Rhode Island proceeding clarifies pre-Wayfair nexus rules


Michael Cronin
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Gabe Garcia
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Metisse Lutz
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On Oct. 12, 2018, the Rhode Island Division of Taxation approved a hearing officer’s ruling in an administrative proceeding that a remote seller’s relationship with a commonly owned affiliate that had Rhode Island physical presence did not create sales and use tax nexus for the remote seller.1 The hearing officer held that the services performed by the affiliate were not significantly associated with the remote seller’s ability to establish and maintain a Rhode Island market.

Background The remote seller, an online retailer of riding apparel, tack, horse care, and other equine-related products, was audited by the Division for the Feb. 9, 2009-to-June 30, 2011 tax period. The Division asserted that the remote seller had created nexus in Rhode Island via activities associated with the remote seller’s affiliate located in the state. The affiliate, also a retailer of equine-related products, operated its business through physical locations in Rhode Island and other states. The remote seller and the affiliate were owned by a common parent, all of which shared a common brand name.

Following the Division’s audit, the remote seller received a notice of deficiency for unreported sales tax. In response, the remote seller argued that it did not have physical presence in Rhode Island, and activities associated with the affiliate were minimal and did not result in substantial nexus with Rhode Island for sales and use tax purposes.

Historic U.S. Supreme Court nexus standards As this hearing concerned a sales tax nexus determination for tax periods prior to the recent U.S. Supreme Court decision in South Dakota v. Wayfair, the Division’s administrative hearing officer used the nexus standards developed in Complete Auto Transit, Inc. v. Brady,2 Quill Corp. v. North Dakota,3 and Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue.4 The Complete Auto test requires, in part, that a substantial nexus must exist between the taxpayer and the state in order to impose a tax. Quill required that a taxpayer have physical presence for substantial nexus to exist for purposes of the sales and use tax, as a means to prevent an undue burden on interstate commerce. Finally, Tyler Pipe addressed the situation where in-state representatives performed activities on behalf of an out-of-state corporation, concluding that nexus could be achieved to the extent such activities were significantly associated with the corporation’s ability to establish and maintain a market in the state.

Nexus activity evaluated in administrative hearing In evaluating whether Rhode Island could impose a sales tax on a remote seller with an in-state affiliate, the Division’s administrative hearing officer had to determine whether the affiliate was performing activities on behalf of the remote seller that were significantly associated with the remote seller’s ability to establish and maintain a Rhode Island market. As Rhode Island did not have any reported case law on the subject, the Division’s hearing officer considered relevant case law from other states in which numerous intercompany activities between in-state and out-of-state entities were analyzed, including the effects of:

  • In-store advertising by the affiliate for the remote seller;
  • Advertising on the remote seller’s web site that customers can return products to the in-state store;
  • Receipts from the in-state store with the web site’s address;
  • Referrals from in-state employees to shop online;
  • Similar logos and branding; and
  • Purchasing a loyalty program or gift card at the in-state store that could apply to the remote seller.5

In the hearing, the Division’s auditor argued that several activities performed by the commonly owned Rhode Island affiliate created nexus for the remote seller, as such activities aided and reinforced the remote seller’s sales effort within Rhode Island. These activities included the use of common logos and intellectual property, providing in-store refunds, services relating to the product bought online that could be performed at the store, having catalogs in-store for the remote seller, common advertising, price matching, accepting returns made online, sharing a credit card issued by a third-party bank, and citing to the online retailer’s listing of retail store locations. The remote seller disagreed with this characterization of the businesses, arguing that it operated as a company separate and apart from its affiliate selling to Rhode Island customers through different sales channels. Since the affiliate was not trying to establish and maintain the remote seller’s market, nexus could not be created for the remote seller merely through a perception that both companies were related.

The Division’s hearing officer determined that while the remote seller and the in-state affiliate shared a brand name, the store did not perform any services that significantly associated the online retailer’s ability to establish and maintain a market in Rhode Island. In an exhaustive analysis, the hearing officer cited numerous examples as to why this was the case:

  • The affiliate did not advertise in its Rhode Island store on behalf of the remote seller.
  • Nothing on the remote seller’s website indicating that products could be returned to the store. Instead, the remote seller’s customers were given a form to return purchases by mail. While the store accepted returns and gave refunds or credits for products it sold for customer satisfaction, the store did not treat online purchases from the remote seller differently. Further, the website and the store did not hold themselves out to specially respond to online returns.
  • The store did not accept deliveries of orders made online for customer pick-up.
  • Customers could not purchase from the remote seller at the store, or via the store’s online database. There was no shared computer system between the store and the remote seller.
  • There was no shared customer data between the store and the remote seller.
  • The store did not use the remote seller’s inventory, but rather had a separate distribution entity that housed and delivered products to both companies.

Accordingly, the Division’s hearing officer determined that the facts in this matter more closely resembled the facts in prior state case law finding a lack of substantial nexus between an out-of-state remote seller and an in-state affiliate, despite certain interrelated activities. Therefore, the hearing officer concluded that the Rhode Island affiliate did not perform activities sufficient for the online retailer to establish and maintain a market in Rhode Island.

Commentary The length of time between the Department’s initiation of its audit to the approval of the decision by the Division’s administrative hearing officer reflects the arduous road that some taxpayers may have to travel to obtain a positive outcome in certain jurisdictions. The Division originally advised the taxpayer it had been selected for audit in February 2011, then issued the taxpayer a Notice of Deficiency Determination for unreported sales tax in June 2013, with hearings in April and June 2016. Briefs were submitted in January 2017, with a final determination ultimately issued in October 2018.

The decision also serves as a vehicle to compare the methods that Rhode Island used in an attempt to impose collection and remittance responsibilities on remote sellers prior to Wayfair, to the affiliate nexus and economic nexus policies that Rhode Island now applies via statute. In 2017, in contemplation of a potential decision in the Wayfair case that would give states more freedom to utilize more expansive nexus standards, Rhode Island enacted a non-collecting retailer statute. Under this statute, certain registration and/or notice and reporting requirements involving Rhode Island sales and use tax are imposed depending upon whether an out-of-state person or entity qualifies as a “non-collecting retailer” (an out-of-state seller), a “retail sale facilitator,” or a “referrer.”6 Non-collecting retailers are presumed to have nexus with Rhode Island if they are related to a person or entity that has physical presence in the state, engaging in specified activities or selling tangible personal property of the same or substantially similar nature to that sold by a non-collecting retailer, under a same or similar business name as that of the non-collecting retailer.7

With the decision handed down in Wayfair, non-collecting retailers that were registered prior to the decision are not impacted and are required to continue to collect and remit the applicable sales or use tax, in accordance with the 2017 Rhode Island law.8 Post-Wayfair, under R.I. Gen. Laws Sec. 44-18.2-3, all non-collecting retailers who, in the previous calendar year made $100,000 or more in gross revenues from sales in Rhode Island or 200 or more transactions in Rhode Island are required to either: (i) register for a Rhode Island sales tax permit and collect and remit the sales or use tax in Rhode Island; or (ii) comply with various notice requirements in the statute.9

1 R.I. Dept. of Rev., Div. of Tax., Administrative Hearing Decision, Dkt. No. 2018-11, 10/12/2018.
2 430 U.S. 274 (1977).
3 504 U.S. 298 (1992).
4 483 U.S. 232 (1987).
5 See Bloomingdale’s By Mail, Ltd. v. Commonwealth of Pennsylvania, Department of Revenue, 130 Pa. Commw. 190 (1989); SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220 (1991); Borders Online, LLC v. Stale Bd. of Equalization, 129 Cal.App.4th 1179 (2005); St. Tammany Parish Tax Collector v., 481 F. Supp.2d 575 (E.D. La. 2007); New Mexico Taxation and Revenue Dept. v. LLC, 303 P.3d 824 (N.M. 2013).
6 R.I. GEN. LAWS § 44-18.2-3.
7 R.I. GEN. LAWS § 44-18.2-2(4).
8 FAQs For Non-Collecting Retailers (Remote Sellers) Following Wayfair Decision, Rhode Island Department of Revenue Division of Taxation, July 20, 2018.
9 Id.

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