Court Opinion

ID: 9956620
Source: CourtListenerOpinion
Date Created: 2024-04-02 17:02:31.419733+00
Date Added: 2024-06-11T08:17:41.810700
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE

                     ROCKAUTO, LLC, Plaintiff/Appellee,

                                         v.

      ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellant.

                              No. 1 CA-TX 23-0002
                               FILED 04-02-2024

                     Appeal from the Arizona Tax Court
                            No. TX2020-000778
                     The Honorable Sara J. Agne, Judge

          REVERSED AND REMANDED WITH DIRECTIONS

                                    COUNSEL

Frazer, Ryan, Goldberg & Arnold, LLP, Phoenix
By Douglas S. John, James M. Cool
Co-Counsel for Plaintiff/Appellee

Husch Blackwell, LLP, Phoenix
By Anthony J. Anzelmo
Pro Hac Vice Co-Counsel for Plaintiff/Appellee

Arizona Attorney General’s Office, Phoenix
By Scot G. Teasdale
Counsel for Defendant/Appellant
                         ROCKAUTO v. ADOR
                          Decision of the Court

                      MEMORANDUM DECISION

Judge Cynthia J. Bailey delivered the decision of the Court, in which
Presiding Judge Paul J. McMurdie and Judge Maria Elena Cruz joined.

B A I L E Y, Judge:

¶1            RockAuto, LLC (“RockAuto”) is an online auto parts retailer
based in Wisconsin. The Arizona Department of Revenue (“ADOR”)
assessed a transaction privilege tax on RockAuto’s sales to Arizona
customers between April 1, 2013, and April 30, 2019 (“the audit period”).
RockAuto contended the tax was unlawful because its business activities
did not create a substantial nexus to Arizona. The tax court granted
summary judgment in favor of RockAuto and denied ADOR’s motion for
summary judgment on the substantial nexus question. Because we
determine that there are no genuine issues of material fact and RockAuto’s
activities established a substantial nexus in Arizona, we vacate the
judgment and award of attorneys’ fees and costs, and remand to the tax
court for entry of summary judgment in favor of ADOR on the substantial
nexus issue and to address the other issues in RockAuto’s complaint.1

                FACTS AND PROCEDURAL HISTORY

¶2             During the audit period, RockAuto contracted with
distributors, six of whom were in Arizona, that supplied inventory,
             2

shipped orders, and processed returns for RockAuto. About 11% of orders
placed with Arizona distributors shipped to Arizona customers, and

1 RockAuto’s complaint also alleged that the assessment overstated the

gross income attributable to RockAuto and that ADOR should abate the
penalties because RockAuto acted reasonably. The tax court granted
summary judgment for RockAuto on the substantial nexus issue, so we
address only that issue here.

2 The parties disagree on what to call RockAuto’s distributors.  RockAuto
argues they are its “suppliers,” while ADOR argues they are RockAuto’s
“affiliates.” We refer to the contractors as distributors because they did
more than supply products and “affiliate” has a statutory meaning that
does not apply here. See Ariz. Rev. Stat. (“A.R.S.”) § 42-5043(H) (defining
“affiliated person”).

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slightly more than 80% of orders placed by Arizona customers shipped
from outside Arizona.

¶3             RockAuto did not maintain its own inventory. Instead,
RockAuto required its distributors to send RockAuto daily inventory lists,
and RockAuto listed the distributors’ products on its website. Customers
placed orders through RockAuto’s website, and RockAuto forwarded the
orders to its distributors.

¶4            RockAuto’s contracts required the distributors to comply
with RockAuto’s shipping and return policies.3 The distributors had to use
RockAuto’s software, which printed shipping labels listing RockAuto’s
name with the distributor’s address.4 RockAuto also required its
distributors to package RockAuto’s orders using RockAuto’s branded tape,
include a RockAuto promotional magnet, and ship the orders directly to
customers by mail or common carrier. RockAuto paid for the tape,
magnets, and packing boxes. RockAuto suffered the loss if in-transit
packages were lost or stolen. If customers returned products, RockAuto
provided return labels that had RockAuto’s name with the distributor’s
address.

¶5           RockAuto chose which distributor and location fulfilled
customers’ orders.5 RockAuto considered multiple factors but prioritized

3 The record contains five of the six Arizona distributors’ contracts, but only

four are legible.

4 RockAuto’s president said the distributors were not required to use the

shipping software and, if the distributor did not use RockAuto’s software,
the label had the distributor’s name and address. But the four legible
contracts required distributors to use the software.

5 The tax court’s minute entry states that “RockAuto does not at all control

whether an Arizona customer is served by an Arizona supplier (an
independent contractor with RockAuto) or one of its other network of
suppliers.” This is incorrect. The tax court was citing ADOR’s
controverting statement of facts, which appears to show a customer could
select a different part or brand that could ship from the same location as the
other parts in the customer’s order. But nothing in the record indicates a
customer could manually select the location a certain part shipped from,
the parties agreed in their statements of facts to the superior court that
“RockAuto chose a warehouse” that would fulfill the order, and the parties
agreed at oral argument that customers did not choose which distributor
fulfilled his or her order.

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“getting the customer his part quickly, getting him a reasonable shipping
cost, [and] having it be the right part.” If a customer’s online cart contained
multiple items, the customer could see if the products would ship from
different warehouses. But RockAuto did not disclose the warehouse’s
location or that it used distributors to fulfill orders. RockAuto’s website
also allowed customers to select different brands of the same part and then
click “Choose for Me to Minimize Cost,” and RockAuto’s system selected
the brand that would ship with the other products for the “lowest total
cost.”

¶6             Customers were responsible for all shipping costs, and
customers complained if shipping was expensive or took too long.
RockAuto advertised that its prices were lower than its competitors’ prices,
and having distributors ship directly to customers was less expensive than
reshipping orders from Wisconsin. RockAuto’s president said RockAuto
chose distributors based on inventory and “whether [it had] a facility that
is suitable for e-commerce” and that location was not a factor. But he also
said shipping times were lower when Arizona distributors shipped orders
to Arizona customers and that shipping costs were “related to the
distance.”

¶7            RockAuto did not want to compete with its distributors; so,
its contracts prevented the distributors from selling products directly to
consumers through the distributor’s website, a website the distributor
controlled, or a third-party’s website. RockAuto helped its distributors
resolve ongoing issues with inventory, orders, and RockAuto’s software.
During the audit period, RockAuto employees made four one- to two-day
business trips to Arizona to meet with distributors.

¶8            RockAuto did not pay transaction privilege taxes during the
audit period. See A.R.S. § 42-5061 (imposing transaction privilege taxes on
the gross proceeds of retail sales). The Town of Gilbert audited RockAuto
after a customer brought a RockAuto package to Gilbert’s tax department
and “complain[ed] that they were not charged tax.” In 2019, ADOR issued
RockAuto a Notice of Proposed Assessment of more than $8 million, which
included tax, interest, and penalties.

¶9           RockAuto filed a complaint in the tax court, alleging ADOR’s
assessment was unlawful because RockAuto did not have a substantial
nexus to Arizona during the audit period. Both parties moved for summary
judgment. The tax court found that RockAuto lacked a substantial nexus
to Arizona, denied ADOR’s motion, and granted RockAuto’s motion for
summary judgment.

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                            Decision of the Court
¶10           We have jurisdiction over ADOR’s timely appeal under
Article 6, Section 9, of the Arizona Constitution and A.R.S. §§ 12-
120.21(A)(1), -170(C), and -2101(A)(1).

                               DISCUSSION

   I.     Standard of Review

¶11            “[I]n determining whether either party is entitled to summary
judgment, we must view the facts and reasonable inferences therefrom in
the light most favorable to the party opposing the motion.” Andrews v.
Blake, 205 Ariz. 236, 240, ¶ 13 (2003) (citation omitted). Summary judgment
is appropriate when “there is no genuine dispute as to any material fact and
the moving party is entitled to judgment as a matter of law.” Ariz. R. Civ.
P. 56(a); accord Orme Sch. v. Reeves, 166 Ariz. 301, 305 (1990); see also Ariz.
Tax Ct. R. Prac. 2 (incorporating the Arizona Rules of Civil Procedure into
tax court proceedings). “Where the issues can be decided as a matter of
law, we have the authority both to vacate the trial court’s grant of summary
judgment in favor of one party and to enter summary judgment for the
other party if appropriate.” Carter Oil Co. v. Ariz. Dep’t of Revenue, 248 Ariz.
339, 347, ¶ 28 (App. 2020) (citation omitted).

   II.    Transaction Privilege Tax

¶12           Arizona can impose a transaction privilege tax only when the
tax (1) “is applied to an activity with a substantial nexus with the taxing
State”; (2) “is fairly apportioned”; (3) “does not discriminate against
interstate commerce”; and (4) “is fairly related to the services provided by
the State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). The
sole issue here is whether RockAuto had a substantial nexus to Arizona
during the audit period.

¶13           During the audit period,6 a “substantial nexus” required a
physical presence in the taxing state. Quill Corp. v. North Dakota, 504 U.S.
298, 306-07 (1992), overruled in part by Wayfair, 585 U.S. at 188. Under the
physical presence test, states may not tax “seller[s] whose only connection
with customers in the State is by common carrier or the United States mail.”

6 In 2018, the Supreme Court held that an economic presence establishes a

substantial nexus to the taxing state. See South Dakota v. Wayfair, Inc., 585
U.S. 162, 188 (2018). Arizona’s statute effectuating the economic nexus test
was enacted after the audit period, and neither party suggests we should
apply it here. See A.R.S. § 42-5044. According to RockAuto, it started
paying transaction privilege tax once A.R.S. § 42-5044 took effect.

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Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of Ill., 386 U.S. 753, 758 (1967),
overruled in part by Wayfair, 585 U.S. at 188. RockAuto argues it falls
“squarely” on the non-taxable side of the “bright line” rule established in
Bellas Hess and Quill. We disagree.

¶14            In Bellas Hess, the Supreme Court held that Illinois could not
tax a company whose sole contact with Illinois was through catalogs and
goods shipped to Illinois customers from out-of-state. Id. at 754–55. The
Court reaffirmed this principle in Quill, where North Dakota sought to tax
a company that maintained no in-state office or employees but shipped
merchandise, including licensed software, to in-state customers from out-
of-state locations. 504 U.S. at 301–02 n.1. The Court held that although the
licensed software may have constituted a “slightest presence,” it was
insufficient to establish a substantial nexus. Id. at 315 n.8.

¶15            The companies in Bellas Hess and Quill shipped orders into the
taxing state via interstate mail or common carrier. See Bellas Hess, 386 U.S.
at 754–55; Quill, 504 U.S. at 302. In contrast, RockAuto’s Arizona
distributors shipped orders and accepted returns from Arizona customers
via intrastate mail and common carrier. See Arco Bldg. Sys., Inc. v. Chumley,
209 S.W.3d 63, 73–74 (Tenn. Ct. App. 2006) (stating the Bellas Hess and Quill
safe harbor did not apply when an out-of-state taxpayer contracted with an
in-state manufacturer who manufactured products in the taxing state and
shipped orders to the taxpayer’s in-state customers via intrastate common
carrier). Moreover, the companies in Bellas Hess and Quill had no in-state
contractors working on their behalf, but RockAuto’s Arizona distributors
actively worked on RockAuto’s behalf shipping orders, accepting returns,
and distributing RockAuto’s promotional materials. Thus, RockAuto does
not fall “squarely” under Bellas Hess and Quill.

¶16            The Supreme Court took a different view where taxpayers
used third parties to perform some business functions in the taxing state.
See Scripto, Inc. v. Carson, 362 U.S. 207 (1960); Tyler Pipe Indus., Inc. v. Wash.
State Dep’t of Revenue, 483 U.S. 232 (1987). In Scripto, the taxpayer had no
in-state office or employees. 362 U.S. at 208–09. But the taxpayer had ten
in-state “wholesalers or jobbers” who solicited orders from customers and
forwarded those orders to the taxpayer’s out-of-state office. 362 U.S. at 209–
10. The Court noted that “the ‘salesmen’ [we]re not regular employees of
[the taxpayer] devoting full time to its service,” but concluded that “such a
fine distinction is without constitutional significance [because t]he formal
shift in the contractual tagging of the salesman as ‘independent’ neither
results in changing his local function of solicitation nor bears upon its
effectiveness in securing a substantial flow of goods into [the taxing state].”
Id. at 211.

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                            ROCKAUTO v. ADOR
                             Decision of the Court
¶17            Similarly, in Tyler Pipe, the taxpayer had no in-state office or
employees, but had an in-state independent contractor who solicited orders
and “provid[ed the taxpayer] with virtually all their information regarding
the [in-state] market.” 483 U.S. at 250. The Court quoted and agreed with
the Washington Supreme Court’s conclusion that the independent
contractor’s activities established the taxpayer’s physical presence because
the contractor’s activities were “significantly associated with the taxpayer’s
ability to establish and maintain a market in th[e] state for the sales.” Id. at
250 (quoting and vacating Tyler Pipe Indus., Inc. v. State, 715 P.2d 123, 126
(Wash. 1986)).

¶18            RockAuto’s business is also not analogous to either Scripto or
Tyler Pipe. In those cases, the taxpayer’s in-state independent contractors
directly solicited customers or sent the taxpayer information about the in-
state market. Scripto, 362 U.S. at 209; Tyler Pipe, 483 U.S. at 249–50. See also
Nat’l Geographic Soc’y v. Cal. Bd. of Equalization, 430 U.S. 551, 556 (1977)
(upholding a tax on a taxpayer’s mail-order business when the taxpayer
had two in-state offices with in-state employees soliciting sales for the
taxpayer’s magazine). Here, RockAuto’s distributors did not call or visit
customers to solicit orders for RockAuto, and nothing suggests they
provided RockAuto with information about the Arizona market. Thus,
RockAuto conducted more in-state activity than the businesses in Bellas
Hess and Quill, but its distributors’ activities differed from those in Scripto
and Tyler Pipe.

   III.    Arizona Cases

¶19            Our cases provide further guidance. We have addressed
whether a company has a physical presence in Arizona on three occasions.
See Ariz. Dep’t of Revenue v. O’Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., 192 Ariz. 200, 206 (App. 1997); Ariz. Dep’t of Revenue v. Care
Comput. Sys., Inc., 197 Ariz. 414, 417, ¶ 15 (App. 2000); Interlott Techs., Inc. v.
Ariz. Dep’t of Revenue, 205 Ariz. 452, 457, ¶ 30 (App. 2003).

¶20           In O’Connor, an out-of-state furniture manufacturer built
custom furnishings for an Arizona law firm. 192 Ariz. at 201–02. The
manufacturer did not maintain an office or property in Arizona, but it
negotiated the contract in Phoenix in-person or by telephone. Id. at 202.
The furnishings were assembled at a Phoenix warehouse owned by the
manufacturer’s independent representative and then delivered on trucks
owned by the manufacturer or a third-party delivery service. Id. at 202–03.
The manufacturer’s employees unloaded the trucks and supervised the
installation conducted by independent representatives. Id. at 203. Title
passed to the firm when the manufacturer delivered the furnishings. Id. at

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202. And the manufacturer responded to warranty complaints by sending
employees or hiring a local electrician. Id. at 203. We held that the
manufacturer had a physical presence in Arizona because of the activities
conducted by the taxpayer’s employees and independent contractors in
negotiating and fulfilling the contract. Id. at 206.

¶21           In Care Computer, the taxpayer sold and licensed computer
hardware and software. 197 Ariz. at 416, ¶ 9. The taxpayer did not own or
lease property in Arizona, maintain inventory in Arizona, or have
representatives “based or residing in Arizona.” Id. The taxpayer conducted
most of its transactions by mail or telefax and shipped goods to Arizona
from out-of-state. Id. at 416–17, ¶¶ 10, 12. Out of 180 transactions in
Arizona, two were leases where, at the end of the lease terms, the customer
purchased the goods. Id. at 416, ¶ 10. The taxpayer had one salesperson
based in California, who took seven one- to two-day business trips to
Arizona over a seven-year period, and the taxpayer sent employees to
Arizona to train customers. Id. at 416–17, ¶¶ 11, 13. We held that the
taxpayer had a physical presence in Arizona because the salesperson’s trips
“were intended to, and did, result in additional sales,” the training was “in
part intended to, and presumably did, increase the satisfaction level of
Arizona customers and encourage other [customers] to buy [the taxpayer’s]
products,” and, although the “leases in Arizona were few in number and
duration, [] they could, and did, develop into outright sales.” Id. at 417,
¶ 15.

¶22            Finally, in Interlott, the taxpayer leased lottery-ticket vending
machines. 205 Ariz. at 453, ¶ 2. The taxpayer had two employees in
Arizona who installed the machines, performed maintenance, responded to
service calls, and moved the machines. Id. at ¶ 3. The taxpayer argued it
had no physical presence because sales did not occur in Arizona, it did not
maintain a market in Arizona, the employees’ contacts did not result in
Arizona business, and the transactions were merely short-term leases. Id.
at 457, ¶ 26. We rejected each argument, holding that the taxpayer had a
physical presence in Arizona, and noting that “[t]he existence of a sale is
not essential to the creation of a nexus,” “[p]erforming a contract is
maintaining a market,” and “an activity need not produce business in order
to create a nexus.” Id. at ¶¶ 27–30.

   IV.    RockAuto’s Arizona Activities

¶23          RockAuto argues it had no physical presence in Arizona
because its distributors did not have “in-person contact with Arizona
customers for sales, product installation, and/or customer service.” We
disagree. Neither Tyler Pipe, nor our cases applying Tyler Pipe, turned on

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                            ROCKAUTO v. ADOR
                             Decision of the Court
whether the taxpayer’s independent contractors had in-person contact with
customers. Instead, Tyler Pipe and our cases focused on the activities
performed in-state and whether those activities were significantly
associated with the taxpayer’s ability to establish and maintain an in-state
market. Tyler Pipe, 483 U.S. at 250–51; O’Connor, 192 Ariz. at 205–06; Care
Comput., 197 Ariz. at 416, ¶ 8; Interlott, 205 Ariz. at 456, ¶ 22. Thus, we do
the same here.

¶24            “Performing a contract is maintaining a market.” Interlott, 205
Ariz. at 457, ¶ 28 (citation omitted). Online sales transactions are contracts
where the customer promises to pay the price of the product and the seller
promises to deliver the product to the customer. See Armiros v. Rohr, 243
Ariz. 600, 605, ¶ 17 (App. 2018). As an auto parts retailer, RockAuto entered
contracts with its customers where the customer promised to pay the sale
price and RockAuto promised to deliver the product. RockAuto did not
maintain inventory, ship orders, or accept returns, so RockAuto depended
on its distributors to perform these activities on RockAuto’s behalf. And,
when Arizona distributors fulfilled orders for Arizona customers, the
product never left Arizona. Thus, except for the acceptance of orders, the
essential portions of RockAuto’s contracts with its customers were
performed in Arizona by RockAuto’s distributors. See O’Connor, 192 Ariz.
at 206 (“Many of the activities that were essential to completing these sales
occurred in Phoenix through employees and independent agents of [the
manufacturer] acting on [the manufacturer’s] behalf.”).

¶25            Moreover, although “an activity need not produce business in
order to create a nexus,” Interlott, 205 Ariz. at 457, ¶ 29, activities that result
in sales support finding a physical in-state presence, see Care Comput., 197
Ariz. at 417, ¶ 15 (stating, “[t]he trips by [the taxpayer’s] salesperson to
Arizona were intended to, and did, result in additional sales”). RockAuto
claims that its distributors did not solicit sales or advertise for RockAuto.
But RockAuto’s distributors were contractually required to use RockAuto’s
branded tape and include a RockAuto promotional magnet with each
order. RockAuto’s president said the tape was intended to improve name
recognition and increase sales and that the magnets were “a reminder item
so the customer hopefully puts it on his toolbox or refrigerator and
remembers us the next time he needs auto parts.” RockAuto asserts that
these activities are irrelevant because the distributors “shipped nearly 90%
of the magnets and tape outside of Arizona.” But a representative’s out-of-
state sales activities do not impact whether we find a physical in-state
presence. See id. at 416–17, ¶¶ 11, 15. And it is undisputed that the Arizona
distributors sent RockAuto’s promotional materials to Arizona customers.

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                           ROCKAUTO v. ADOR
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¶26           Further, activities that increase customer satisfaction support
concluding a taxpayer has a physical presence in Arizona. Id. at 417, ¶ 15
(noting training provided to customers supported concluding a taxpayer
had a substantial nexus to Arizona because it “w[as] in part intended to,
and presumably did, increase the satisfaction level of Arizona customers
and encourage other[s] . . . to buy [the taxpayer’s] products”). RockAuto
advertised that its prices were lower than its competitors’ prices, and
RockAuto’s president said RockAuto competed against local retailers, in
part, by having “[l]ower prices.” Customers paid shipping costs directly,
and customers complained when shipping costs were too high or delivery
took too long. Shipping costs were not always directly related to distance,
but cost and distance had a “linear” relationship. And, to reduce shipping
times and costs, RockAuto had its distributors send orders directly to
customers. Thus, even when viewed in a light most favorable to RockAuto,
RockAuto’s business model sought to increase customer satisfaction by
reducing shipping times and costs for customers, which consequently
helped RockAuto establish and maintain a market in Arizona.

¶27            Finally, although the parties focus on RockAuto’s
distributors’ activities, RockAuto’s physical presence in Arizona was not
limited to its distributors. During the audit period, RockAuto employees
made four business trips to Arizona to meet with distributors. According
to RockAuto, these trips were intended to strengthen RockAuto’s
relationships with its distributors. One state court noted that business trips
like these may be sufficient to establish a physical presence in a taxing state.
Travelscape, LLC v. S.C. Dep’t of Revenue, 705 S.E.2d 28, 37 (S.C. 2011)
(concluding that the fact that employees and representatives visited the
taxing state “to enable [the taxpayer] to establish and maintain hotel
relationships and obtain the discounted net room rate” “may be enough to
satisfy the physical presence requirement”). See also Care Comput., 197 Ariz.
at 416–17, ¶¶ 11–12, 15 (concluding a salesperson’s infrequent trips to
follow up on “business prospects” supported concluding the taxpayer had
a physical presence in Arizona). Because of RockAuto’s distributors’
activities, we need not conclude whether the trips alone were sufficient, but
the trips support our conclusion that RockAuto had a physical presence in
Arizona.

   V.     RockAuto’s Other Arguments

¶28          RockAuto argues that various other factors show it had no
physical presence in Arizona. We are not persuaded.

¶29           RockAuto argues its distributors’ activities were not
significantly associated with establishing and maintaining a business in

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                            Decision of the Court
Arizona because almost 90% of orders placed with Arizona distributors
shipped to out-of-state customers, and more than 80% of orders placed by
Arizona customers were shipped from out-of-state distributors. But
RockAuto also claims that “[n]either the number of [Arizona] transactions
nor the number of [Arizona] customers has anything to do with whether
RockAuto had the requisite physical presence in Arizona.” Essentially,
RockAuto uses sales volume as both a sword and a shield by arguing that
we should not consider the amount of business in Arizona as evidence that
RockAuto had a physical presence in Arizona, while contending the
amount of business conducted outside Arizona shows it had no physical
presence in Arizona.

¶30             “[F]or the purpose of establishing nexus, the volume of local
activity is less significant than the nature of its function on the out-of-state
taxpayer’s behalf.” O’Connor, 192 Ariz. at 208. Thus, we agree with
RockAuto that the number of Arizona transactions and customers do not
dictate whether it had a physical presence in Arizona.

¶31            But we disagree with RockAuto that its distributors’ out-of-
state activities or contact with out-of-state customers shows RockAuto did
not have a physical presence in Arizona. A representative’s in-state
activities support concluding a taxpayer has a physical in-state presence,
even when the representative is predominately focused on serving an out-
of-state market. See Care Comput., 197 Ariz. at 416–17, ¶¶ 11, 15. In Care
Computer, the taxpayer’s salesperson lived in California and “focused
almost exclusively on southern California.” Id. at 416, ¶ 11. Over seven
years, the salesperson made seven one- to two-day business trips to Arizona
that produced sales. Id. at 416–17, ¶ 11. We concluded the trips supported
finding the taxpayer had a physical presence in Arizona. Id. at 417, ¶ 15.
Likewise, here, although most of the Arizona distributors’ orders were
shipped out-of-state, the orders shipped to Arizona customers support
concluding RockAuto had a physical presence in Arizona.

¶32            Further, a taxpayer’s in-state activities establish a physical
presence, even if in-state customers are also served by out-of-state
representatives. Cf. Tyler Pipe, 483 U.S. at 249–51 (noting solicitation of in-
state sales was “directed by executives who maintain their offices out-of-
state” but concluding the work of one in-state independent contractor
established the taxpayer’s physical in-state presence). Accordingly, our
focus is on RockAuto’s in-state activities, not RockAuto’s out-of-state
activities or out-of-state customers.

¶33         Finally, RockAuto claims it did not seek to maintain an
Arizona market because it selected its distributors based on inventory and

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                          ROCKAUTO v. ADOR
                           Decision of the Court
ability to fulfill orders, not geography. But RockAuto chose to have six
Arizona distributors fulfilling orders for some of its Arizona customers, and
RockAuto controlled which distributor fulfilled each order.               And,
RockAuto’s website said it offered lower prices than its competitors, partly
because it shipped directly to customers from “centralized warehouses.”
RockAuto’s claim that contracting with Arizona distributors was not
intended to maintain an Arizona market does not change the nature of the
distributors’ activities. See Scripto, 362 U.S. at 211–12 (“The test is simply
the nature and extent of the [in-state] activities of the [taxpayer].”).

¶34          Thus, RockAuto had a physical presence in Arizona during
the audit period, and ADOR could assess a transaction privilege tax on
RockAuto’s sales to Arizona customers.

                               CONCLUSION

¶35           For the reasons stated, we vacate the judgment and award of
attorneys’ fees and costs and remand to the tax court for entry of summary
judgment in favor of ADOR on the substantial nexus issue and to address
the other issues in RockAuto’s complaint.

¶36          RockAuto requests attorneys’ fees pursuant to A.R.S. § 12-
348(B). Section 12-348(B) authorizes an award of attorneys’ fees to a
taxpayer who “prevails by an adjudication on the merits.” RockAuto has
not prevailed, so we deny the request. We award ADOR its taxable costs
on appeal pursuant to A.R.S. § 12-341 upon compliance with ARCAP 21(b).

                          AMY M. WOOD • Clerk of the Court
                          FILED: TM

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