SFA Folio Collections, Inc. v. Tracy - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

	ROMINGER LEGAL
		Ohio Court Cases and Opinions - Ohio Legal Research
					Need Legal Help?
					Need Legal Help?
LEGAL RESEARCH CENTER
LEGAL RESEARCH CENTER			LEGAL HEADLINES - CASE LAW - LEGAL FORMS	NOT FINDING WHAT YOU NEED? -RESEARCH

This court case was taken from the web sites of the Ohio Courts. Search our site for more cases - CLICK HERE

LEGAL RESEARCH

COURT REPORTERS

PRIVATE INVESTIGATORS

PROCESS SERVERS

DOCUMENT RETRIEVERS

EXPERT WITNESSES

Find a Private Investigator

Find an Expert Witness

Find a Process Server

Case Law - save on Lexis / WestLaw.

Legal News - Legal Headlines

OPINIONS OF THE SUPREME COURT OF OHIO
The full texts of the opinions of the Supreme Court of
Ohio are being transmitted electronically beginning May 27,
1992, pursuant to a pilot project implemented by Chief Justice
Thomas J. Moyer.
Please call any errors to the attention of the Reporter's
Office of the Supreme Court of Ohio. Attention: Walter S.
Kobalka, Reporter, or Deborah J. Barrett, Administrative
Assistant. Tel.: (614) 466-4961; in Ohio 1-800-826-9010.
Your comments on this pilot project are also welcome.
NOTE: Corrections may be made by the Supreme Court to the
full texts of the opinions after they have been released
electronically to the public. The reader is therefore advised
to check the bound volumes of Ohio St.3d published by West
Publishing Company for the final versions of these opinions.
The advance sheets to Ohio St.3d will also contain the volume
and page numbers where the opinions will be found in the bound
volumes of the Ohio Official Reports.

SFA Folio Collections, Inc., Appellant and Cross-Appellee v.
Tracy, Tax Commr., Appellee and Cross-Appellant.
[Cite as SFA Folio Collections, Inc. v. Tracy (1995),
Ohio St.3d .]
Taxation -- Use tax -- Out-of-state direct mail retailer not
required to collect use tax, when "substantial nexus" with
Ohio exists, when -- R.C. 5741.01(H)(1) is constitutional.
(No. 94-431 -- Submitted May 9, 1995 -- Decided August 16,
1995.)
Appeal and Cross-Appeal from the Board of Tax Appeals, No.
91-K-295.
SFA Folio Collections, Inc. ("Folio"), appellant and
cross-appellee, a New York corporation, is a wholly owned
subsidiary of Saks & Company ("Saks"), also a New York
corporation. Folio sells clothes and accessories by direct
mail, including to customers in Ohio. It mails its catalogs to
its customers, and the customers place orders with Folio by
telephone, mail, or facsimile machine.
Customers pay for the merchandise by credit card,
including Saks's company credit card, or check. If payment is
by credit card, the credit card company guarantees payment. If
payment is by check, Folio sends the merchandise after the
check has cleared the bank. Consequently, Folio does not enter
Ohio to collect payment for the merchandise or on the
accounts. Once satisfied of payment, Folio ships the
merchandise to the customer via mail or common carrier. It has
no facility in Ohio to store or ship merchandise. Folio
directs dissatisfied customers to return merchandise to it in
New York. It does not accept returns in any other manner.
Saks also wholly owns another subsidiary, Saks Fifth
Avenue of Ohio, Inc. ("Saks-Ohio"). Saks-Ohio operates a Saks
Fifth Avenue store in Cincinnati, one in Cleveland, one in
Portland, Oregon, and an A/X: Armani Exchange in Columbus.
Saks-Ohio sells merchandise at retail and is a separate profit
center from Folio.
Nevertheless, Saks-Ohio receives, at Folio's direction,
copies of Folio's catalogs from Folio's printer. The
Cincinnati store manager claimed his store used these catalogs

in training its employees and for reference to learn what
merchandise Folio sold. According to the testimony, at the
Cincinnati store, Saks-Ohio left some catalogs on the counter
for free distribution to its customers. According to other
testimony, at the Cleveland store, customers asked Saks-Ohio
employees for the catalogs, which the store kept under the
counter or in its office.
If the store did not have the item a customer sought, the
store searched for the item in a locator service, which could
discover whether any Saks retail store in the nation carried
the item. The locator service did not search Folio's stock.
If it were unsuccessful in locating the item, the store might
then refer the customer to the Folio catalogue. Saks-Ohio did
not place orders with Folio for its customers, nor did it
assist its customers in doing so.
The Saks-Ohio stores, according to each store's policy,
accepted returns of merchandise that Folio had sold. Each
store charged the returned merchandise to its inventory and
attempted to sell the merchandise itself; it did not contact
Folio about the transaction. According to the testimony, such
returns were a minimal part of Saks-Ohio's returns.
The Tax Commissioner, appellee and cross-appellant,
assessed Folio use tax on its sales of merchandise to Ohio
residents during the first quarter of 1988. He did so because
Folio had not collected use tax on these sales. He ruled that,
under R.C. 5739.01(B)(3)(e), Folio is a member of an affiliated
group including Saks-Ohio and that Folio had substantial nexus
with Ohio. He further ruled that Saks-Ohio was an agent of
Folio, also, so he concluded, providing substantial nexus with
Ohio.
Folio appealed to the Board of Tax Appeals ("BTA"). The
BTA affirmed the commissioner's order. The BTA ruled that
Saks-Ohio was not an agent of Folio, but found that R.C.
5741.01(H)(1) created substantial nexus with Ohio, since Folio
was a member of an affiliated group including Saks-Ohio. The
BTA suggested that this statute was unconstitutional under the
Commerce Clause, but ruled that it had no power to invalidate
it.
The cause is now before this court upon an appeal and
cross-appeal as of right.

Jones, Day, Reavis & Pogue, Maryann B. Gall, Laura A.
Kulwick and Timothy B. Dyk, for appellant and cross-appellee.
Betty D. Montgomery, Attorney General, and Barton A.
Hubbard, Assistant Attorney General, for appellee and
cross-appellant.
Baker & Hostetler, Edward J. Bernert, Wayne C. Dabb, Jr.
and Christopher J. Swift; George S. Isaacson, Martin I.
Eisenstein and David W. Bertoni, pro hac vice, urging reversal
for amicus curiae, Direct Marketing Association.

Per Curiam. According to Clause 3, Section 8, Article I
of the United States Constitution, "[t]he Congress shall have
power *** to regulate commerce *** among the several States."
The United States Supreme Court has interpreted this clause to
prohibit certain state actions that interfere with or burden
interstate commerce. Quill Corp.v. North Dakota (1992), 504

U.S. 298, 112 S. Ct. 1904, 119 L.Ed. 2d 91. In Complete Auto
Transit, Inc. v. Brady (1977), 430 U.S. 274, 97 S.Ct. 1076, 51
L.Ed. 2d 326, the court set forth a four-part test to enforce
this dormant Commerce Clause provision. A state tax will
survive a Commerce Clause challenge if the "tax [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." 430 U.S. at 279, 97 S. Ct. at 1079, 51
L.Ed.2d at 331.
Folio argues that the taxed activity lacks substantial
nexus with Ohio because Folio has no physical presence in
Ohio. It maintains that R.C. 5741.01(H)(1) is unconstitutional
if it attributes to Folio the physical presence of a separate
corporation whose only connection with Folio is that the same
parent owns both. It also maintains that Folio and Saks-Ohio
are not an affiliated group under the statute.
The commissioner contends that Folio is part of an
integrated unitary retail merchandising business providing
sufficient nexus under the Commerce Clause for Ohio to require
Folio to collect the tax. He also maintains that Folio's
affiliation with Saks-Ohio, which accepts Folio's returns and
distributes Folio's catalogs, also provides substantial nexus.
Additionally, the Direct Marketing Association filed an
amicus brief in support of Folio. Direct Marketing urges that
reading R.C. 5741.01(H)(1) to mean that the out-of-state
business must maintain a place of business in Ohio allows the
statute to survive constitutional scrutiny.
In Quill Corp.v. North Dakota, supra, the Supreme Court
held that the Due Process Clause does not bar enforcement of
the state's use tax collection responsibilities on an
out-of-state direct mail retailer if the retailer has minimal
contacts with the state to satisfy due process notice
requirements. However, the court held that under the Commerce
Clause holding of Natl. Bellas Hess, Inc. v. Dept. of Revenue
of Illinois (1967), 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d
505, the retailer must have substantial nexus with the state
for this collection duty to be valid under the Commerce
Clause. According to the Quill court, 504 U.S. at 315, 112
S.Ct. at 1914, 119 L.Ed.2d at 108, Bellas Hess "*** created a
safe harbor for vendors 'whose only connection with customers
in the [taxing] state is by common carrier or the United States
mail.' Under Bellas Hess such vendors are free from
state-imposed duties to collect sales and use taxes." Thus,
the Quill court reinvigorated the Bellas Hess bright-line rule
in dormant Commerce Clause cases in holding that the retailer
must have a physical presence in the state before the state has
substantial nexus to require the retailer to collect the use
tax.
Applying Quill to this case, we note former R.C.
5741.17(A) required "[e]very seller of tangible personal
property or services who has nexus with this state [to]
register with the tax commissioner." R.C. 5741.04 obliges a
seller to collect use tax from consumers to whom it sells
tangible personal property or services. In former R.C.
5741.01(H)(1), the General Assembly defined "nexus with this
state" to mean:

"[T]hat the seller has sufficient contact with this state,
in accordance with the Constitution and laws of the United
States, to allow the state to require the seller to collect and
remit use tax on sales of tangible personal property or
services made to consumers in this state. Nexus with this
state exists when the seller does any of the following:
"(1) Maintains a place of business within this state,
whether operated by employees or agents of the seller, by a
member of an affiliated group, as described in division
(B)(3)(e) of section 5739.01 of the Revised Code, of which the
seller is a member, or by a franchisee using a trade name of
the seller[.]"
Former R.C. 5739.01(B)(3)(e) defined an "affiliated group"
as:
"[T]wo or more persons related in such a way that one
person owns or controls the business operation of another
member of the group. In the case of corporations, one
corporation owns or controls another if it owns more than fifty
per cent of the other corporation's common stock with voting
rights."
The BTA correctly concluded that Folio, itself, does not
have a physical presence in Ohio. The BTA found that Folio is
incorporated in New York, has no employees or agents in Ohio,
has no bank accounts in Ohio, and performs no credit
investigations or collections in Ohio. All advertising and
mail order catalogs and fliers originate outside Ohio. The BTA
concluded that the occasional return of Folio's merchandise to
Saks-Ohio's stores is common within the retail industry and
that Saks-Ohio accepted such merchandise to maintain its
customers' satisfaction, not to benefit Folio. However, we
disagree with the BTA that the affiliate language of R.C.
5741.01(H)(1) creates substantial nexus for Ohio to require
Folio to collect use tax on these catalog sales.
Quill Corp. requires physical presence in the taxing state for
that state to require the vendor to collect use tax. Folio,
however, has no physical presence in Ohio; moreover, the parent
and subsidiary corporations are separate and distinct legal
entities. Mut. Holding Co. v. Limbach (1994), 71 Ohio St.3d
59, 60, 641 N.E. 2d 1080, 1081. Thus, to impute nexus to Folio
because a sister corporation has a physical presence in Ohio
runs counter to federal constitutional law and Ohio corporation
law.
We read R.C. 5741.01(H)(1) to conform with the Commerce
Clause cases, as that statute mandates, and declare R.C.
5741.01(H)(1) constitutional, a presumed legislative
intention. R.C. 1.47(A); see, e.g., State v. Sinito (1975), 43
Ohio St.2d 98, 102, 72 O.O. 2d 54, 56-57, 330 N.E. 2d 896, 899;
J.C. Penney Co. v. Limbach (1986), 25 Ohio St. 3d 46, 25 OBR
71, 495 N.E. 2d 1. We agree with amicus, Direct Mailing, that
substantial nexus exists under R.C. 5741.01(H)(1) only if the
seller maintains a place of business within the state, or its
employee, agent, or an affiliate operates the business.
However, in this case, Folio does not maintain a place of
business in Ohio because Folio sells its merchandise by direct
mail without entering Ohio. Saks-Ohio, on the other hand,
sells merchandise in retail stores in Ohio, but does not sell
any merchandise for Folio. Thus, Folio's selling activity does

not have substantial nexus with Ohio because Folio does not
have a physical presence in Ohio and because Saks-Ohio, the
in-state affiliate, does not own or operate an in-state place
of business for Folio.
As to Saks-Ohio accepting Folio's returns and distributing
Folio's catalogs, these contacts might provide minimal
connection under due process standards. However, these
contacts do not create substantial nexus. Saks-Ohio accepted
Folio's returns according to its policy, not Folio's, and
charged the returns to its inventory; it did not charge Folio.
Moreover, the returns were a minimal part of the returns
Saks-Ohio received.
As for distributing the catalogs, Folio directed up to two
hundred copies per issue to be delivered to Saks-Ohio stores,
and these catalogs were assumed minimal to Folio's business.
We note that, in Quill Corp., 504 U.S. at 315, 112 S.Ct. at
1914, 18 L.Ed. 2d at 108, fn. 8, the Supreme Court concluded
that Quill's distribution of licensed software to some of its
North Dakota clients, with which the clients could order
merchandise, did not meet the substantial nexus requirement of
the Commerce Clause. The court agreed with Quill that a few
floppy diskettes to which Quill held title might constitute
minimal nexus under Natl. Geographic Soc. v. California Bd. of
Equalization (1977), 430 U.S. 551, 556, 97 S.Ct. 1386, 1390, 51
L. Ed.2d 631, 637, but that this transfer seemed a slender
thread on which to base substantial nexus. Id.
Moreover, we find no validity in the commissioner's
unitary-business-entity argument. We discussed this principle
in Am. Home Products Corp. v. Limbach (1990), 49 Ohio St.3d
158, 160, 551 N.E. 2d 201, 203-204:
"*** Under the Due Process Clause of the Fourteenth
Amendment, a state may tax such income if there is a nexus,
i.e., a minimal connection, and a rational relationship between
the income attributed to the state and the intra-state values
of the enterprise. Id. [Mobil Oil Corp. v. Commr. of Taxes of
Vermont (1980), 445 U.S. 425] at 436-437 [100 S.Ct. 1223, at
1231, 63 L. Ed.2d 510, at 520]. Sufficient nexus exists '***
if the corporation avails itself of the "substantial privilege
of carrying on a business" within the state ***.' Events that
generate income, and that occur outside the state, do not
necessarily break the nexus. Id. at 437 [100 S.Ct. at 1231, 63
L. Ed.2d at 520]. According to the court, the appellant, to
break nexus, must establish that the income was earned in the
course of activities unrelated to the state, a proof of a
discreet business enterprise. Id. at 439-440 [100 S.Ct. at
1232-1233, 63 L.Ed.2d at 522]. The court concluded its
analysis, at 441-442 [100 S.Ct. at 1233, 63 L.Ed.2d at
523-524], with this statement:
"'We do not mean to suggest that all dividend income
received by corporations operating in interstate commerce is
necessarily taxable in each State where that corporation does
business. Where the business activities of the dividend payor
have nothing to do with the activities of the recipient in the
taxing State, due process considerations might well preclude
apportionability, because there would be no underlying unitary
business.'"
The commissioner contends that this principle should apply

to Saks's businesses in Ohio. He claims that the thrust of
Saks's retail efforts creates a unitary business and this, in
turn, creates substantial nexus to require Folio to collect the
use tax. However, as Folio essentially notes in its reply
brief, this principle applies to due process and whether a
corporation physically present in the taxing state must pay tax
to such state on all of its business income, including income
earned in other states. In fact, in Allied-Signal, Inc. v.
Dir. of Taxation (1992), 504 U.S. 768, 778, 112 S. Ct. 2251,
2258, 119 L.Ed. 2d 533, 546, a case applying this
unitary-business-attribution theory, the Supreme Court
distinguished the type of nexus in the instant case from the
type of nexus in a unitary-business case:
"The constitutional question in a case such as Quill Corp.
is whether the State has the authority to tax the corporation
at all. Present inquiry, by contrast, focuses on the
guidelines necessary to circumscribe the reach of the State's
legitimate power to tax."
Accordingly, we reverse the BTA's decision because it is
unlawful.
Decision reversed.
Moyer, C.J., Wright, Resnick, Pfeifer and Cook, JJ.,
concur.
Douglas and F.E. Sweeney, JJ., dissent.