|Drafting and Interpretation and the Odd State of the Law Produced
As evidenced by rulings in two states, a link on a Web site may create nexus, while a paper order processed by an in-state person does not.
June 11, 2009
In 1992 the U.S. Supreme Court held that physical presence was necessary for a state to impose sales tax collection obligations on a vendor (Quill, 504 US 298). Since then, taxpayers, tax agencies and the courts have struggled to determine how much and what type of presence may create nexus. Low compliance rates by customers who owe use tax when a vendor is not required to collect sales tax and states' preference to collect tax from thousands of vendors rather than millions of customers, has led states to look for ways to find non-present vendors to be treated as present (see Grabbing Remote Vendors, July 31, 2008). This article contrasts two recent state tax rulings that reached opposite conclusions on whether a vendor had sales tax nexus.
New York and Internet Vendors
In April 2008, New York broadened its sales tax reach with a law that created a rebuttable presumption that vendors generating over $10,000 of sales from links on Web sites of New York residents were soliciting business and required to collect sales tax (see Grabbing Remote Vendors). At least two vendors challenged the validity of the new rule. In decisions issued in January 2009, the court dismissed the taxpayers' claims. The court found that it was "not irrational" for the state to presume that a resident with a link would "actively solicit business for the remote seller." Also, the vendor had the opportunity to rebut the presumption.
The result is that in New York, for example, a remote vendor that enters into agreements that allow others ("associates") to place a vendor link on their Web site in which commissions can be earned when a customer places an order with the vendor by first using the associate's link, can create tax collection obligations for the vendor.
Connecticut and Teachers
In April 2009, the Superior Court of Connecticut ruled on whether actions of school teachers caused a vendor to have sales tax nexus in the state (Scholastic Book Clubs v. Commissioner, Docket CV 07 4013027S (PDF)). This was not a new issue or fact pattern; it has been litigated in other states.
The Connecticut holding was similar to a 1997 Michigan case (567 N.W.2d 692) where both courts found no nexus, analogizing the teachers to parents helping children buy books rather than being similar to a typical sales force. However, other states found nexus in similar fact patterns. One distinguishing factor between the Connecticut case and prior contrary rulings is that Scholastic now awards sales bonuses to the classrooms rather than to the teachers. (Also see a California ruling; Scholastic Book Club redetermination (PDF); October 1999.)
While the teachers were not agents of Scholastic, they did help customers place orders. Typically, teachers distributed order forms to students, mailed the completed forms and money to Scholastic and distributed the books when received from Scholastic. If there were any problems, the teacher contacted Scholastic. Teachers earned points for their classroom (not for them) which can be used to buy books and equipment from Scholastic.
Contrasting the Rulings
To illustrate the odd state of the law that can result from how legislation is drafted and how fact patterns are structured and interpreted, various factors of the New York and Connecticut situations are compared below. The result seems odd because the teachers did far more to make a sale occur than associates did, yet the associates created tax collection obligations for the vendor, while the teachers did not.
In the following analysis, some of the factors that are compared are not relevant for nexus determinations, but are offered here just to compare the fact patterns.
Role played in processing orders:
Obligation to sell:
Necessary for a sale?
The seemingly odd results of the rulings discussed above are due to legislative drafting in New York (and the difficulty of rebutting the presumption) and that neither the associates nor the teachers were acting as agents of the vendors with whom they worked. The current state of the law as to when a vendor must collect sales tax leaves much uncertainty for businesses and their tax advisers. Remedies are possible, but will not be easy. States can do more to simplify their sales tax system (such as having a single rate) and educate consumers about the use tax. But all parties need to work towards finding sensible and workable rules to determine when a vendor has sales tax collection obligations. With states in dire need of revenues and vendors facing greater uncertainty on tax obligations, it is possible that this topic will gain more traction in Congress this year.
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Annette Nellen, CPA/Esq., is a tax professor and Director of the MST Program at San José State University. She is also a fellow with the New America Foundation. Nellen is an active member of the tax sections of the AICPA and ABA. She has several reports on federal and state tax reform and a blog.