State Sales Tax Issue: Furnitureland South's Use of Personalized Delivery Service Creates Representational Nexus
Furniture World Magazine
A Maryland trial court has ruled in a declaratory judgment case after trial that Furnitureland South, a North Carolina furniture dealer, must register to collect Maryland use tax on the sale of furniture for delivery in the State of Maryland. Comptroller of the Treasury v. Furnitureland South, Inc., et al., Circuit Court for Anne Arundel County Case No. C-97-37872 OC (August 13, 1999). The Court ruled that activities performed within the State by Royal Transport, Furnitureland's primary carrier, establish nexus in the State within the meaning of the Commerce Clause of the United States Constitution. An important part of this ruling is the trial court's definition of a common carrier for purposes of applying the safe harbor from nexus of National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Facts: Furnitureland is a nationwide retailer of furniture and home furnishings located in North Carolina that does not collect Maryland use tax on its sales into Maryland. Annual gross sales since 1996 have been in excess of $100 million. Furnitureland has no showrooms or other facilities outside of North Carolina and neither owns nor leases real property in Maryland. Furnitureland conducts no advertising within the State of Maryland, other than through its website and through in-place advertising on the delivery trucks. Nor does Furnitureland have any employees, agents or representatives in Maryland who solicit or take orders.
Since 1991, Royal has acted as Furnitureland's primary carrier for interstate delivery. Furnitureland has rarely used another carrier for these deliveries. Royal has both common and contract carrier authority from the ICC. Furnitureland capitalized Royal's operations and was the source of its rolling stock. Furnitureland also provided Royal with rent-free office space in Furnitureland's distribution center. Furnitureland is essentially Royal's only customer. There are no common stockholders, directors, officers or employees between the two companies.
Furnitureland makes all delivery arrangements at the time of sale. Typically, a customer makes a one-third deposit with Furnitureland and Royal thereafter collects the balance at the time of delivery. Furnitureland generates "driver trip sheets" for Royal, through which Furnitureland identifies the delivery stops for each trip, the order in which the deliveries are to be made, the time period (in three to six hour increments) during which each delivery should be made, and the C.O.D amount due on each sale. Furnitureland contacts each customer to inform them of the delivery arrangements. While Royal assigns the drivers for each trip, these drivers generally follow Furnitureland's stated itinerary. The drivers consult with Furnitureland before making any changes to the itinerary. As necessary, Furnitureland supplies the drivers with work orders for furniture repair for each assigned trip. Until the time of delivery, customers have no contact with any Royal employees.
Furnitureland's employees load Royal's trucks, and Royal's drivers pick up the loaded vehicles at Furnitureland's facility. Royal's drivers are seldom present when the trucks are loaded and sealed. Most of the trucks and trailers display Furnitureland advertising, which is essentially the same as the advertising that Furnitureland has on its own vehicles that are used for delivery within North Carolina.
Royal employees deliver and set-up the furniture in Maryland. They also perform minor repairs as needed, pick up furniture for return to Furnitureland for more extensive repair and bring repaired furniture back to the customer. Each month, Royal drivers collect over $200,000 in C.O.D. money from Maryland customers for Furnitureland. In 1997, Furnitureland made sales of $3,493,553 to Maryland residents. In the first ten months of 1998, Furnitureland made sales of approximately $2,955,682 to Maryland residents.
Analysis: The Court first addressed the state law question of whether Furnitureland and Royal are "vendors" within the meaning of the Maryland Sales and Use Tax Act. The Court concluded that Furnitureland is an out-of-state vendor and is therefore considered to be a vendor under the Maryland statute. The Court found that Royal acts as Furnitureland's agent for the purpose of delivering, setting-up and servicing furniture in Maryland. The Court noted that Furnitureland's promotional literature stresses the "personalized delivery service" provided by Royal, and that the delivery service helped Furnitureland become the largest furniture retailer in the world.
The Court also held that Royal is liable for the collection of the Maryland use tax under a Maryland statute providing that the Comptroller may regard any salesman or representative as the agent of the vendor and hold them both liable for the collection of the tax.
The Court next addressed the constitutional issue of nexus under the Commerce Clause. Citing Scripto, Inc. v. Carson, 80 S. Ct. 619 (1960), the Court observed that "substantial nexus" can be established through a representative acting on behalf of the remote seller in the taxing state. Royal's extensive and exclusive activities on behalf of Furnitureland clearly establish that Royal acts as Furnitureland's representative for delivery, set up and post-sale service in Maryland.
Finally, the Court addressed whether Royal's activities on behalf of Furnitureland in Maryland are insulated by their consisting exclusively of delivery by common carrier within the meaning of the "safe harbor" of National Bellas Hess. The Court acknowledged that the term "common carrier" has never been defined for purposes of applying the "safe harbor" rule. The Court rejected accepting the ICC's designation of Royal as a common carrier for purposes of applying Bellas Hess. The Court noted the abolishment of the federal regulatory system for interstate trucking. The testimony of Furnitureland's expert witness acknowledged there are no currently meaningful distinctions between a "common" and a "contract" carrier under federal law, and a common carrier can now provide the same services as can a contract carrier. Reliance on the former ICC designation of Royal as a common carrier in a use tax collection case would undermine the purpose of creating the Bellas Hess safe harbor.
The Court ruled that, for purposes of applying the Bellas Hess safe harbor, a common carrier is a carrier that holds itself out to provide its services to the public on a nondiscriminatory, arms' length basis, that controls the time, manner and means of delivery, and that does not engage in substantial contacts with the receiving party, such as by providing post-delivery service. The Court held that the personalized delivery service provided by Royal to Furnitureland does not fit this meaning. Therefore, the Commerce Clause did not bar the State from requiring Furnitureland and Royal to collect the use tax.
National Nexus Program Voluntary Disclosure Program: The MTC National Nexus Program will process company offers to voluntarily resolve sales/use and income/franchise tax liabilities in several states at a time. The Nexus Program will advise the taxpayer's representative of each state's basic settlement policies, prepare the settlement offer documents, present them to Program states and help to work out any issues. The company may remain anonymous throughout the process, until the settlement is complete and the company sends in the registration materials. Any taxpayer who, after consultation with its tax professional, wants to register to collect sales or use tax in any of the National Nexus Program's 39 member states as a result of the Furnitureland trial court decision should contact Tom Shimkin at email@example.com or call Mr. Shimkin at (202) 508-3869. For more information about the NNP's Voluntary Disclosure Program, please visit the MTC's website at http://www.mtc.gov/txpyrsvs/disclose.htm. In addition, most states administer their own individual voluntary disclosure programs. Any taxpayer that would prefer to deal with each state directly should contact the applicable state revenue department for further information.