CONSUMER SALES AND SERVICE TAX - USE TAX -- Entry of a parent corporation and its wholly owned subsidiary corporation into an arms length fee arrangement that is based upon market value of the services provided to the parent corporation by the subsidiary does not subject the parent corporation to the requirement for collecting either Consumers Sales and Service Tax or Use Tax on sales of the parent corporation's products or merchandise to West Virginia customers where the subsidiary does not own any retail inventory or make sales of tangible personal property in West Virginia, and where the subsidiary does not provide any services to any of the parent corporation's customers located in West Virginia
This Technical Assistance Advisory (herein "TAA") is in response to correspondence, dated October 27, 1999, requesting a determination that Corporation will not be required to collect either West Virginia Consumer Sales and Service Tax (herein "Sales Tax") or West Virginia Use Tax (herein "Use Tax") when its wholly owned subsidiary (herein "Contact Company") enters into an arms length fee arrangement with Corporation that is based upon market value of the services provided to Corporation, where the Contact Company does not own any retail inventory or make sales of tangible personal property in West Virginia, and where the Contact Company does not provide any services to any of Corporation's customers located in West Virginia. The request for a TAA provided the following information:
Corporation engages in the business of mail order sales of a variety of products over the Internet. The request for a TAA states that Corporation maintains no place of business in West Virginia, has no employees in West Virginia, has no ownership interest in property in West Virginia, and does not have an agent or representative authorized to conduct business in West Virginia on its behalf.
Corporation is considering establishing Contact Company in West Virginia which will respond to e-mail and telephone inquiries from current and prospective customers. The information provided in the request for a TAA does not appear to discuss how postal inquiries will be handled. An example in the request for a TAA mentions an individual who may "write or call." For purposes of the determination set forth in this TAA, the Tax Department will assume that postal mail will be handled by an entity other than Contact Company. Should this not in fact be the case, the nexus and jurisdictional analysis set forth herein may change.
Contact company will provide pre-sale and post-sale customer support. Pre-sale support consists of processing orders for merchandise sold by Corporation, and providing responses to inquiries relating to the Corporation's website, to the availability of a particular product, or to how Corporation's order process works. Post-sale support relates to product orders that have been placed by Corporation's customers. Such inquiries may relate to shipping status or order changes. Contact Company employees would answer questions, make adjustments and resolve complaints.
Contact Company will be a wholly-owned subsidiary of Corporation. Contact Company will negotiate with Corporation to establish an arm's length fee arrangement for the customer support contact center services to be rendered by Contact Company, and the fee will be based on the market value of the services provided.
Contact Company will not own retail inventory or make sales of any tangible personal property owned by the Contact Company. Contact Company will take sales orders for Corporation's merchandise. However, Contact Company will not provide contact center services for Corporation's customers located in West Virginia. West Virginia customers will be served by a contact center located in a state other than West Virginia.
Contact Company will negotiate its own location and development details, own or lease its own realty, fixtures, computer hardware, and other assets for use in the West Virginia contact center, acquire all licenses and certificates allowing it to do business in West Virginia, and file and pay all appropriate taxes and fees relating to its operation of the West Virginia contact center. Contact Company will not be included in any consolidated income, franchise or other tax filing by Corporation in West Virginia.
The West Virginia contact center will primarily be used for telephone contact, and will accept inquiries originating mainly in the eastern United States. E-mail contacts will not be the main focus of the activity.
The technology Contact Company will be using will recognize a customer by the customer's e-mail address if the customer has ordered from Corporation in the past. Contact Company's systems will route e-mails originating in West Virginia to another contact center located outside of West Virginia. If it is determined that an e-mail has been received from a West Virginia resident, Contact Company will forward the e-mail to another location outside of West Virginia for response. Contact Company will not direct contact center activities at the West Virginia market, and will take all viable steps to eliminate contacts with West Virginia residents. The request for a TAA is unclear as to when, in the process of receiving and evaluating e-mail of an unidentified origin, the rerouting of West Virginia source e-mail may take place.
If e-mail to the contact center is done through a system requiring the sender to fill in information fields (including a field for physical or mailing address) before the customer's initial e-mail transmission can proceed, and if Contact Company simply examines incoming e-mail, determines that the physical or mailing address of the sender is a West Virginia address, and then forwards the e-mail to an out of State contact center without responding to it, then there would appear to be no substantial service provided by the contact center to the West Virginia customer on behalf of Corporation except for the comparatively deminimis service of forwarding e-mail correspondence.
However, if Contact Company staff must interrogate the customer, actively seeking the customer's address or other information from the customer (such as the nature of the inquiry, etc.), then the West Virginia contact center would arguably be engaged in an active information gathering service for Corporation focusing on the West Virginia customer which is effectively little different from services performed for Corporation customers outside West Virginia.
The request for a TAA states that "If it is determined that an e-mail has been received from a West Virginia resident, the West Virginia Contact Center will forward the same to another location for a response." This seems to indicate that the West Virginia contact center will make no response to the West Virginia source e-mail, but will forward it without further contact with the West Virginia customer. We interpret the request for a TAA as outlining this basic factual disposition. If this is in fact not the case, the Tax Department's analysis set forth herein of the e-mail services provided by Contact Company may not apply.
The request for a TAA states that, prior to making a commitment to place the contact center investment in the State of West Virginia, Corporation wants to obtain an interpretation from the West Virginia Tax Department as to whether the State of West Virginia would find nexus with Corporation as a result of the operations of Contact Company in West Virginia such as to cause sales of Corporation into West Virginia to be subject to Sales Tax or Use Tax collection and remittance requirements.
The request for a TAA discusses decisional law relating to the Commerce Clause of the United States Constitution, and advocates the position that the proposed activities of Contact Company will not be sufficient to allow the State of West Virginia to assert Sales Tax and Use Tax reporting and remittance jurisdiction over the sales of Corporation into West Virginia.
The main issue to be determined is whether Contact Company is acting as an agent or representative of Corporation operating in West Virginia for the purpose of exploiting the West Virginia market such as to create a nexus with the State and establish West Virginia jurisdiction over Corporation for purposes of requiring the Corporation to collect the Sales Tax or the Use Tax.
It appears from the request for a TAA that:
Telephone calls originating in West Virginia will be automatically routed to a contact center outside of West Virginia.
E-mail of a West Virginia customer that has ordered from Corporation in the past will be automatically rerouted to a contact center outside of West Virginia.
In the case of new customers or e-mails with unidentified origins, the customer inquiry will be received at Contact Company, and upon identification of an inquiry as originating in West Virginia, the inquiry will be forwarded to a call center outside of West Virginia.
Contact Company will be a separate subsidiary of Corporation and a separate legal entity.
Contact Company will have a physical presence in West Virginia, and itself will be subject to the West Virginia corporation net income tax and other applicable taxes.
Contact Company will file separate corporation net income tax and (presumably) other tax returns in West Virginia, separate from Corporation
Corporation has no physical presence in West Virginia and no employees in West Virginia, and will file no tax returns in West Virginia.
Contact Company will hold no inventory of Corporation in West Virginia.
Contact Company will independently negotiate its fee arrangement with Corporation
Contact Company will negotiate its own site location and development details, and will own or lease the realty on which its facility will be sited, and the equipment, fixtures and other assets.
Whether the relationship between Corporation and Contact Company, and the activity of Contact Company in West Virginia, will result in Corporation being required to collect either Sales Tax or Use Tax on sales of its products to customers in West Virginia.
It appears that Corporation and Contact Company intend to deliberately structure their operations so as to effectively shield Corporation from nexus with the State of West Virginia.
Whether or not sufficient nexus exists for a state to impose applicable taxes is essentially a constitutional question - Is there sufficient nexus for the taxing state to impose the tax at issue to satisfy both the Due Process Clause and Commerce Clause of the United States Constitution? Under the United States Constitution, a state may not impose taxes on activities in interstate commerce if there is insufficient nexus between the activity or Taxpayer being taxed and the taxing state. The amount of nexus which is sufficient has not been identified by the United States Supreme Court, and must be determined on a case-by-case basis. The West Virginia Supreme Court of Appeals recently said of nexus, "That this area of the law is nebulous at best is beyond dispute." Hartley Marine Corp. v. Mierke, 474 S.E.2d 599, 607 (W. Va. 1996) (cert. denied) (inter alia, upholding the continuing validity for nexus purposes of Western Maryland RR Co. v. Goodwin, 167 W. Va. 804, 282 S.E.2d 240 (1981)).
To be sufficient to satisfy the Commerce Clause, nexus must be "substantial," which is more than the minimum contacts required for due process. Physical presence in the State is not required for due process, but physical presence is required under the Commerce Clause, at least for purposes of the Use Tax. See Quill Corp. v. North Dakota, 119 L.Ed.2d 91 (1992). In order for there to be sufficient nexus under the Commerce Clause, the Taxpayer's presence in a taxing jurisdiction must be more than the "slightest presence" rejected in National Geographic Society v. California Bd. Of Equalization, 430 U.S. 551, 555-556 (1977).
Although nexus is sometimes discussed in the abstract as though it exists apart from the type of tax and the factual situation, in actuality such is not the case. While the form of the tax is generally inconsequential to questions of nexus (See Hartley Marine Corp. v. Mierke, supra, FN 13, where one issue was whether the motor fuel tax is a "general revenue tax or otherwise"), it cannot be reasonably concluded that nexus is an all purpose concept which applies in the same manner to all types of taxes in all types of situations. Put another way, the fact that nexus exists for one type of tax does not necessarily mean that nexus exists for all types of taxes, nor does lack of nexus for one type of tax necessarily mean that insufficient nexus exists for all types of taxes.
Sales Tax is a transactional tax, so even a single, brief trip into a taxing jurisdiction creates ample nexus to impose Sales Tax on any purchase or sale made during the trip, if no exemption or exception applies. Such nexus for Sales Tax does not continue after the transaction is consummated nor does it create nexus for any other taxes. Conversely, lack of nexus for other taxes does not cause nexus for Sales Tax to be insufficient. Nevertheless, when nexus is sufficient to impose tax, it does raise a rebuttable presumption that nexus may exist for one or more other taxes.
Use tax is the tax most similar to Sales Tax, but the nexus for Use Tax may be different than for Sales Tax simply because of the nature of the transactions involved. In National Geographic Society v. Bd. Of Equalization, the U.S. Supreme Court "distinguished between a[n] indirect tax [such as Use Tax] and a direct tax [such as Sales Tax] in terms of the level of contacts necessary to sustain each, and concluded that a nondiscriminatory Use Tax could be imposed where there were sufficient contacts to satisfy due process standards while a higher commerce clause standard would be required to support the imposition of a direct tax." See J.C. Penney, Inc. v. Hardesty, 264 S.E.2d 604, 609 (W. Va. 1979). (Bracketed material added for emphasis).
The nexus required to impose Use Tax is built into the tax when the purchaser resides in the state seeking to impose it. The nexus requirement is clearly different when the state seeking to impose the tax does so by attempting to require an out-of-state company to collect it. Thus, even for a given tax, nexus requirements vary according to the situation.
With the foregoing general discussion in mind, we now turn to the specific activities in issue.
Sales Tax is imposed on sales of tangible personal property and selected service in West Virginia. See W. Va. Code § 11-15-3. "Services" or "selected services" includes "all nonprofessional activities engaged in for other persons for a consideration, which involve the rendering of a service as distinguished from the sale of tangible personal property, but shall not include contracting, personal services or the services rendered by an employee to his employer or any service rendered for resale." See W. Va. Code § 11-15-2(s) and 110 C.S.R. 15, § 2.74. All sales and services are subject to the Sales Tax unless specifically excepted or exempted. See W. Va. Code § 11-15-6.
West Virginia Code § 11-15-4 requires the purchaser to pay the proper amount of Sales Tax to the vendor. The term "vendor" is defined in Section 11-15-2 as "any person engaged in this state in furnishing services taxed by this article or making sales of tangible personal property."
The question is whether Corporation is engaged in this State in selling tangible personal property and therefore, satisfies the definition of "vendor." If the response is in the affirmative, then Corporation is required to collect Sales Tax on sales to West Virginia customers. However, if the response is negative, Corporation has no responsibility to collect Sales Tax.
While Contact Company will be located in West Virginia and will act as an agent of representative of Corporation, Contact Company will structure its operations in such a way as to have deminimis or no contact with West Virginia customers of Corporation. Corporation has structured its business activities so as to not have any business location, property or employees in West Virginia. That being the situation, Corporation does not qualify as a vendor. Therefore, Corporation is not required to collect Sales Tax on sales to West Virginia customers.
West Virginia also imposes a Use Tax that is complementary to the Sales Tax. See W. Va. Code § 11-15A-1a. The Use Tax is imposed essentially at the same rate as the Sales Tax, and is imposed upon the use in this State of tangible personal property and selected services purchased outside of this State or sold across state lines into this State. See W. Va. Code § 11-15A-2.
In accordance with West Virginia Code § 11-15A-6a, a retailer engaging in business in West Virginia is required to collect Use Tax. The following definitions are applicable.
(7) "Retailer" means and includes every person engaging in the business of selling, leasing or renting tangible personal property for use within the meaning of this article, or in the business of selling, at auction, tangible personal property owned by the person or others for use in this state: Provided, That when in the opinion of the tax commissioner it is necessary for the efficient administration of this article to regard any salesmen, representatives, truckers, peddlers or canvassers as the agents of the dealers, distributors, supervisors, employees or persons under whom they operate or from whom they obtain the tangible personal property sold by them, irrespective of whether they are making sales on their own behalf or on behalf of such dealers, distributors, supervisors, employers or persons, the tax commissioner may so regard them and may regard the dealers, distributors, supervisors, employers, or persons as retailers for purposes of this article.
(8) "Retailer engaging in business in this state" or any like term, unless otherwise limited by federal statute, shall mean and include but not be limited to any retailer having or maintaining, occupying or using, within this state, directly or by a subsidiary, an office, distribution house, sales house, warehouse, or other place of business, or any agent (by whatever name called) operating within this state under the authority of the retailer or its subsidiary, irrespective of whether such place of business or agent is located here permanently or temporarily, or whether such retailer or subsidiary is admitted to do business within this state pursuant to section forty-nine, article one, chapter thirty-one of this code. (Emphasis added.)
Corporation is a "retailer" within the foregoing definition. However, the primary question is whether Corporation is a "retailer engaging in business in this state." Corporation and Contact Company have specifically structured their relationship so as to preclude contact between Contact Company and any West Virginia customers, exclusive of any deminimis contact.
While Contact Company is to be a wholly-owned subsidiary of Corporation, Contact Company will not be selling any tangible personal property or providing any services to West Virginia customers. This is a distinction of substance because the retailer engaging in business in this State must be selling its products or providing its services in this State. As the Contact Company is not performing those activities for West Virginia customers, Corporation may not be classified as a retailer engaging in business in this State. Corporation will be making sales into West Virginia which will have been solicited and completed in interstate commerce. Corporation will not have nexus with the State of West Virginia in the context of Sales Tax or Use Tax collection requirements, either by reason of the operations of Contact Company in West Virginia, or by reason of its sales in interstate commerce into West Virginia. Therefore, Corporation will not be required to collect Use Tax on sales to West Virginia customers.
Determination - Corporation will not be required to collect the Sales Tax or the Use Tax on sales to West Virginia customers, as discussed herein.
The conclusions reached in this Technical Assistance Advisory are based upon the facts and representations submitted, and upon application of current law. In the event there is a material change in the facts, or if it is determined that material facts were omitted or are materially different from those furnished to us for purposes of this ruling, or if there is a material change in the applicable law, the conclusions reached in this Advisory may no longer apply.
Precedential Value - Under W. Va. Code § 11-10-5r(b), a technical assistance advisory has no precedential value except to the Taxpayer who requests the advisory, unless the Tax Commissioner specifically states that it has precedential value. This Technical Assistance Advisory is declared to have precedential value and may be cited by other Taxpayers, but shall be considered to be relevant only when the material facts and laws are essentially the same as in this advisory.
Publication - Under W. Va. Code § 11-10-5r(e), the Tax Commissioner is required to release technical assistance advisories to the public after they are modified to delete identifying characteristics, unless the Taxpayer waives its right to confidentiality. This Technical Assistance Advisory will be released as Technical Assistance Advisory 99-002.
If you have any question about this advisory, please contact this office.
Issued: November 15, 1999
Joseph M. Plamer
Sate Tax Commissioner
West Virginia State Tax Department