Opinion ID: 1205408
Heading Depth: 1
Heading Rank: 3

Heading: Sufficient Nexus

Text: Because an agency exists we must determine if there is a substantial nexus to this state requiring the retailer (Scholastic) to collect the tax. In Quill, 504 U.S. at 311, the Supreme Court followed the substantial nexus rule set out in Nat. Bellas Hess v. Dept. of Revenue, 386 U. S. 753, 18 L. Ed.2d 505, 87 S. Ct. 1389 (1967): [A] vendor whose only contacts with the taxing State are by mail or common carrier lacks the `substantial nexus' required by the Commerce Clause. The Court recognized that [w]hether or not a State may compel a vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office. 504 U.S. at 315. In determining whether there is substantial nexus providing Kansas the authority to collect the compensating tax from an outof-state corporation, we will review and analyze three cases from other jurisdictions. In Scholastic Book Clubs, Inc. v. State Bd. of Equalization, 207 Cal. App.3d 734, Scholastic brought a similar action for refund of use taxes assessed by California. In that case, the retailer (Scholastic) was also a foreign corporation. Similarly, California teachers received a catalog and order forms from Scholastic. The sale of books to students through teachers was accomplished in the identical manner as in our case. After being assessed for compensating taxes due, Scholastic appealed and made an argument similar to their argument before this court. In reaching its decision, the California court reviewed several cases. It observed that the case upon which Scholastic most strongly relied was Nat. Bellas Hess v. Dept. of Revenue, 386 U.S. 753, in which the Illinois Supreme Court invalidated an Illinois tax on an out-of-state merchandiser whose only contact with Illinois was through the mail or by common carrier. In that case, the Missouri retailer mailed catalogs to active or recent customers throughout the country twice a year. All Illinois customers mailed orders directly to the Missouri plant, from which the goods were sent directly to the customer through the mail or by common carrier. The California court noted that the Missouri retailer had no agents in Illinois, but sold directly by catalogs sent through the mail. The California court observed that the basis of the Illinois court's determination that the Illinois use tax could not be assessed against the Missouri retailer was that the United States Supreme Court had never allowed a state to impose the duty of use tax collection and payment upon a retailer whose only connection with customers in the state is by common carrier or through the United States mail. The California court then reviewed the case relied upon by the State, Scripto v. Carson, 362 U.S. 207, 4 L. Ed.2d 660, 80 S. Ct. 619. In that case, the Georgia retailer had written contracts with Florida jobbers, who solicited orders in Florida, forwarded the resulting orders to Georgia for shipment, but collected no payment for the order from the customer. The jobbers were described in their contract with the Georgia retailers as independent contractors, were not required to work exclusively for the Georgia retailer, and were paid solely on commission. The fact that the representatives were not regular and exclusive employees of the Georgia retailer was characterized as a fine distinction... without constitutional significance. 362 U.S. at 211. The United States Supreme Court concluded that the requisite nexus was sufficient for Florida to impose the use tax on the Georgia retailer insofar as the sales were made in Florida by local representatives who conducted business in the taxing state. The California court found that the Scholastic case was more similar to Scripto than to Nat. Bellas Hess. It concluded that although the teachers did not have written agency agreements with the retailer, they served the same function as did the Florida jobbers in Scripto obtaining sales in California from local customers for a foreign corporation. It observed that unlike the Florida jobbers, the California teachers also collected payment from the purchasers, and received and distributed the merchandise. The Court pointed out that Scholastic not only relied, but in fact depended, upon the teachers to act as its conduit to the California students. It found there was an implied contract between Scholastic and the teachersScholastic rewarded the teachers with bonus points for merchandise if they obtained and processed the orders. It found the bonus points were similar to the Florida jobbers' commission. The California court concluded that the teachers who took students' catalog orders for books sold by a foreign corporation were, for tax purposes, operating under the authority of the corporation. Furthermore, by accepting orders and payment and by shipping merchandise, the corporation ratified the acts of the teachers, confirming their authority as its agents or representatives. It determined that under these circumstances, Scholastic was responsible to collect the California use tax. In Quill Corp. v. North Dakota, 504 U.S. 298, a mail-order house incorporated in Delaware made annual sales to about 3,000 customers in North Dakota. The mail-order house had no offices or warehouses in North Dakota or employees that worked or resided in North Dakota. Orders were solicited through catalogs and flyers sent into North Dakota by mail. All merchandise delivered to North Dakota customers was by mail or common carrier from outof-state locations. When the mail-order house refused to collect the use tax from its North Dakota customers, North Dakota filed an action to require the mail-order house to pay taxes, as well as interest and penalties. The mail-order house alleged that the North Dakota use tax statute as applied violated the federal Constitution's Commerce Clause and the Due Process Clause of the Fourteenth Amendment. The district court ruled in favor of the mail-order house, finding that North Dakota had failed to establish a sufficient nexus between the mail-order house and the state. The Supreme Court of North Dakota reversed. On certiorari, the United States Supreme Court noted that the Due Process Clause did not bar enforcement of the state's use tax if (a) the mail-order house had purposely directed its activities at North Dakota residents, (b) the magnitude of such contacts was sufficient for due process purposes, and (c) the use tax was related to the benefits that the mail-order house received from access to the state. After reviewing the facts, it reversed the North Dakota Supreme Court. The United States Supreme Court observed that a vendor who solicits sales by catalogs and whose only connection with customers in the taxing state is by common carrier or through the United States mail is free from state-imposed duties to collect sales and use tax because such vendor lacks the substantial nexus with the taxing state required by the Commerce Clause. In Pledger v. Troll Book Clubs, Inc., 316 Ark. 195, 871 S.W.2d 389 (1994), a New Jersey corporation's order forms listing current book selections for a particular grade were mailed to Arkansas teachers. The catalogs instructed the Arkansas teachers how to collect the students' orders, how to consolidate the orders, and how to collect the money for the orders. The teacher then filled out a master list and sent the money to the out-of-state retailer. The books were then sent to the Arkansas teacher by the bookseller. When the books arrived, the teacher distributed the books to the students. The teachers received cash or merchandise bonuses, depending upon the amount of the order. Troll, the New Jersey bookseller, was assessed a vendor's use tax. The bookseller brought an action under the Arkansas Tax Procedure Act. The chancellor ruled that Troll's sales of books in Arkansas was not subject to the state's use tax. The State appealed to the Arkansas Supreme Court. The Arkansas Supreme Court noted that the Arkansas statute provided for imposition of a tax upon a vendor located outside the state if the vendor makes sales of personal property within the state. It pointed out that the Commerce Clause of the United States Constitution limits a state's ability to tax out-of-state entities when such taxation burdens interstate commerce. It observed that for such a tax to be upheld under the Commerce Clause, the entity to be taxed must maintain a physical presence in the taxing state. The Arkansas Supreme Court observed that unless the State could prove a formal agency relationship between the teachers and the retailer, Troll lacked the substantial nexus required by the federal Constitution in order to be taxed in Arkansas. 316 Ark. at 198. The court noted that the State, in its argument that the chancery court should have found an agency relationship, relied upon a case that involved the same defendant under identical arrangements for selling books, Scholastic Book Clubs, Inc. v. State Bd. of Equalization, 207 Cal. App.3d 734. The Arkansas Supreme Court observed that although the California case was factually on point, it was distinguishable from the Arkansas case for two reasons. First, the California case was decided prior to the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298, which mandated the brightline physical presence test for interstate mail order sales. Second, California agency law, unlike Arkansas agency law, allowed a relationship of agency to be implied retroactively by ratification. Unlike California law, in Arkansas the agency relationship must be shown to exist by proof of both authorization and control, and the doctrine of ratification cannot be implied retroactively by ratification. See E. P. Dobson, Inc. v. Richard, 17 Ark. App. 155, 158, 705 S.W.2d 893 (1986) (citing Runyan v. Community Fund of Little Rock, 182 Ark. 441, 31 S.W.2d 743 [1930]). Quill and Pledger each determined there was an insufficient nexus for the state to require the foreign corporation to collect the state's compensating tax for the foreign corporation's sales to the state's residents. In Quill, all sales were made through catalogs. The seller mailed the catalog to the buyer, the buyer returned the order and payment to the seller, and the seller sent the books to the purchaser. Here, the sales are made by Kansas teachers to their students; obviously, Quill is factually different and does not apply. In Pledger, the out-of-state seller sold its products through Arkansas teachers. All contacts, sales, and deliveries of the books sold to the students were conducted through the teachers. In rejecting the State's claim that the teachers were acting as agents for the out-of-state seller, the Arkansas Supreme Court noted that for an agency to exist in that state, the essential elements are authorization and control. It noted that Arkansas agency law places the burden upon the party asserting the agency relationship. In the absence of these elements, the doctrine of ratification was inapplicable. The Arkansas court found that an agency relationship was not clearly proven in Pledger. In Kansas, the test to determine if an alleged agent possessed implied powers is whether, from the facts and circumstances of the particular case, it appears there was an implied intention to create an agency. The relation may exist, notwithstanding a denial by the alleged principal or whether the parties understood it to be an agency. Moore v. Adkins, 2 Kan. App. 2d 139, Syl. ¶ 7, 576 P.2d 245 (1978). Clearly, the Arkansas standard for proving the existence of an agency relationship is stricter than that required by Kansas law. Under the circumstances, Pledger does not apply. We find the California case persuasive. The facts are similar to the case at bar. Although Scholastic has in its written material attempted to deny an agency relationship with the Kansas teachers, that denial is not permissible under Kansas law. Scholastic clearly has more of a connection with Kansas than catalog sales through the mail or by common carrier. Applying the test stated in Nat. Bellas Hess and Quill, Scholastic's use of the Kansas teachers to sell its product to Kansas students provides a substantial nexus with the state of Kansas. Scholastic is a retailer doing business in Kansas. Application of the KCTA does not violate the Commerce Clause. Affirmed.