Update on attributional nexus.

• Author: Rosen, Arthur R.

Update on Attributional Nexus

In the November-December 1989 issue of The Tax Executive, a colleague and I published an article that (1) analyzed the historical foundations regarding constitutional limitations on state tax jurisdiction and (2) discussed recent attempts by state taxing authorities to assert jurisdiction over a corporation based on the presence within the state of that corporation's agent, alter ego, or unitary affiliate. (Rosen & Bernstein, State Taxation of Corporations: The Evolving Danger of Attributional Nexus, 41 Tax Executive 533 (1989).) During the past year, several cases regarding attributional nexus have been decided by various courts. This article summarizes those cases.

Agency Found in Missouri

In Amway Corporation v. Director of Revenue, 794 S.W.2d 666 (Mo.1990), the Missouri Supreme Court sustained the assessment of the State's corporate income tax on Amway, even though the company had no employees or property in Missouri. Amway, a Michigan-based company, sold products to distributors located in Missouri, which resold them either to consumers or to other distributors. In addition, the distributors solicited for sales of distributorships. Distributorships are direct agreement between the new distributor and Amway, and the initial and annual fees are paid by the new distributorships directly to Amway. A distributor who solicits new distributorships obtains indirect benefits through increased market, volume discounts, and the opportunity to become a "direct distributor."

Amway asserted that it was not subject to the state's income tax because (1) it had no presence in Missouri, and (2) even assuming it were present in the state, its activities were protected by Public Law No. 86-272. Reviewing the relationships between Amway and its distributors, the Missouri Supreme Court disagreed. If found that the company's Missouri distributors were acting as agents for Amway and, therefore, that Amway was present in the state. The court also concluded that the sales of distributorships were sales of intagibles independent from the sales of products and, hence, were unprotected by Public Law No. 86-272. Thus, Amway's income from sales of goods and distributorships was subject to apportionment for imposition of the state's income tax.

The court reviewed the twin nexus requirements: (1) connection between the taxpayer and the taxing state, and (2) connection between the income sought to be taxed and the state. (These requirements were discussed at length in the 1989 article.) The court reasoned that although the Missouri-based distributors were not employees of Amway and although the distributorship contracts were between the new distributorship and Amway, "[o]ne may be a representative or agent for the limited purpose of soliciting sales without being an employee and without having the legal authority to enter into contracts on behalf of another." Id. at 671. The court found that the soliciting distributors "were clearly authorised to act on behalf of Amway in soliciting the sale of distributorships. In doing so, they were Amway's representatives." Id.

In bolstering its conclusion that presence nexus exited because of the agency relationship, the court seems to have unnecessarily equated "presence" with "economic exploitation." Futhermore, the court effectively blurred the two separate nexus requirements when it stated:

Whether the corporation's...