Affiliate Nexus: Nexus Creation Through Common Ownership

Affiliate Nexus: Nexus Creation Through Common Ownership

by Robert Desiderio *

Over the past couple of decades, one issue that has plagued the courts in a number of states has been that of determining when nexus is created by corporations that are subject to common ownership and/or control. A number of states have taken the position that the existence of common ownership between an in-state taxpayer and an out-of-state corporation could potentially create nexus for the out-of-state corporation. The basis for this position lies in the rule of law found in § 52 of the Restatement (Second) Conflict of Laws. [According to the Restatement of Conflicts, "[j]udicial jurisdiction over a subsidiary corporation does not of itself give a state judicial jurisdiction over the parent corporation." Therefore, "a state does not have judicial jurisdiction over a parent corporation merely because a subsidiary of the parent does business in the [state]." However "[j]udicial jurisdiction over a subsidiary corporation will...give the state judicial jurisdiction over the parent corporation if the parent so controls and dominates the subsidiary so as in effect to disregard the latter's independent corporate existence." Likewise, "[j]udicial jurisdiction over the parent corporation will give the state judicial jurisdiction over the subsidiary corporation if the parent so controls and dominates the subsidiary so as in effect to disregard the latter's independent corporate existence."]

The economic issue driving litigation in this area is the fact that many national retail concepts have captive on-line entities. [In this context, a "captive" on-line entity is one which is wholly owned by the retail venture (the retail entity often being a publicly traded entity with multiple subsidiaries).] making sales into various states. Because of their lack of physical presence nexus, as required by Quill Corp. v. N.D., 504 U.S. 298 (U.S. 1992), for sales and use tax imposition, sales made through related entities do not require the selling entity to collect sales tax on retail sales, even though similar sales made through a related "bricks and mortar" [The phrase "bricks and mortar" as it applies in the retail context is the presence, within a given state, of physical store locations.] entity within the state would require the collection of sales tax.

[1] Sales Through Catalogues


SFA Folio Collections, Inc. (Folio) was a New York corporation and a wholly owned subsidiary of Saks & Company (Saks), also a New York corporation. Folio sold clothes and accessories by direct mail to customers in Ohio and elsewhere. Folio mailed its catalogues to customers and received orders by telephone, mail or fax.

Saks also owned another subsidiary, Saks Fifth Avenue of Ohio, Inc. (Saks-Ohio). Saks-Ohio operated Saks Fifth Avenue stores in Ohio and elsewhere. Saks-Ohio was a separate profit center from Folio.


The Ohio Tax Commissioner assessed Folio use tax on its sales of merchandise to Ohio residents as Folio had not collected use tax on those sales...

The court found that Saks-Ohio did not own or operate an in-state place of business for Folio. [SFA Folio Collections v. Tracy, 73 Ohio St. 3d 119 (Ohio 1995)]. The acceptance of the occasional return of Folio merchandise at Saks-Ohio stores may have created "minimal nexus," but not "substantial nexus." ...

[2] Sales Through Websites

Many of the cases that have addressed the issue of nexus through common ownership have been cases involving bookstores and the websites through which the books are also sold. In Borders Online v. State Bd. of Equalization, 129 Cal. App. 4th 1179 (Cal. App. 1st Dist. 2005), the California Court of Appeal analyzed whether, through an affiliated entity (Borders, Inc.), Borders Online (Online) had sufficient presence in California to justify the imposition of sales tax collection. The trial court had ruled, in a summary judgment, in favor of the California State Board of Equalization (SBE). In this case, Online challenged the Board's ruling on its merits.

Online was a Delaware limited liability company (LLC) with its headquarters in Michigan. From April 1998 to September 1999, Online sold more than $1.5 million in books and other similar goods over the Internet to customers in California. Online did not own or lease property in California during the period and did not have any employees or bank accounts in California. Online employees outside of California received and processed all orders placed through, Online's website. Online did not collect or pay sales or use taxes on items sold to California purchasers during the periods in question.


The question presented on appeal was whether Online had a "representative" or "agent" in California acting under Online's authority for the purpose of selling tangible personal property pursuant to Cal. Rev. & Tax Code § 6203(c)(2).


[The California Court of Appeal] found that the stores were effectuating Online's return policy by accepting Online's merchandise under the terms of Online's return policy. Thus, the stores acted as Online's agent or representative. Online met the statutory definition of a retailer engaged in business in the state by having a representative or agent operating in California. Further, by accepting returns of items sold by Online, the stores were Online's representative "for the purpose of selling" Online's goods. The court concluded that the imposition of a use tax on Online did not violate the Commerce Clause of the U.S. Constitution.

Subsequent to the decision in Borders Online, a California superior court ruled that another internet retailer, whose promotional materials were distributed by an affiliated retailer with a physical location in the state, did not have the requisite nexus under Cal. Rev. & Tax Code § 6203(c)  to be subjected to California use tax collection. [ v Franchise Tax Board, Case No. CGC-06-456465, Sup Ct SF County, Sep 7, 2007].The court held that nexus is determined by a two-pronged test, both prongs of which must be met. While the internet retailer met the requisite "selling" requirement, its affiliate did not qualify as an "agent."


A federal district court in Louisiana has also weighed in on the fact pattern. The court held that, which sold items in a Louisiana parish and had an affiliated store in the parish, was not liable for the collection of sales and use tax because it did not have substantial nexus. [St. Tammany Parish Tax Collector v., 481 F. Supp. 2d 575 (E.D. La. 2007)].


Like the California court, the federal district court concluded that did not have substantial nexus with the parish. Booksellers' activities in the parish on behalf of did not establish that Booksellers marketed 's products. Booksellers and were formally separate corporate entities that were wholly owned by the same parent company for only part of the relevant period. According to the court, the nature and extent of the activities performed by Booksellers on behalf of within the parish were insufficient to treat Booksellers as acting as a marketing presence. Booksellers had never taken or solicited orders on behalf of and did not provide facilities to place orders with

* ROBERT J. DESIDERIO practices with Sanchez, Mowrer and Desiderio, P.C., Albuquerque, New Mexico, in the areas of tax law, tax-exempt organizations, and business and commercial transactions. He was dean of the University of New Mexico School of Law from 1979 to 1985 and from 1997 to 2003, and served as a professor of law for the school over several decades. He is currently Professor Emeritus at UNM, teaching State and Local Taxation, Tax-Exempt Organizations and Remedies.


LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 12 pages)

RELATED LINKS: For additional information and insight into affiliate nexus, see:

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store