B. Even Seemingly Innocent Activities within a State Have Resulted in Companies’ Being Held Present in that State
Certain States also find that occasional visits to sites or customers in their State constitute “doing business.” The interstate commercial activity protected by the Commerce Clause and Public Law No. 86-272 is thus based on a fairly passive business model of a company receiving orders in one State and delivering goods through common carriers to another State, without much more involvement.
To determine the extent of activities in their State, departments of revenue will routinely send questionnaires to out-of-state companies or vendors when such departments become aware of sales activities within their borders.
Upon receipt of such questionnaires, companies should review and answer the questions with the assistance of legal counsel. Similarly, deployment and expansion into another State should be discussed with legal counsel as such initiatives can have corporate and/or sales tax consequences.
About ten years ago, a company turned to my firm for assistance in a dispute it was having with a State’s Tax Authority.
The company had hastily and improperly completed a business activities questionnaire, which included a question on occasional visits to the State. The client—a manufacturer-- had only one distributor in the State in question – which in and off itself should not have had any tax consequences – but the client had apparently answered positively to a survey question as to whether it made occasional visits to the State.
As it happened, the owner of the manufacturer had developed a close friendship with the owner of the distribution company and visited him on occasion when the former was in town.
The consequence of the client’s apparent innocent representation to that State was that it was thereafter required to file several years of tax returns, at significant cost and expense. Our firm won on appeal to the State Board of Appeals by convincing it that the manufacturer was not, in fact, “doing business” in the State.
Just two years ago, the same State again claimed that the manufacturer was required to file another set of returns. Although we pointed out that this issue had been previously been resolved in the client’s favor, the client, again, was required to retain an accountant to prepare returns for different periods, and ended up being assessed significant taxes based on the client’s alleged presence in the State.
We, again, prevailed on appeal but not before the client had to pay yet more money to defend its position.
The Take Away
The lesson to be learned from the above is that expansion into a State, other than the State of organization, needs to be analyzed to ensure that the company will be compliant with State qualification rules.
Furthermore, sales methods, although they may seem a prerogative of business managers, should be periodically reviewed with legal counsel as to their potential tax consequences.
About the author
Louise Martin-Valiquette was born in Montreal, Canada. She is an attorney who, primarily, advises clients concerning cross-border transactions, corporate structure, and international distribution and trade. She is admitted to practice law before the courts of the State of New York and the Province of Quebec, Canada. She is, currently, adjunct Professor of International Trade Law at Pace University, Westchester, New York, and was the recipient, in 2008, of the Averell Harriman International Trade Award for Service Provider of the Year, and, in 2009, the Apex Award for outstanding service provider in the International Business category, awarded by the Westchester County Association. Ms. Valiquette has a national and international practice based in Ossining, New York. She is fluent in English, French, and Italian, and has a working knowledge of Spanish.