State tax practitioners are familiar with the basic nexus requirements regarding the relationship between the tax-payer and the taxing jurisdiction (which is distinct from the relationship required between the transaction and the taxing jurisdiction): the due process clause minimum connection requirementand the commerce clause substantial presence requirement.

The due process clause requires some minimum connection between the state and the person it seeks to tax and is concerned with the fairness of the governmental activity. Accordingly, a due process clause analysis focuses on ‘‘notice’’ and ‘‘fair warning’’ and the due process clause nexus requirement will be satisfied if an out-of-state company has purposefully directed its activities at the taxing state.¹

The commerce clause, on the other hand, requires a ‘‘substantial nexus’’ between the person being taxed and the state.² In Quill Corp. v. North Dakota,³the U.S. Supreme Court addressed this substantial nexus requirement and held that a seller must have a physical presence in the taxing state to satisfy the substantial nexus requirement for sales and use tax purposes. As a result, it is universally accepted that physical presence in a state is required for a state to impose a sales or use tax collection obligation on an out-of-state seller.

However, because the case involved a use tax collection obligation, there has been significant debate about whether a physical presence in a state is required to create substantial nexus for income or other business activity tax purposes. Many state courts and tribunals have addressed the economic nexus issue, yielding conflicting results, with some concluding that the substantial nexus requirement can be met if a taxpayer merely derives an economic benefit from customers located in the state without having any physical presence there.⁴

The extent of those due process clause and commerce clause nexus requirements has been the subject of countless controversies for years. Central to many of those controversies is the question of whether specific de minimis activities — analyzed in either quantity or quality — should create state tax nexus. A quantitative analysis typically involves determining whether the activity is regular and systematic.⁵

A qualitative analysis involves determining the nature and purpose of the potentially nexus creating activities. Over the years, various thoughtful observers have said that both purposeful availment and substantial nexus refer to those activities directly related to the taxpayer’s generating income.⁶

In contrast, activities that do not directly generate income such as purchases from in-state suppliers or attendance at conferences or trade shows have been found to be non-nexus-creating or de minimis from a qualitative perspective.⁷

The rationale of the U.S. Supreme Court in Tyler Pipe Industries v. Washington State Dept. of Rev.⁸ regarding nexus-creating activities is instructive to a qualitative analysis. Although Tyler Pipe Industries concerns activities conducted by third parties that through attribution might create nexus, the principle derived from that case — that market enhancement is the essential qualitative element for that nexus purpose — may be, in some situations, equally applicable in evaluating the de minimis issues in a direct nexus analysis.⁹ As recognized by the Court in Tyler Pipe, ‘‘the crucial factor governing [commerce clause] nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.’’¹⁰

A further wrinkle in corporation income tax nexus cases arises when the protection afforded by P.L. 86-272 is considered. Consider the following: what happens when a corporation’s general activities in a state would be protected under P.L. 86-272 because its activities in the state are limited to soliciting orders for purchases of tangible personal property that are sent outside the state for approval and shipment but the corporation also conducts additional activities that would arguably fall outside the scope of its P.L. 86-272 protection (for example, are unrelated to solicitation) but those activities are, nevertheless, de minimis, not necessarily from a P.L. 86-272 perspective but from a due process clause or commerce clause nexus perspective.¹¹Recently, the New York State Department of Taxation and Finance issued Advisory Opinion TSB-A-13(6)C,¹²which concludes that in that case a corporation would become subject to New York’s corporation franchise tax.

The Tax Department’s Latest Analysis

In TSB-A-13(6)C, the taxpayer at issue, referred to as Petitioner X, requested an advisory opinion from the tax department’s Office of Counsel regarding whether, based on the facts presented therein, Petitioner X would be doing business in New York, and thus, subject to the franchise tax. Petitioner X represented that it was a remote retailer of women’s apparel, accessories, and footwear with customers nationwide. Petitioner X did not own or operate any retail stores in any states and had not operated a store in New York since 2002. Petitioner X solicited sales by sending catalogs, e-mails, and other marketing materials to prospective customers nationwide, including those in New York. Customers of Petitioner X ordered merchandise by calling the company’s 800 number, placing an order by mail or fax, or ordering online. Petitioner X fulfilled all customer orders from points outside New York and shipped all merchandise by common carrier or the U.S. Postal Service.

Petitioner X had no real or tangible personal property in New York. Petitioner X did not have any employees, sales representatives, agents, independent contractors or other third parties soliciting sales on its behalf in New York. Petitioner X did not have any New York-based employees but some employees of Petitioner did come to New York on a temporary basis to meet with potential merchandise vendors and to engage in ‘‘inspirational shopping’’ trips to gather information on fashion trends. Also, Petitioner X’s employees came to New York from time to time to attend trade shows but not to participate in or exhibit at those shows. Typically, six to eight of Petitioner X’s employees traveled to New York approximately nine or 10 times each year for inspirational shopping or to attend trade shows. Each visit lasted two to three days and none of those visits involved sales promotion or selling activities.

As noted above, the question raised by Petitioner X was whether, based on the facts discussed above, Petitioner X was doing business in New York for purposes of Tax Law section 209.1, as interpreted by Tax Law Regulation section 1-3.2. The Office of Counsel concluded that ‘‘while it is a close question, given the limited purpose and duration of Petitioner’s employees’ trips into the State, those trips do not rise to the level of ‘doing business’ in the State for purposes of Tax Law section 209.1.’’¹³ But, more interesting is the discussion in the advisory opinion that is ancillary to Petitioner X’s question, and that is whether the conclusion reached in the advisory opinion would change if Petitioner X also had employees or representatives in the state soliciting sales on its behalf. Although the advisory opinion acknowledges that solicitation, alone, is protected by P.L. 86-272, the opinion goes on to direct that if Petitioner X were conducting activities protected by P.L. 86-272 while at the same time conducting the activities discussed above (that is, inspirational shopping and trade show attendance), Petitioner X would exceed its P.L. 86-272 protection and would be doing business in New York.

That ancillary conclusion is important for two reasons: It reflects the tax department’s position regarding de minimis nexus presence for the franchise tax; and that position is inconsistent with its prior guidance. The facts of TSB-A-13(6)C provide that ‘‘none of Petitioner X’s in-state visits involved sales promotion, or any selling activities,’’ and the advisory opinion concludes that those visits ‘‘do not rise to the level of doing business.’’ Yet, the advisory opinion also concludes that while those activities (that is, ‘‘inspirational shopping’’ and trade show attendance), alone, would not rise to doing business in New York, if Petitioner X also solicited sales, those previously de minimis activities conducted by Petitioner would cause Petitioner X to both exceed its P.L. 86-272 protection and to be doing business in New York.

That conclusion is contrary to other guidance in New York in which it was found that activities thatare ‘‘sufficiently de minimis’’ would not give rise to nexus for franchise tax purposes when the taxpayeris otherwise conducting activities protected by P.L. 86-272. For example, in TSB-A-98(17)C, ¹⁴ it was concluded that a taxpayer that was protected by P.L. 86-272 did not exceed its P.L. 86-272 protection and was not ‘‘doing business’’ simply because the taxpayer continued to lease retail space in New York. In TSB-A-98(17)C, because the taxpayer had ceased its physical retail business in New York and held the remaining store leases only until it could terminate its leases with its landlords, the ‘‘leases’’ were deter- mined to be sufficiently de minimis so as not to subject the taxpayer to the franchise tax. ¹⁵

There is no apparent meaningful distinction between the de minimis leasing activities in TSB-A-98(17)C and the de minimis inspirational shopping and trade show attendance in TSB-A-13(6)C. Both advisory opinions conclude that the New York activities at issue (that is, leasing, or inspirational shopping and trade show attendance) were de minimis; however, in one instance it was determined that leasing real property would not cause the taxpayer at issue to be subject to the franchise tax but, in the other instance, it was concluded that ‘‘inspirational shopping’’ and trade show attendance would. It is unclear whether the tax department intended to create any distinction. Perhaps the department viewed the quantity and quality of the trade show attendance and inspirational shopping trips in TSB- A-13(6)C to be more significant or more directly related to the taxpayer’s income generation than the leasing activities in TSB-A-98(17)C. Regardless, for now, taxpayers should be aware that the tax department appears to be taking a different position regarding the quantity and quality of de minimis nexus-creating activities.

_{1 See Quill v. North Dakota, 504 U.S. 298 (1992).}

_{2 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 287 (1977).}

_{3 504 U.S. 298 (1992).}

_{4 See, e.g., Geoffrey, Inc. v. South Carolina Tax Comm’n, 437 S.E.2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993); A&F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004), cert. denied, 546 U.S. 821 (2005); Lanco, Inc. v. Director, Division of Taxation, 908A.2d 176 (N.J. 2006), cert. denied 127 S. Ct. 2974 (2007); and Tax Comm’r of West Virginia v. MBNA America Bank, N.A.., 640 S.E.2d 226 (W. Va. 2006), cert. denied, 127 S. Ct. 2997 (2007).}

_{5 See International Shoe Co. v. Washington, 326 U.S. 310 (1945).}

_{6 See, e.g., Arthur R. Rosen, ‘‘Technical and Policy Aspects of Crossing the Presence Nexus Threshold: How Much of What Activities May and Should Cause Taxability’’ (The Tax Executive, May-June 1997).}

_{7 See, e.g., Signal Thread Co. v. King, 222 Tenn. 241 (1968); Hellerstein, State Taxation, para. 6.06. ‘‘Maintenance of Employees in State as Jurisdictional Basis for Income or Franchise Taxation.’}

_{8 483 U.S. 232 (1987).}

_{9 See supra note 7.}

_{10 There is also authority in due process nexus cases regarding limiting the activities considered to those that are market enhancing. See, e.g., Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985). The Supreme Court has also concluded that in the context of state taxation, the Fourteenth Amendment’s due process limitation is ‘‘comparable’’ to the due process limitation applicable for general state jurisdictional purposes, although less demanding than the commerce clause limitation (‘‘minimal connection’’ versus ‘‘substantial nexus’’). See, e.g., Rosenberg Bros. & Co. v. Curtis Brown Co., 260 U.S. 516 (1923) (the Court held that a company was not subject to the jurisdiction of a state when its only connections with the state were purchases of merchandise within the state and occasional visits to New York by an officer of the company to facilitate the purchases). New York authorities have similarly concluded that activities conducted in New York that are not market enhancing would not give rise to nexus for franchise tax purposes. See, e.g., Cargill Financial Services Corp., TSB-A-90(20)C (Sept. 26, 1990); Anonymous , TSB-A-91(18)C (Sept. 23, 1991); Counsel of N.Y.S. Tax Dept. Addresses Nexus Issue, LEXIS (Oct. 18, 1996). There is similar authority in the sales tax context. See, e.g., Orvis Co. v. Tax Appeals Tribunal of New York , 86 N.Y.2d 165 (1995) (in which the New York State Court of Appeals concluded that the taxpayer’s visits into the state significantly contributed to its ability to main- tain a market for its products).}

_{11 Not to be confused with the de minimis considerations for purposes of a P.L. 86-272 analysis like that in Wisconsin Dep’t of Rev. v. Wrigley, 505 U.S. 214, 232 (1992).}

_{12 April 11, 2013}

_{13 Emphasis added.}

_{14 Sept. 16, 1998.}

_{15 See also American Association of Advertising Agencies, Inc. TSB-H-80(32)C (Nov. 14, 1980).}