December 4, 2007
SALES TAX NEXUS CASE CONCERNING
SFA FOLIO COLLECTIONS, INC.
By: Judith Lohman, Chief Analyst
You asked for a copy and short summary of the Connecticut Supreme Court's decision in the case of SFA Folio Collections, Inc. v. Timothy F. Bannon, Commissioner of Revenue Services, 217 Conn. 220 (June 22, 1991). The case concerned sales tax nexus for a mail order catalogue company.
The case concerned whether imposition of Connecticut sales and use tax on SFA Folio Collections, Inc. (“Folio”), a mail order company, was a violation of the due process and commerce clauses of the U.S. Constitution because Folio lacked sufficient nexus to the state.
The revenue services (DRS) commissioner argued that Folio had nexus because it is part of an “enterprise” of affiliated corporations that included Saks Fifth Avenue Stamford, Inc. (“Saks-Stamford”). Saks-Stamford had a clear taxable nexus to Connecticut because it operated a retail store in Stamford.
The Supreme Court ruled that:
1. Folio and Saks-Stamford two are separate corporations that could not be considered one company for purposes of determining nexus, and
2. Folio does not have sufficient nexus to Connecticut on its own to be obliged to collect Connecticut sales and use tax.
The commissioner appealed the ruling to the U.S. Supreme Court, which declined to hear the case on June 17, 1991.
The parties agreed on the following facts.
Folio conducts a nationwide mail order business. It is a wholly owned subsidiary of Saks & Co., and, like its parent, is a New York corporation. The two companies share a number of common directors, although each has separate management. Folio, with Saks' consent, uses “SFA,” which is Saks' trademark, as part of its corporate name. It uses the SFA name in its catalogs and benefits from customers' association of the name with Saks Fifth Avenue.
In addition to owning Folio, Saks Fifth Avenue also owns Saks-Stamford, a separate corporation that operates a retail store in Stamford. Folio and all Saks stores, including the Stamford store, share sales and financial data and profit and loss statements. The management groups for Folio and Saks-Stamford are separate and operate autonomously. Folio, through its printers, sends extra copies of catalogs to Saks-Stamford's general manager, who uses them to inform store employees of fashion trends and as reference guides and merchandise educational tools. Folio customers can use Saks-Stamford tailoring services for a fee, but so can the public at large. Folio sells some of the same items as Saks-Stamford, but many of the items are also available at other retail stores.
Folio distributes catalogs and flyers to Connecticut residents and receives orders by mail or telephone. Customers pay by check or credit card. Folio fills orders in Yonkers. Customers can use their Saks cards to buy from Folio. Folio includes advertising for Folio in Saks credit card bills but pays for the return envelope that is with the bill. Folio delivers purchases to Connecticut buyers by mail or common carrier. Customers pay shipping, handling, and transportation costs for their orders. Customer assistance, returns, exchanges, and other services are handled by Folio's Yonkers office.
Folio operates no retail stores and does not maintain any store, office, distribution house, sales house, sample room, warehouse, or other place of business in Connecticut. It has no solicitors, canvassers, sales persons, authorized agents, or representatives in the state. It is not licensed to do business in Connecticut and has no merchandise or inventory in the state. Contacts with Folio are made through an “800” number. It has no bank accounts here, retains no security interest in goods sold to state residents, and does not investigate credit or collect accounts in Connecticut.
Folio – Nexus on Its Own
The U.S. Supreme Court has stated that the relevant legal inquiry for reviewing the constitutionality of imposing state sales and use tax on an out-of-state seller is whether there exists “some definite link, some minimum connection, between the state and the person, property or transaction it seeks to tax.” (National Bellas Hess, Inc. v. Department of Revenue (386 U.S. 753 (1967)).
The Connecticut court found that Folio, viewed independently, does not have enough of a connection to Connecticut to support taxation here. Its only contacts with the state are “through the mail or common carriers.” (SFA Folio Collections, p. 239)
Folio – Nexus Through Affiliate That Has Nexus
The DRS commissioner argued that the presence in Connecticut of an affiliated corporation (Saks-Stamford) gave Folio an “economic presence” in the state that supports requiring Folio to collect sales and use tax from Connecticut customers. The commissioner claimed that, because both Folio and Saks-Stamford have a common parent, their separate corporate existence should be disregarded and they should be treated as one enterprise for establishing tax nexus.
The court stated that: “Connecticut courts will disregard the corporate structure and pierce the corporate veil only under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.” (Ibid., p. 230, citations omitted)
The court found no statutory authority within the Connecticut sales and use tax chapter allowing DRS to treat separate corporations as part of one enterprise. “It is a fundamental principle of corporate law that the parent corporation and its subsidiary are treated as separate and distinct legal persons even though the parent owns all the shares in the subsidiary and the two enterprises have identical directors and officers.” (Ibid., p. 232)
The SFA decision affirmed that the court would recognize the separate corporate entities of affiliated corporations, absent illegitimate purposes, unless:
1. their business transactions, property, employees, or bank and other accounts and records are intermingled;
2. they do not observe the formalities of separate corporate procedures;
3. the corporation is inadequately financed as a separate unit when it comes to meeting its normal obligations;
4. the respective enterprises are not held out to the public as separate; and
5. the policies of the corporation are not directed primarily to its own interest but to those of its affiliate.
Using this standard, the court found that “Folio is not a paper arrangement but a separate and independently functioning corporation.” (Ibid., p. 234)