The New Jersey Tax Court denied a holding company’s motion for partial summary judgment seeking a determination that the taxpayer lacked nexus with New Jersey and would not be required to file corporation business tax returns. The taxpayer’s only connection to the state of New Jersey was the receipt of royalties from an affiliate doing business in New Jersey. The taxpayer argued that its facts were distinguishable from those in Lanco, Inc. v. Dir., Div. of Taxation, 188 N.J. 380 (2006), in which the New Jersey Supreme Court held that an out-of-state company lacking a physical presence in New Jersey was deemed to be doing business in the state by receiving state-sourced royalty income. The court acknowledged that the taxpayer’s facts appeared to be distinguishable from the facts in Lanco, but noted that the facts regarding the taxpayer’s activities in the state were not sufficiently developed in the motion and that discovery was still incomplete and pending. As a result, the court denied the taxpayer’s motion but left open the question of whether the taxpayer had sufficient contact with the state to satisfy the Due Process and Commerce Clauses of the U.S. Constitution. Crown Packaging Technology, Inc. v. Dir., Div. of Taxation, Dkt. No. 003249-2012 (N.J. Tax Ct. Feb. 26, 2019).

The New York City Tax Tribunal held that an out-of-state corporate taxpayer, with an indirect interest in a limited liability company investment fund engaged in business in New York City, had nexus with the City and was subject to tax on capital gain from its sale of the fund. The taxpayer had no property, employees, or otherwise conducted business in the City and the parties stipulated that the fund was not unitary with the taxpayer. The taxpayer sold its interest in the fund through an intermediate partnership and realized capital gain. The taxpayer claimed that its capital gain was not subject to the City General Corporation Tax because it had no nexus with the City and its passive investment in the nonunitary fund did not create nexus for the taxpayer. The Tax Appeals Tribunal disagreed and reasoned that the ownership of a flow-through interest in an entity conducting business in the City, created nexus for the corporate owner and the gain was mainly attributable to the protection, opportunities and other benefits upon the fund by the City. The Tribunal apportioned the gain to the City based on the City’s business allocation percentage of the investment fund. The Tribunal held that the assessment satisfied the four-prong test in Complete Auto and was supported by the ruling in Wayfair and that physical presence is not required to subject an out-of-state corporation to tax in certain circumstances. The Tribunal further found that the imposition of tax did not violate the Due Process Clause or Commerce Clause. (Petition of Goldman Sachs Petershill Fund Offshore Holdings, TAT (H)16-9(GC), (N.Y.C. Tax Trib. Dec 6, 2018))

The Missouri Department of Revenue, in a letter ruling, found that a taxpayer’s sales of exercise products were subject to state and local sales taxes because the transactions were not in commerce, since the orders were fulfilled and shipped to Missouri customers by a third-party warehouse in Missouri. The Department of Revenue also found that the taxpayer had substantial nexus with the state, through its use of a third-party warehouse in Missouri, to require it to collect state and local use tax for the sales of its products, fulfilled and shipped outside of the state directly to Missouri customers. (Missouri Director of Revenue, Letter Ruling No. 7972 (Aug. 23, 2018)).

In a Technical Advice Memorandum issued on December 4, 2018, the California Franchise Tax Board (FTB) concluded that delivery of tangible personal property via private truck is a protected activity under P.L. 86-272. However, any activity that goes beyond the scope of delivery, such as backhauling, is not protected. The FTB explained that Congress, when it enacted P.L. 86-272 in 1959, chose not to limit P.L. 86-272 protection to shipments by common or contract carrier. The FTB further noted that Congress intended to broadly protect activities “by or on behalf of” an out-of-state company, including “shipment or delivery” from out-of-state. Cal. FTB Tech. Adv. Mem. No. 2018-3 (Dec. 4, 2018).

The Texas Comptroller of Public Accounts recently ruled that the physical presence nexus standard continues to apply for the Texas Franchise Tax, even after South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). As a result, a California company whose only contacts with Texas were sales of digital products, software and e-commerce transaction processing and subscription management services to third parties did not have franchise tax nexus with the state. In the Comptroller’s view, retaining ongoing rights in software used in Texas, by itself, is not sufficient to create physical presence in the state. The Comptroller observed that although Texas has not yet moved away from the physical presence requirement, the agency will give “ample notice through various means” of any change to the current requirement.


Texas Private Letter Ruling No. No. 201809005L (09/07/2018).

The Texas State Office of Administrative Hearings (“SOAH”) found that the receipts of a non-nexus member of a combined group (Company A) “should be deleted” from the computation of the group’s gross receipts for purposes of apportioning revenue to the state.  The group was in the business of franchising fast food restaurants.  On audit, the Texas Comptroller of Public Accounts determined that Company A had nexus with Texas because the group’s Texas franchisees were required to purchase their food products and supplies from an unrelated distributor that purchased the same items from Company A.  The Comptroller contended the distributor was acting as an agent for Company A in Texas and imputed the distributor’s nexus in Texas to Company A.  SOAH disagreed with the auditor’s determination and concluded that an agency relationship did not exist between the distributor and Company A.  An agency relationship only exists if: (1) one person acts for another, (2) both consent to the arrangement, and (3) the agent is under the principal’s control.  SOAH determined that there was insufficient evidence that Company A controlled the distributor.  In addition, Company A did not have nexus with Texas based on its own activities with Texas because it did not have physical assets or employees working in Texas.

On Tuesday, June 24, the Judiciary Committee of the US House of Representatives held a hearing on “Examining the Wayfair decision and its Ramifications for Consumers and Small Businesses.” The hearing was scheduled at the direction of Rep. Robert Goodlatte (R-VA), Chairman of the Judiciary Committee and did not address any specific pending or former legislation, but instead was informational and used to assist the committee in determining whether and how Congress should intervene.

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The North Carolina Supreme Court recently held that the presence in the state of a trust’s beneficiary is not sufficient to establish income tax nexus for the trust. In the Kimberly Rice Kaestner 1992 Family Trust case, the trust’s beneficiaries were residents of North Carolina. There were no other connections between the state and the trust. The court held that the trust did not have sufficient minimum connections with the state of North Carolina to satisfy the due process requirements of the US Constitution and the equivalent due process requirements of the Constitution of North Carolina. The court emphasized that a trust is a separate and distinct entity from its beneficiaries, and a trust’s connections with the state are what matters for determining whether the tax violates due process. The court reasoned that the beneficiaries’ residency in North Carolina cannot be viewed as the trust conducting purposeful activities in the state because the trust and its beneficiaries are separate legal entities. Kimberley Rice Kaestner 1992 Family Trust v. N.C. Dep’t of Revenue, No. 307PA15-2 (N.C., June 8, 2018).

For more information on the lower court decisions in this case, please see our previous posts regarding the North Carolina Court of Appeals decision and the Wake County Superior Court decision.

In a 5-4 decision, the US Supreme Court today overruled its landmark decisions in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois, disposing of the “physical presence” rule that has served as the bright-line standard for whether remote sellers are required to collect state sales taxes. Although the Court made clear its criticisms of the physical presence standard—referring to it as “arbitrary,” “artificial,” and a “judicially created tax shelter”—it was less clear in describing a new standard to replace it.

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