More on New York and Taxation of Out-of-State Sales

Article excerpt

Two recent decisions by the N.Y. Court of Appeals make it more difficult for vendors to avoid collecting sales or compensating use taxes on out-of-state sales. These decisions have implications for both New York Corporations that ship out of state and for foreign corporations that ship to customers within New York.

The first case involved Orvis Corporation, a well-known Vermont-based company that sells hunting, fishing, and camping equipment. That case is discussed in detail in the previous article by Alan Zheutlin. The state argued successfully that, although the visits to retailers had no connection to Orvis's catalog sales, they gave the company sufficient presence in the state to make its catalog retail sales subject to compensating use tax.

Since the company did not charge sales or use taxes when the sales were made, it must absorb what is probably a large tax liability. Following the court's logic, the way for Orvis to avoid the tax in the future would be to either stop visits or stop selling to retailers within New York State.

The second case also involved a Vermont-based company. Vermont Information Processing sold computer software and hardware to beverage distributors in New York State. Products were delivered by either common carriers or the U.S. Mail. Its employees visited New York customers to give instructions on the use of its software and occasionally to help install the computer systems. As in the Orvis case, the court ruled that these visits constituted a sufficient presence to require the company to collect compensating use taxes. One way Vermont Information Services may have been able to avoid having a presence in the state would have been to use independent contractors to assist the customers. Of course, the contractors must be truly independent and not considered employees. It is also not certain how the court would have viewed this situation.

The states have been limited in their ability to tax foreign corporations by both the Commerce Clause and the Fourteenth Amendment to the Constitution. The U.S. Constitution states in part that, "No State shall, without the consent of the Congress, lay any imposts or duties on imports or exports."

A state may require a foreign (out-ofstate) corporation to collect use tax only if that business has a nexus with the state. The definition of "nexus" has evolved over several U.S. Supreme Court decisions.

The dictionary defines nexus as "a means of connection; bond or link." The U.S. Supreme Court in several decisions has given a legal meaning to this defintion. In the 1967 National Bellas Hess decision, the Court explicitly made the requirement that the vendor must have some physical presence in the taxing state. This requirement still exists. How much constitutes "some" was addressed in later cases. …