Tax Type
Retail Sales and Use Tax
Description
Interstate transactions; Nexus requirement
Topic
Taxability of Persons and Transactions
Date Issued
12-28-1993
December 28, 1993
Re: §58.1-1821 Application; Retail Sales & Use tax
Dear***************
This will reply to your letter of August 7, 1992, in which you have requested an interpretation of the impact of the decision of the United States Supreme Count in Quill Corporation v. North Dakota, 112 S. Ct. 1904 (1992) on the assessment issued for*********(the "Taxpayer") during the periods April, 1991 through June, 1992. We have treated your letter as an application to the Tax Commissioner to correct an assessment of retail sales and use tax filed in accordance with Va. Code §58.1-182l.
FACTS
The Taxpayer is a retail furniture dealer, located outside of Virginia. In April of 1991, the Taxpayer filed a combined registration certificate with the department. In 1992, the department contacted the Taxpayer for the purpose of scheduling an audit by one of the department's auditors. In July of 1992, the Taxpayer agreed to allow the department to conduct its audit, but did not provide all of the information which was requested by the auditors.
The audit revealed that between April of 1991, and June of 1992, the Taxpayer sold and delivered more than*****worth of furniture to customers in Virginia. Neither Virginia nor any other state's retail sales and use tax was collected by the Taxpayer on these sales. The Taxpayer's state of residence also imposes a retail sales and use tax
The Taxpayer maintains that it does not have sufficient nexus with Virginia, and is thus not required to collect the Virginia use tax on sales delivered into Virginia. The Taxpayer has also requested that its status as an out-of-state dealer be terminated.
DETERMINATION
I will address the issues of the case, and the Taxpayer's grounds for protest below:
Dealer defined. Va. Code §58.1-612 provides that the use tax shall be collectible from all persons who are dealers, as defined therein, who have sufficient contact with the Commonwealth. As provided in Va. Code §58.1-612 B 3, dealers are defined to include every person who:
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- Sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.
- Sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.
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- 2. Solicits business in this Commonwealth by employees, independent contractors, agents or other representatives;
3. Advertises in newspapers or other periodicals printed and published within this Commonwealth, on billboards or posters located in this Commonwealth, or through materials distributed in this Commonwealth by means other than the United States mail: or
4. Makes regular deliveries of tangible personal property within this Commonwealth by means other than common carrier. A person shall be deemed to be making regular deliveries hereunder if vehicles other than those operated by a common carrier enter this Commonwealth more than twelve times during a calendar year to deliver goods sold by him.
- 2. Solicits business in this Commonwealth by employees, independent contractors, agents or other representatives;
Virginia's laws define a dealer, the responsibility of a dealer to collect and remit the use tax, and the requirements for registration with the department. The Taxpayer has failed to fully cooperate with the audit process, and has refused to provide adequate evidence as to the extent of its activities in Virginia. However, the evidence available indicates that the Taxpayer is a dealer as defined by Virginia law, therefore the Taxpayer is responsible for the collection and remittance of the use tax.
Determination of Nexus. In Quill Corporation v. North Dakota, 112 S. Ct. 1904 (1992), the United States Supreme Court drew a sharp distinction between the "minimum contacts" with a taxing state as required by the Due Process Clause, and the "substantial nexus" with the state required by the Commerce Clause. The Court held that the Due Process Clause does not bar enforcement of North Dakota's use tax against a mail order retailer whose only contacts with customers within the state were by mail or common carrier from out-of-state locations. The Court held that its due process jurisprudence has evolved, abandoning the requirement of physical presence. Quill had purposefully directed its activities at North Dakota, the magnitude of those contacts were more than sufficient for due process purposes, and the use tax related to the benefits received from access to the state.
The Court's Due Process Clause analysis strongly suggests the department can utilize the judicial powers of the Commonwealth to compel the Taxpayer to fully cooperate in its investigation of the sales and use tax obligations arising from the Taxpayer's activities in Virginia. The Taxpayer's continued and substantial sales and advertising in the state go well beyond the minimum contacts required for due process nexus. Hence, if necessary, the department can require the Taxpayer to fully cooperate with its requests for information.
In Quill, the Court went on to find that the Commerce Clause requires "substantial nexus," which is not identical to the nexus requirements for due process. Because the substantial nexus requirement is a means of limiting state burdens on interstate commerce, it requires more of a physical presence to establish nexus than for due process. Upholding its decision in National Bellas Hess Inc. v. Department of Revenue of Illinois 386 U. S. 753 (1967), the Court affirmed that physical presence within a state was necessary to justify use tax collection responsibilities. Citing the continuing value of a bright-line test and the doctrines and principles of stare decision, the Court refused to overturn Bellas Hess, leaving that decision to Congress.
The bright-line test to determine physical presence with a state has been extended beyond maintaining a place of business within a state. The United States Supreme Court's decision in General Trading Co., v. State Tax Commission of Iowa, 322 U.S. 335, 64 S. Ct. 1028 (1944) held that the presence of traveling salesmen in a state constitutes sufficient nexus to impose use tax collection responsibilities. The requirement to collect Iowa's use tax was upheld regardless of the fact that General Trading Co. did not maintain a branch, office, or warehouse in Iowa.
In National Geographic Society v. California Bd. of Equalization, 430 U. S. 551, 559 (1977), the U. S. Supreme Court made it clear that the requisite nexus for requiring an out-of-state seller to collect and pay California's use tax was not whether the use tax related to the seller's activities carried on in California, but simply whether the facts demonstrated some definite link, some minimum connection between the State and the Society. Accordingly, the National Geographic Society was required to collect California's use tax even though its physical presence in California was limited to two small offices, unrelated to the taxable sales.
The courts have also indicated that a de minimis level of activity will not constitute sufficient nexus to impose responsibility for use tax collection. In Miller Bros. Co. v. State of Maryland, 347 U.S. 340 (1954) the United States Supreme Court held that where the activities of a Delaware retailer did not exceed the occasional delivery of goods sold at an out-of-state store, with no solicitation other than the incidental effects of general advertising, Maryland could not require the collection of their sales tax. The decision was distinguished from General Trading by the failure of Miller Bros. Co. to invade or exploit the consumer market in Maryland. However, Miller Bros. dealt with sporadic sales into a neighboring state. In Miller Bros., an assessment of only $365 was generated over a four year period. The Court did not bar the imposition of use tax responsibility where the requisite physical nexus exceeds a de minimis level of activity within the state.
In its decision in Scripto Inc. v. Carson, 362 U.S. 207 (1960), the U. S. Supreme Court reinforced its decision in General Trading. The Court found the activities of independent contractors within a state constituted sufficient nexus to compel the collection of use tax by a dealer, and to require the payment of such tax by the dealer if he fails to collect it. The Court's decision in Scripto was distinguished from that reached in Miller Bros. by the regular exploitation of markets within a state, and the knowledge that the goods sold were to be used and enjoyed within the taxing state.
Accordingly, the information received to date supports the determination that sufficient nexus exists for use tax collection responsibilities. The nexus requirements for due process mandated by the U. S. Supreme Court in Quill are clearly present. The Taxpayer has purposefully directed its business at Virginia markets, through advertising and regular deliveries. In the 15 month period audited by the department, the Taxpayer made over*********deliveries into Virginia, producing sales in excess of Because this cannot be considered a de minimis level of activity, the nexus requirements for due process are satisfied.
The bright-line test for the substantial nexus required under the Commerce Clause is satisfied by a pattern of continuous and regular delivery by other than common carrier. The decision in National Geographic made it clear that the physical presence creating nexus does not need to be directly related to sales activities. Furthermore, I find that the level of activities, intentional exploitation of Virginia markets, and economies realized in sales to Virginia customers distinguish the instant case from Miller Bros. Co., where occasional delivery and incidental advertising were held to he insufficient to create nexus.
In conclusion, I find that the Taxpayer has the requisite nexus to impose use tax collection responsibilities, and meets the definitions of a dealer as defined in the Code of Virginia.
In any proceeding relating to the interpretation or enforcement of the tax laws of the Commonwealth, the burden of proof is on the Taxpayer. The Taxpayer, having refused to provide evidence to support its application, has not met that burden. Accordingly, the assessment is upheld.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6820M
Rulings of the Tax Commissioner