The Current State of "Attributional" Nexus: Claims of Jurisdiction Over Out-of-State Sellers

The poor economy has created a budgetary crisis for many state governments. One solution is to expand a state's taxes to include companies earning income or with benefits that are seen occurring in the state. There are controversies on "attributional nexus," relating to the lines that govern a state's reach to impose taxes on out-of-state sellers with customers but no employees or property in the state.

Authors Thomas Steele and Kirsten Wolff write: Seventeen years ago, the United States Supreme Court established a "bright-line" standard that required, quite simply, that a taxpayer be physically present (beyond a de minimis presence) within the state as a condition for being subject to its taxing regime. Quill Corp. v. N.D., 504 U.S. 298 (U.S. 1992) ("Quill") (citing National Bellas Hess v. Department of Revenue, 386 U.S. 753 (U.S. 1967) ("Bellas Hess")). Notwithstanding the "bright-line" rule, the battles continue to this day and there is little reason to believe they will be resolved soon.  Indeed, Dell's recent petition for writ of certiorari with the United States Supreme Court to obtain the Court's guidance on the very issues addressed by this article was denied. Dell Catalog Sales L.P. v. Taxation & Revenue Dep't, 145 N.M. 419 (N.M. Ct. App. 2008). (N.M. Ct. App.), cert. denied, Dell Catalog v. NM Taxation & Revenue Dep't, 144 N.M. 593 (N.M. 2008), cert. denied, Dell Mktg. L.P. v. N.M. Taxation & Revenue Dep't, 129 S. Ct. 1616 (U.S. 2009) (U.S. Mar. 23, 2009) (No. 08-770) ("Dell (NM)").

...

The Attributional Nexus Test

Courts have relied on the United States Supreme Court's decisions in Scripto, Inc. v. Carson, 362 U.S. 207, 213 (U.S. 1960) and Tyler Pipe Indus. v. Washington State Dep't of Revenue, 483 U.S. 232, 249 (U.S. 1987) (quoting the Washington Supreme Court decision on appeal,  Tyler Pipe Indus. v. Dep't of Revenue, 715 P.2d 123, 125 (Wash. 1986)) for the proposition that an out-of-state seller will have nexus by attribution of a third party's in-state activities when: 1) the third party is acting "on behalf of" the out-of-state seller, and 2) the third party's activities are "significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales." Tyler Pipe, 483 U.S. at 247-48.

While this attributional nexus test is clear in theory, application of the test by the courts has yielded less than fully predictable results...

...

Application of These Principles to the Bookseller Cases

Three cases involving Borders and Barnes & Noble, two booksellers with apparently similar business models, provide a useful opportunity to examine how the courts have determined whether the in-state entity is acting on behalf of the out-of-state entity and whether in-state activities should be viewed as creating or maintaining a market. In those cases, the fundamental facts were the same: each involved stores operating within the state (so-called "brick & mortar" operations) owned by one corporation and a separately incorporated operation that provided sales over the Internet (and that was not physically present in the state seeking to impose the tax) (the "Internet seller"). In each case, the taxing authorities sought to impose use tax collection over the remote Internet sales operation based upon activities of the brick & mortar stores in the state. See Borders Online v. State Bd. of Equalization, 129 Cal. App. 4th 1179 (Cal. App. 1st Dist. 2005); St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F. Supp. 2d 575 (E.D. La. 2007).

...

[T]hese cases provide a pointed example of the variety of conclusions courts can reach when deciding attributional nexus questions, even in the face of seemingly parallel facts.

Guidelines for Avoiding Attributional Nexus

Because the battle lines continue to shift and because the cases that have recently considered this issue often turn on specific facts, it is difficult to develop any practical rules for avoiding attributional nexus based solely on corporate structure or even operational limits. However, notwithstanding the variation among individual cases, we believe it is possible to establish... guidelines that can be used to analyze the risk that an in-state business operation may produce nexus for an out-of-state sales operation...

Subscribers can access the complete commentary on lexis.com. Additional fees may be incurred (Approx. 9 pages)

If you do not have a lexis.com ID, you can purchase the Emerging Issues Analysis content through our lexisONE Research Packages.

For a complete discussion of Attributional and Agency Nexus concepts, see 1-12 Bender's State Taxation: Principles and Practice § 12.04.  Or to find out more about Bender's State Taxation: Principles and Practice in print, visit the LexisNexis® Store.