US Court To Decide On Tax Liability Created By 3rd Party Supplies

by Mike Godfrey, tax-News.com, New York

17 July 2001

An upcoming appeals court hearing in the US will address the issue of whether the provision of third-party maintenance services in a US state creates 'nexus' for the company that originally supplied the item being serviced.

If there is nexus, then the original supplier is liable for local state taxes including use, income and franchise taxes. Evidently, a national company that supplied and maintained, say, sophisticated household alarm systems through a series of local sub-contractors, would then quickly find itself taxable in every state in the union although it had a conventional 'permanent establishment' only in one state.

Curiously, this question has never been ruled on in court, although 25 states have already taken the position that nexus is created by the supply of third party maintenance services.

The case will also obviously have a major bearing on the question of internet taxation (once the moratoriums cease to have effect) for any type of supply that involves later contact between the customer and an agent of the original supplier.

The case is reported on at length by Professor David Hardesty in E-commerce Tax News. 'The original supplier in the case, Quantex Microsystems,' says Professor Hardesty, 'is a New York corporation, with its principal place of business in New Jersey. It sells computer products via the mail, the telephone, and the internet. It has no offices, property, bank accounts, or direct employees in Louisiana. Quantex provides a warranty with its computer, under which is provided on-site service for the replacement of defective hardware parts for one year from the date of purchase. Warranty services were allegedly provided through an independent contractor in Louisiana (although there some question as to who actually performed the services).'

The state of Louisiana attempted to tax Quantex on the basis that nexus had been created, but Quantex obtained a summary judgement dismissing the claim. Now Louisiana is appealing.

For the full text see http://ecommercetax.com/doc/071501.htm

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