Did a separately operated Tennessee distribution subsidiary create sales-tax nexus for its out-of-state parent before their merger?

Plain-English summary

Tennessee concluded that the out-of-state parent did not have Tennessee sales-and-use-tax nexus before merging with its subsidiary. The parent had no Tennessee office, employees, agents, inventory, or other business location.

The subsidiary bought products for resale in arm's-length wholesale transactions on the same terms used for independent distributors. Its employees did not solicit sales or perform other activities for the parent. On those facts, the subsidiary acted no more as the parent's representative than an independent distributor would.

The ruling distinguished the planned post-merger period. Once the subsidiary merged into the parent and its sales force became the parent's employees, the parent expected Tennessee nexus and registration obligations.

What this means for you

This 1998 ruling treated corporate separation, arm's-length pricing, ownership of inventory, and whether subsidiary employees acted for the parent as central nexus facts. Its age and advisory status make it unsuitable as a current no-nexus safe harbor without checking current law.

Common questions

Q: Did owning a Tennessee subsidiary automatically create nexus? A: No, not on the facts described in the ruling.

Q: What facts supported the no-nexus conclusion? A: Separate entities, arm's-length resale purchases, no parent property or personnel in Tennessee, and no solicitation or agency activity by subsidiary employees.

Q: Would the merger change the result?
A: Yes. The ruling said the former subsidiary's sales force would become parent employees, creating nexus.

Q: Should a business treat this ruling as current nexus law? A: No. The document was advisory when issued and expressly subject to later statutory, regulatory, or judicial changes.

Citations and references

• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
• Pearle Health Services, Inc. v. Taylor, 799 S.W.2d 655 (Tenn. 1990)
• Reader's Digest Ass'n, Inc. v. Mahin, 255 N.E.2d 458 (Ill. 1970)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/98-26.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 98-26

WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a redacted form is information only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Departmental policy. SUBJECT Whether nexus of subsidiary corporation gives rise to nexus of parent corporation. SCOPE Revenue rulings are statements regarding the substantive application of law and statements of procedure that affect the rights and duties of taxpayers and other members of the public. Revenue rulings are advisory in nature and are not binding on the Department. FACTS The Taxpayer is a [PRODUCER] of [MERCHANDISE] and other related materials. The Taxpayer is headquartered outside of Tennessee and has no office, employees, agents, inventory, or other business location in Tennessee. The Taxpayer distributes the majority of its products through independent distributors and a wholly owned subsidiary. All sales to the distributors and the subsidiary are made for resale. The transactions with the subsidiary are treated at arms’ length and the subsidiary receives the same terms as the independent distributors. The subsidiary is registered and remits sales tax in all relevant jurisdictions, including Tennessee, in which it does business, or maintains documents on exempt sales. To the best of the Taxpayer’s knowledge, the independent distributors also collect and remit sales and use tax as required by law. The Taxpayer also sells [MERCHANDISE] and related materials through the mails and common carriers for orders received at its headquarters via the phones or mail. These are the only retail sales made by the Taxpayer. Solicitation of these orders is made exclusively by direct mail.

The Taxpayer is planning to merge the subsidiary into the Taxpayer. The Taxpayer will then conduct the subsidiary’s business activities. The merger will create nexus as the sales force of the subsidiary will now be employees of the Taxpayer. Therefore, the Taxpayer will be required to register for sales and use tax in all states in which it is not currently registered. All future sales will require that tax be collected and remitted unless exempt under state law. The Taxpayer has not previously collected sales and use tax in Tennessee. The Taxpayer and subsidiary are presently legally separate entities. The sales, at wholesale, of [MERCHANDISE] to the subsidiary have always been conducted at arms’ length. The pricing structure between the Taxpayer and the subsidiary has been developed using the same arms’ length transaction standard that exists between the Taxpayer and independent distributors. The subsidiary’s employees are not authorized to, nor do they in fact, solicit sales on behalf of the Taxpayer, or engage in any other activities on behalf of the Taxpayer. ISSUE Whether the Taxpayer has nexus for sales and use tax purposes in Tennessee prior to the merger because of the activities of the subsidiary. RULING The Taxpayer does not have nexus for sales and use tax purposes in Tennessee prior to the merger. ANALYSIS A tax will survive challenge under the Commerce Clause so long as it (1) is applied to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. Complete Auto Transit, Inc. v. Brady, 97 S.Ct. 1076 at 1079 (1977). The first requirement is determinative in this case: whether the Taxpayer has connections with Tennessee which are substantial enough to legitimate Tennessee’s exercise of power over it. See Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). The determination of nexus is based on the relevant facts and circumstances. The Taxpayer is headquartered outside of Tennessee and has no office, employees, agents, inventory, or other business location in Tennessee. The Taxpayer does not own the products shipped into Tennessee to its subsidiary, but has sold the items to the subsidiary for resale. The Taxpayer’s connection with Tennessee, if any, is through the actions of its subsidiary.

2

Based on the facts provided, the subsidiary does not solicit sales or take any action on behalf of the Taxpayer, but only purchases for resale and distributes the Taxpayer’s products. Although the subsidiary does conduct business in Tennessee, it appears to have no more connection with the Taxpayer than does an independent corporation doing the same type of distribution activities. See Pearle Health Services, Inc. v. Taylor, 799 S.W. 2d 655 (Tenn. 1990); The Reader’s Digest Assoc., Inc. v. Mahin, 255 N.E.2D 458 (Ill. 1970), cert. den’d, 399 U.S. 919, 90 S. Ct. 2237, 26 L. Ed. 2d 786 (1970). Accordingly, the activities of the subsidiary do not give rise to nexus with the Taxpayer prior to the merger of the Taxpayer with the subsidiary.

______
Caroline R. Krivacka
Tax Counsel

APPROVED: _______
Ruth E. Johnson
Commissioner
DATE:

6-1-98

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