98-019
Response August 13, 1998
REQUEST
LETTER
Expeditious
Handling is Requested
January
30, 1998
Ms.
Irene Rees
We
request the Utah State Tax Commission (Commission) confirm our understanding of
the sales and use tax and corporate income tax reporting obligations of our client.
To the best of our knowledge the issues involved in this ruling request are not
the subject of an existing audit protest or appeal or litigation concerning
this taxpayer.
We
respectfully request that this Ruling Request be handled in an expedited manner. The issue in this request affects the proper
filing of future sales/use tax and corporate income tax returns. Our client COMPANY A, has a fiscal year
ending March 28, 1998 and is ceasing its current manner of business operations
in March 1998. The position taken in
this ruling request is that all sales/use and corporate income tax filing
obligations end effective March 28,
1998. A timely response is therefore requested.
Facts
COMPANY
A is a retailer of tangible personal property. In the past COMPANY A has generated sales through a variety of
different business activities. COMPANY
A operated retail stores and sales offices located throughout the United States
and Canada, including Utah. COMPANY
A has also employed direct salespeople
who solicited sales from corporate environment and educational organizations. These salespeople were based
throughout the country, including Utah, and made sales calls to companies in
your state.
In
addition, COMPANY A sells its products via mail order and solicits mail order
sales primarily through catalogs and other promotional materials which are sent
directly to consumers. Mail order sales are also accepted through COMPANY A's
Internet web page. All items sold
through the mail order division are delivered to customers by common
carrier. All orders are accepted at its
Corporate headquarters located in another state and are delivered from
inventory stored in a warehouse also in
another state. COMPANY A is currently
registered with the Commission for both corporate income tax and sales/use tax
purposes.
COMPANY
A has recently announced plans to close numerous retail stores located throughout the country. As a result, COMPANY A will close all retail
stores that operate in Utah. The three store
have varying lease end dates, the longest running lease terminates on January
31, 2007. COMPANY A is currently
negotiating with the landlords of its stores to reach a mutually acceptable
settlement with respect to the lease terminations. COMPANY A may sublease certain unoccupied stores if it is unable
to reach a settlement agreement with the landlord. If a settlement agreement is
reached, COMPANY A plans to immediately pay the landlord the agreed upon
amount to terminate the lease.
Prior
to the closure of its retail stores, COMPANY A sold its direct sales division
effective May 13, 1996. As a result, COMPANY A no longer operates sales offices
(other than its Corporate headquarters in another state) or employs direct
salespeople and has not employed direct salespeople or independent sales
representatives since May of 1996.
Thus, with the closure of its
retail stores, COMPANY A will no longer have a physical presence in
Utah.
Due
to the tremendous administrative burden associated with filing sales/use tax
returns and corporate income tax returns, COMPANY A would like to formally
withdraw from Utah as it will no longer be conducting business through in-state
retail outlets or in-state salespersons.
COMPANY
A will continue to operate its mail order business and anticipates that sales
into Utah may exceed $100,000 on an annual basis. However, these mail order
sales will be solicited only through catalogs, or similar promotional mailings;
or via COMPANY A's web page. All mail
order sales will be delivered via common carrier or electronically via the
Internet.
Conclusion
COMPANY
A will no longer have nexus in Utah after the closure of its retail stores in March 1998. Therefore,
COMPANY A will terminate its sales/use tax registration with Utah and will stop
collecting sales/use tax as of March 28, 1998.
COMPANY A's final sales and use tax return will be filed in April
1998. In addition, COMPANY A will file
its final income tax return with Utah for its fiscal year ending in March
1998. COMPANY A will file a formal
withdrawal application with Utah prior to March 28, 1998 (its fiscal year end
date).
With
the closure of its retail stores, COMPANY A will have no physical presence in the state in the form of
in-state tangible personal property, inventory, employees, independent
contractors, real property, business offices, or subsidiaries. COMPANY A will continue to solicit sales in Utah via catalogs and other direct
mail. Customers may also order products by accessing COMPANY A's web page. However, under Quill Corp. v. North Dakota,
112 S. Ct. 1904 (1992) these activities are not nexus creating activities and
under Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 S. Ct. 2447 (1992), these activities
are protected. Thus, Utah may not
impose its taxes or a duty to collect
taxes upon COMPANY A after COMPANY A terminates its in-state physical presence.
Authority and Discussion
Constitutional
Limits on State's Authority to Tax
Both
the Due Process Clause and the Commerce Clause of the United States Constitution impose limitations on
the states' power to levy corporate income tax or impose a sales or use tax
collection obligation on out-of-state businesses. For a state to constitutionally
impose a tax on a corporation, there must be "nexus" or some minimum
connection between the corporation and the taxing state. If a corporation has
no nexus in a state, it is unconstitutional for the state to impose taxes or
the duty to collect taxes on the corporation.
The
Commerce Clause limits the states' power to interfere with interstate
commerce. In Complete Auto Transit Inc.
v. Brady, 430 U.S. 274(1977), the Court enunciated the four-prong Commerce
Clause test that determines whether a state tax is constitutional. First, the tax must be applied to an
activity that has a substantial nexus with the 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 services provided by the
state.
Sales
and Use Tax Nexus
In
National Bellas Hess Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967), an out-of-state seller
was not found to have use tax collection responsibilities when its only activity
was the solicitation of sales of its products through catalogs delivered through the U.S. mail. The seller had no
physical presence or property in Illinois, utilized no salespeople or
independent contractors in the State and did not engage in local advertising.
A
more recent case, Quill Corporation V. North Dakota, challenged the physical
presence theory of Bellas Hess. In Quill, the North Dakota Supreme Court held
that an out-of-state mail order and
telemarketing vendor was required to collect and remit use tax on sales to
North Dakota residents. The North
Dakota court concluded that Quill had established nexus in the State through an
economic presence, along with Quill's retained ownership of software licenses
in the State. The United States Supreme Court reversed the North Dakota Supreme
Court's ruling in Quill, and determined
that North Dakota's economic presence statute is unconstitutional. The
Court reaffirmed the physical presence
standard for use tax collection jurisdiction that it had
established
in Bellas Hess. According to the court, the physical presence test "firmly
established the boundaries of
legitimate state authority to impose a duty to collect sales and use
taxes..." Based upon the protection offered by the Commerce Clause, North
Dakota's attempt to compel an out-of-state company (without an in-state physical presence) to collect its sales or
use tax was found to unduly burden
interstate commerce.
Thus,
Utah may not impose a duty to collect its sales or use tax upon COMPANY A after
the closure of COMPANY A's in-state retail stores. As explained above, a
physical presence that constitutes substantial nexus is required in order for a
state to impose its duty to collect a use tax on an out-of-state mail order
seller.
Income
Tax Nexus
The
Commerce Clause provides Congress with the power to regulate interstate
commerce. The enactment by Congress of Public Law 86-272 significantly limits
the states' ability to impose income taxes on certain out-of-state businesses.
P.L. 86-272 prohibits a state from imposing a net income tax on an out-of-state
corporation engaged in interstate commerce if its only business activity within
the state consists of the solicitation of orders for the sale of tangible
personal property by its employees or representatives. The orders must be
accepted outside the state and delivery must originate from an out-of-state
location.
In
Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 S. Ct. 2447 (1992) an out-of-state
seller was found to have income tax reporting responsibilities when its
in-state activities exceeded the scope of solicitation under Public Law 86-272.
Under the test prescribed by the Court in Wrigley, solicitation includes
"those activities that are entirely ancillary to requests for purchases
those that serve no independent business function apart from their connection
to the soliciting of orders" and excludes "those activities that the
company would engage in anyway but
chooses to allocate to its in-state sales force."
The
Court in Wrigley does identify the following business practices as protected
under P.L. 86-272; recruiting, training, and evaluating employees that
participate in the solicitation function; using hotels and homes for
sales-related meetings; intervening periodically in credit disputes; setting up
display racks and assisting wholesalers in obtaining suitable product display
in retail shops; providing a stock of free samples to salesmen; renting a room
for temporary display of sample products; providing company cars to salesmen;
and maintaining a home office by an in-state employee.
On
the other hand, the Court identifies the following activities as beyond the
scope of solicitation; repairing or servicing the company's products; providing
technical assistance to customers; maintaining an office within the state by
the company; replacing spoiled product; selling products by in-state
representatives through practices like agency stock checks; and storing
inventory to be used in connection with non-immune activities.
Thus,
Utah may not impose a duty to file corporate income tax returns upon an entity
that does not exceed the allowable solicitation activities as outlined
above pursuant to the Wrigley decision. Therefore, with COMPANY A's closure of its
stores in Utah, and by limiting the scope of its solicitation to out-of-state
activities only, COMPANY A will no longer have an income tax return filing obligation in Utah after
filing its final return for the year ending in March 1998.
Relevant
Utah Law
Utah
Code Annotated §59-l2-l07 states in relevant part:
(I)(a) Each vendor shall pay or collect and remit the
sales and use taxes imposed by this
chapter if within this state the vendor:
(iii) engages in regular or systematic solicitation of
sale of tangible personal property, whether or not accepted in this state, by
the distribution of catalogs,
periodicals, advertising flyers, or other advertising by means of print,
radio, or television, or by mail,
telegraphy, telephone, computer data base, optic, microwave, or other
communication system for the purpose of selling, at retail, tangible personal
property;
COMPANY
A will continue to solicit sales in Utah on a regular basis through in-state direct mail or newspaper
advertising and through its Internet Web page. However, under the Quill
decision described above, this activity can not be construed to create an
in-state physical presence. Thus,
COMPANY A will not have substantial presence in Utah and thus can not be
compelled to collect Utah retail sales or use tax despite the provisions of
Utah Code Ann. §59-l2-l07(l)(a)(iii).
Clearly, COMPANY A's level of activity in Utah after the closure of its
retail stores will not rise to the level of "substantial presence"
and therefore Utah may not require COMPANY A to collect Utah sales or use tax on sales shipped to Utah via common
carrier.
Pursuant
to Utah Code Ann. §59-7-104:
(1) Each
domestic and foreign corporation, except those exempted under Section 59-7-102,
shall pay an annual tax to the state based on its Utah taxable income for the
taxable year for the privilege of exercising its corporate franchise or for
the privilege of doing business in the
state...
Further,
Utah Regulation R865-6F-l states in relevant part:
A. The Utah
franchise tax is imposed upon corporations qualified or incorporated under the laws of Utah, whether or not they do
business therein, and also upon
corporations doing business in Utah, whether or not they are qualified
or incorporated under the laws of Utah.
However,
in conformity with P.L. 86-272, Utah Regulation R865-6F-6 states:
Foreign
corporations not qualified in Utah which ship goods to customers in this state
from points outside this state, pursuant to orders solicited but not accepted
by agents or employees in this state, and which are not doing business in Utah
are not taxable under the Utah Corporation
Franchise
Tax if: (1) they maintain no office nor stocks of goods in Utah, and (2) they engage in
no
other activities in Utah.
The
regulation goes on to list in detail protected and unprotected activities in
conformance with P.L. 86-272 as described above.
COMPANY
A's activities will not exceed those allowed under P.L. 86-272 and Wrigley, and therefore can not be
compelled to file Utah corporate income tax returns after the closure of its
retail stores and the filing of its final return for the fiscal year ending in
March 1998.
In
the event that this letter does not provide sufficient information to support
our conclusions, we request a verbal hearing to more fully state our position
with respect to the foregoing. If you require additional information or would
like to discuss this request further,
please call me at #####. Thank you for your consideration.
Please
send all correspondence on this matter to NAME's attention at NAME, ADDRESS,
CITY, STATE, ZIP.
Very
truly yours,
NAME
August
13, 1998
NAME
ADDRESS
CITY,
STATE ZIP
RE:
Advisory opinion - COMPANY A
Dear
NAME,
We have received your request for
information concerning your client, COMPANY A (COMPANY A), and its planned
withdrawal from Utah for purposes of the Utah sales and use tax and income
tax. You have specifically requested an
advisory opinion that addresses whether or not COMPANY A will still have nexus
with Utah once it has closed its retail stores.
This opinion will be based on the
facts, as set forth below, that were provided in your letter. For some time, COMPANY A has operated three retail
stores in Utah, selling tangible personal property. COMPANY A’s plans were to close these retail stores in March of
1998. Nevertheless, even after the
closure of these stores, COMPANY A will engage in activities that bring it into
contact with Utah. Below, we shall
address separately each of COMPANY A’s activities that still exist in Utah
after the store closures, focusing on the application of nexus with Utah for
both the sales and use tax and income tax.
1.
Mail order business. COMPANY A
will continue to operate its mail order business, which will solicit sales in
Utah through catalogues or similar promotional mailings originating from an
out-of-state site. We would need
specific information about the “similar promotional mailings” before determining
if they too are treated in the same manner as a catalogue mailing. For purposes of this opinion, we will assume
that they are of the type that would be considered part of a mail order
business. Should there character be
otherwise, then a different opinion might result.
Given these facts, the U.S. Supreme
Court has decided that a mail order business with these characteristics is not
an activity that exposes an out-of-state corporation to sales and use tax nexus
with another state. Consequently,
COMPANY A does not have nexus with Utah for sales and use tax purposes as a
result of such mail order sales to Utah customers. As to the income tax, this activity is protected from nexus by
Public Law 86-272, which prohibits the imposition of an income tax when an
out-of-state corporation’s only contact with a state is the solicitation of
sales. As mail order sales would
qualify as such a solicitation of sales, COMPANY A does not have nexus with
Utah for income tax purposes as a result of this activity in Utah.
2.
Internet sales. COMPANY A will
solicit sales in Utah through its Internet web page. Orders will be processed at a center located out-of-state, with
deliveries made either by common carrier or by electronic downloading through
COMPANY A’s web site. For purposes of
this opinion, we assume that COMPANY A’s web page will be located on a single,
independently operated server located outside of Utah that COMPANY A either
owns or leases and that COMPANY A does not have a contractual relationship with
or its web page maintained by an online service provider. Based only on these specific circumstances
and assumptions, the Commission does not consider that COMPANY A’s Internet
activities provide sufficient contact with Utah to create nexus for either
Utah’s sales and use tax or income tax.
3.
Leasing property in Utah.
COMPANY A is closing its three Utah retail stores and plans to negotiate
lease terminations for these stores.
Should COMPANY A be successful in terminating all three leases, it will
neither be retaining an interest in nor leasing real property in Utah. Without the leasing activity, there is no
basis on which to consider nexus for this activity. However, should any of the three negotiations fail, COMPANY A
plans to sublease that unoccupied store to a sublessee. In this situation, we would consider COMPANY
A to have an interest in real property, as evidenced by both its lease and
sublease. The Commission would consider
this leasing activity one that would expose COMPANY A to nexus with Utah for
both its sales and use tax and its income tax.
In conclusion, once COMPANY A
terminates all of its leases of real property in Utah, the Commission will not
consider the above mail order and Internet activities sufficient to subject
COMPANY A to nexus with Utah for the two taxes. However, this determination is based on COMPANY A having no
contact with Utah other than that explicitly described above. Any other direct or indirect presence in
Utah may indeed expose COMPANY A to nexus.
Finally, should COMPANY A not terminate the leases for all Utah stores,
the Commission determines that COMPANY A will retain nexus with Utah for both
its sales and use tax and its income tax.
Please contact us if you have any
further questions.
For
the Commission,
Joe
B. Pacheco, CPA
Commissioner
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