NO. 07-09-00250-CV IN THE COURT OF APPEALS FOR THE SEVENTH DISTRICT OF TEXAS AT AMARILLO PANEL B JULY 14, 2010

GALLAND HENNING NOPAK, INC., APPELLANT

v. SUSAN COMBS, SUCCESSOR TO CAROLE KEETON STRAYHORN, COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS; AND GREG ABBOTT, ATTORNEY GENERAL OF THE STATE OF TEXAS, APPELLEES

FROM THE 345TH DISTRICT COURT OF TRAVIS COUNTY; NO. D-1-GN-06-001409; HONORABL E C. W. DUNCAN, JR., JUDGE

Before QUINN, C.J., a nd CAMPBELL and HANCOCK, JJ.

OPINION Appellant, Galland Henning Nopak, Inc. (Nopak), appeals an or der of the trial court granting defendants’, Caro le Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, 1 and Greg Abbott, Texas Attorney Gener al (collectively, “the State”),

1 Susan Combs is the current Texas Comptroller of Public Accounts and, as a successor in interest, is a party to this appeal in her official capacity.2 motion for summary judgment and denying Nopak ’s motion for summary judgment. We affirm. Background The Texas Comptroller of Public Acc ounts discovered that Nopak, a Wisconsin corporation that manufactures and sells p neumatic and hydraulic cylinders and valves, had been filing employee wages for its Texas-based employee , David Sebbas. Due to this discovery, the Comptroller established a franchise tax account and gave Nopak thirty days to file its franchise tax repor ts. After Nopak failed to respond to the Comptroller’s notice, the Comptroller estima ted Nopak’s franchise tax liability for the years of 1995 through 2004. Nopak subsequently requested a redetermination of the assessment resulting in the Comptroller i ssuing a decision finding that there was a sufficient nexus between Nopak’s business and Texas to justify t he imposition of the franchise tax assessed. Nopak then filed t he instant lawsuit claiming that Nopak’s business had insufficient nexus with Texas to allow the assessm ent of franchise taxes. As a result of Nopak’s lawsuit, a heari ng was held before the Administrative Law Judge of the Comptroller’s Office. Duri ng this hearing, Nopak called Sebbas and Joseph Dechant, general sales manager for N opak, to testify. Sebbas and Dechant testified that Sebbas was employed by N opak as a regional manager, servicing the needs of distributors in seven and a half stat es, including Texas. Dechant and Sebbas then testified regarding t he responsibilities of a regional sales manager. 2 After

2 The testimony regarding the responsib ilities of Nopak’s regional sales managers will be addressed in the analysis below.3 requesting some briefing from the parties , the Administrative Law Judge of the Comptroller’s Office found t hat Nopak had a substantia l nexus with Texas and was, therefore, subject to the franchise tax asse ssment. Nopak appealed this decision to the district court. Both parties filed motions for summary judgment based on the evidence that had been admitted at the administrative law hearing. 3 The district court granted the State’s traditional summary judgment motion and denied Nopak’s summary judgment motion. Nopak timely appealed. By one issue, Nopak appeals the district court’s gran t of summary judgment in favor of the State and den ial of Nopak’s motion for summary judgment. Nopak contends that the imposition of the Texas franchise tax against Nopak constitutes a violation of the United Stat es Constitution because Nopak does not have a substantial nexus with the State of Texas.

Standard of Review We review a trial court's decision to grant or to deny a motion for summary judgment de novo . See Tex. Mun. Power Agency v. Pub. Util. Comm'n of Tex. , 253 S.W.3d 184, 192 (Tex. 2007). Although the denial of summa ry judgment is ordinarily not appealable, we may review such a denial when both parties moved for summary judgment and the trial court grant ed one and denied the other. Id . When reviewing competing motions for summary judgment, we review the summary judgment evidence presented by each party, deter mine all questions presented, and render the judgment

3 Both Dechant and Sebbas were deceased by the time that the district court considered the competing mo tions for summary judgment.4 that the trial court should have rendered. Id .; FWT, Inc. v. Haskin Wallace Mason Prop. Mgmt., L.L.P. , 301 S.W.3d 787, 792 (Tex.App.--Fort Worth 2009, pet. denied). When the trial court does not specify the basis on which it granted summary judgment, the judgment will be affirmed on any meritorious gr ound expressly presente d in the motion. State Farm Fire & Cas. Co. v. S.S. , 858 S.W.2d 374, 380 (Tex. 1993). Law and Analysis
Nopak contends that it is entitled to su mmary judgment because it established, as a matter of law, that it lacks a substant ial nexus with the stat e and, therefore, the imposition of the Texas franchise tax wo uld be an unconstitutional abridgement of interstate commerce. The State responds that the evidence established, as a matter of law, that the activities of Nopak created a substantial nexus between the company and Texas and, therefore, the assessment of t he Texas franchise ta x against Nopak was constitutional and authorized by the laws of Texas. The United States Constitution specifica lly grants Congress the power to regulate commerce among the several states, which implic itly prohibits the states from actions that interfere with interstate commerce, such as taxation. See U.S. C ONST . art. I, § 8; Rylander v. Bandag Licensing Corp. , 18 S.W.3d 296, 298-99 (Tex.App.—Austin 2000, pet. denied). However, the Commerce Clause does not prohibit all direct state taxation of interstate commerce. Rylander , 18 S.W.3d at 299. A state tax on a foreign corporation will be sustained if the “tax is applied to an activity with a substantial nexus with the taxing State, is fa irly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Complete Auto5 Transit, Inc. v. Brady , 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Nopak’s challenge to the assess ment of the Texas franchise tax is limited to whether a substantial nexus exists between Nopak and Texas. Texas imposes a franchise tax on each co rporation that does business in the state. T EX

. T AX C ODE A NN . § 171.001(a) (Vernon 2008); IN OVA Diagnostics, Inc. v. Strayhorn , 166 S.W.3d 394, 396 (Tex.App.—Austin 2005, pet. denied). A foreign corporation has a substantial nexus with Te xas if the corporatio n can be taxed without violating the United Stat es Constitution. 34 T EX

. A DMIN

. C ODE §§ 3.546(b) (2010) (Comptroller of Pub. Accounts, Taxable Capital; Nexus), 3. 554(a) (2010) (Comptroller of Pub. Accounts, Earned Surplus: Nexus). The Supreme Cour t has established a brightline rule to determine whether a taxing state has a sufficient nexus with the taxpayer to allow taxation: does the taxpayer have a “ph ysical presence in [t he] state.” INOVA Diagnostics, Inc. , 166 S.W.3d at 402 (citing Quill Corp. v. North Dakota , 504 U.S. 298, 314, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992)). This bright-l ine test distinguishes companies whose only connection to the taxing state is by common carrier or the United States mail from those that have a physical presence in the taxing state, such as a small sales force, plant, or office. 4 See Quill Corp. , 504 U.S. at 315. Thus, the constitutionality of the impos ition of the Texas franchise tax on Nopak depends on the determination of whether Nopak had a physical pr esence in Texas. As a guide to this determination, the Comptroller has indica ted that a representative of a foreign corporation in the state “to pr omote or induce sales of the foreign corporation’s goods or

4 We fully agree with Nopak’s contention that the physical presence required in Quill Corp. is not satisfied simply by Sebbas having chosen to live in Texas.6 services . . .” is indicative of a physical presence in the state. 34 T EX

. A DMIN

. C ODE § 3.546(c)(4).

The facts in this case are not in dis pute. The dispute re volves around whether the activities of Sebbas were sufficient to create a substantial nexus between Nopak and Texas. The evidence establishes that N opak is a foreign corporation that sells products in Texas; Sebbas wa s a regional manager for Nopak during the relevant time period and Texas was included in his region; and, other than the activities of Sebbas, Nopak’s only connection to the state was by common carrier and the Un ited States mail. It is the job of Nopak’s regi onal managers “to support the sales efforts of our distribution . . . companies with whom we have agreem ents.” The regional managers are “more or less our liaison” with the distributors of Nopak ’s products. Sebbas described his job as “mak[ing] sure that Nopak . . . is taking care of . . . the distributor, period, and that they are satisfied with their services.” Being mindful that a cor poration has a physical presence with the state if, inter alia , it has a sales force in the state, see Quill Corp. , 504 U.S. at 315, we will look to the types of activities that Sebbas performed in the state to determine whether they were sufficient to establish that Nopak had a subs tantial nexus with the state. Dechant testified that one purpose of Sebbas’s presence in Texas wa s to allow customers to see a representative of Nopak per iodically “to keep us in a dominant position among the salespeople.” Dechant further testified th at Sebbas was presented by many distributors to be an expert on the Nopak product line and able to answer questions that the customers of the distributor might have. Dechant and Sebbas both testified that Sebbas7 would communicate advantages of Nopak products to distributors and their customers. While we fully acknowledge th at Sebbas was not authorized to directly solicit or take orders for Nopak’s products, we conclude that his Texas activities were “to promote or induce sales” of Nopak’s prod ucts and, therefore, were sufficient to conclusively establish that Nopak had a physica l presence in the state. See Tyler Pipe Indus. Inc. v. Wash. State Dep’t of Revenue , 483 U.S. 232, 250, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987) (approving of the state co urt’s holding that “the crucia l factor governing nexus is whether the activities performed in this state on behalf of t he taxpayer are significantly associated with the taxpayer's abi lity to establish and maintain a market in this state ....” (emphasis added)). As such, we affirm the trial court’s im plied determination that the assessment of the Texas fr anchise tax against Nopak does not violate the Commerce Clause. Nopak further contends that Sebbas’s ac tivities in Texas were, at best, de minimis activities that should be ignored for taxing purposes. T he substantial nexus requirement requires more than de minimis contact with the state before taxes may be assessed against a foreign company doing bus iness through interstate commerce. See Wis. Dep’t of Revenue v. William Wrigley, Jr., Co. , 505 U.S. 214, 231, 112 S.Ct. 2447, 120 L.Ed.2d 174 (1992). Texas has defined de minimis activities to include “those [activities] that, when taken together, establish only a triv ial additional connection with Texas. An activity regularl y conducted within Texas pursuant to a company policy or on a continuous basis shall normally not be considered trivial.” 34 T EX

. A DMIN

. C ODE § 3.554(c)(3). An activity is more than de minimis if it serves an independent business function, separate from reques ting orders, that the com pany would have reason to8 engage in whether or not it em ployed a sales force. See Wis. Dep’t of Revenue , 505 U.S. at 228-29. In Texas, an example of an activity t hat is an independent business function in the state is the “i nvestigating, handling, or ot herwise assisting in resolving customer complaints.” 34 T EX

. A DMIN

. C ODE § 3.554(d)(7). Looking at the activities performed by Se bbas on behalf of Nopak, the evidence establishes that his primary job was investigati ng, handling, or ot herwise assisting in resolving customer complaints. While No pak focuses on the infrequency with which Sebbas would go with a dist ributor to the distributor’s custom er to “put out fires” relating to those customer’s compla ints, there was evidence pres ented that Sebbas would take similar actions when it was a distribut or that had a complaint regarding Nopak’s products or service. Based on the test imony of Dechant and Sebbas, it is hard to identify any services that Sebbas provid ed Nopak beyond extolling the virtues of Nopak’s products to distributors and attempti ng to resolve customer complaints. In addition, it appears that it is Nopak’s po licy to have regional managers located throughout the country so that Nopak wil l have a continuous presence with its distributors. That the percept ion of Nopak having a local physical presence is a reason for Nopak to employ regional managers is shown through Dechant’s testimony that, “There’s an old axiom in our business that out of sight [is] out of mind, so we firmly believe that they need to see a representative of our company periodically . . . .” Thus, Sebbas’s activities were performed in accordance with a company policy and on a continuous basis. Consequently, we affirm the trial court’s implied finding that Sebbas’s activities in Texas were more than de minimis and, therefore, just ified the assessment of Texas franchise taxes against Nopak.9 Conclusion For the foregoing reasons, we conclude that the trial court did not err in granting the State’s motion for summary judgment and denying Nopak’s motion for summary judgment. Therefore, we affirm t he judgment of t he trial court.

Mackey K. Hancock Justice