery, customers have no contact with any Royal employee.

Furnitureland employees usually load and seal the trucks before Royal drivers pick them up. Most of the trucks and trailers display Furnitureland advertising, which is essentially the same as the advertising on Furnitureland’s own vehicles delivering within North Carolina.

Royal employees deliver and set up the furniture in Maryland, perform minor repairs as needed, pick up furniture for return or extensive repairs, and deliver repaired furniture back to customers. Each month, Royal drivers collect more than $200,000 in C.O.D. money from Maryland customers for Furnitureland. In 1997, Furnitureland made sales of $3,493,553 to Maryland residents. In the first 10 months of 1998, Furnitureland made sales of approximately $2,955,682 to Maryland residents.

Analysis

The court first addressed the question of whether Furnitureland and Royal are “vendors” within the meaning of the Maryland Sales and Use Tax Act, concluding that Furnitureland is an out-of-state vendor and therefore a vendor under the Maryland statute. The court found that Royal acts as Furnitureland’s agent for the purpose of delivering, setting up, and servicing furniture in Maryland, noting that Furnitureland’s promotional materials stress the “personalized delivery service” provided by Royal, and that the delivery service helped Furnitureland become the largest furniture retailer in the world. The court also held that Royal is liable for the collection of the Maryland use tax under a Maryland statute providing that the comptroller may regard any salesperson or representative as the agent of the vendor and hold them both liable for the collection of the tax.

Because the defendants stipulated the existence of sufficient minimum contacts to satisfy the nexus requirements of the due process clause, the court next addressed the constitutional issue of nexus under the commerce clause. Citing Scripto, Inc. v. Carson [80 S. Ct. 619 (1960)] the court observed that “substantial nexus” can be established through a representative acting on behalf of the remote seller in the taxing state (for constitutional law purposes, the court did not use the agent standard it used to determine the state law issue). Royal’s extensive and exclusive activities on behalf of Furnitureland clearly establish that Royal acts as Furnitureland’s representative for delivery, set up, and post-sale services within Maryland.

Finally, the court addressed whether Royal’s activities on behalf of Furnitureland in Maryland are insulated because they consist exclusively of delivery by common carrier within the “safe harbor” of National Bellas Hess. The court acknowledged that “common carrier” has never been defined for purposes of applying this safe harbor rule, but rejected the ICC’s designation of Royal as a common carrier for the purposes of applying Bellas Hess. The testimony of Furnitureland’s expert witness acknowledged that there were no currently meaningful distinctions between a common carrier and a “contract carrier” under federal law and that a common carrier can now provide the same services as can a contract carrier. The court noted the abolishment of the federal regulatory system for interstate trucking and concluded that reliance on the former ICC designation of Royal as a common carrier in a use tax collection case would undermine the purpose of creating the Bellas Hess safe harbor.

The court ruled that, for purposes of applying the Bellas Hess safe harbor, a common carrier is a carrier that

1) holds itself out to provide its services to the public on a nondiscriminatory, arm’s-length basis;
2) controls the time, manner, and means of delivery; and
3) does not engage in substantial contacts with the receiving party, such as providing post-delivery services. The court held that the personalized delivery service provided by Royal to Furnitureland does not fit this meaning. Therefore, the commerce clause did not bar the state from requiring Furnitureland and Royal to collect the use tax.

National Nexus Program: Voluntary Disclosure

The Multistate Tax Commission (MTC) National Nexus Program will process offers to voluntarily resolve sales or use and income or franchise tax liabilities in several states at a time. The company remains anonymous until the settlement is complete and the company sends in the registration materials. Any taxpayer who, after consultation with its tax professional, wants to register to collect sales or use tax in any of the National Nexus Program’s 40 member states should contact Tom Shimkin at (202) 508-3800. For more information about the MTC’s voluntary disclosure program, please visit www.mtc.gov/txpyrsvs/disclose.htm.

Sheldon H. Laskin, LLM, is the director of the National Nexus Program at the Multistate Tax Commission, Washington, D.C., and teaches in the graduate tax program at the University of Baltimore.

State and Local Editor:
Stewart Buxbaum, CPA
S. Buxbaum & Company, P.C.

Interstate Editor:
Nicholas Nesi, CPA
BDO Seidman LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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STATE AND LOCAL TAXATION