When is "independent" not independent?
By E.Northrop

February 25, 1999 -- There has been a recent decision by the New York State Division of Tax Appeals that should put companies who make nontaxable interstate sales on-guard.  This decision involved an Ohio table pad manufacturer who had commissioned "referral sources" in New York.  The company had no employees in New York.   Instead, the referral sources (who also worked for other manufacturers) called on furniture stores to determine if the store would be a good outlet for the manufacturer's products.  If so, the referral resource recommended that the manufacturer contact the store.  The company made all the negotiations and, if successful, sent samples and brochures to the furniture store.  The referral source would check on the store to
determine if the samples, etc. needed replacement.  Large stores were visited every month, small stores less frequently.  The company paid a commission to the referral resource.

        The manufacturer argued that since the referral resource did not solicit retail sales, were not direct employees, agents, or representatives of the company, that it should not be required to register to collect sales tax. The Division of Tax Appeals rejected the argument stating that the "referral resources were commissioned manufacturers' representatives whose activities in New York demonstrably exceeded the slightest presence test".

        Both the manufacturer and the Division of Taxation cited Matter of Orvis Co. v. Tax Appeals Tribunal, 86NY2d 165, 630 NYS2d 680, cert. Denied, 133 Led 2d 426 (1995) arguing each side of the nexus standard for slightest presence.  The Division of Tax Appeals concluded that "the activities of the referral sources constituted solicitation and (therefore the
manufacturer) was a vendor within the meaning of 20 NYCRR 526.10(a)(3)".

        It is important to understand that each case would stand on its own merit in determining nexus for sales and use tax purposes.  I cite the above case to illustrate that if your company solicits sales in any way by independent sales reps, you should carefully examine both the law and the lore of the state in question to determine the extent of your filing exposure.
Remember, where no sales tax return has been filed, there is no closure on the time period open for audit, and therefore, potential sales tax liability that probably would not be recoverable from customers.  You must
weigh this fact against the cost of registration, collection and filing sales and use tax returns in that jurisdiction.

Eugene A. Northrop