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SFA Folio Collections, Inc. v. Tracy, 73 Ohio St.3d 119, 652 N.E.2d 693, 1995 -Ohio- 130

Facts

SFA Folio Collections, Inc. is a New York corporation that sells clothes and accessories by direct mail, including to customers in Ohio. It does not have any physical presence in Ohio, such as employees or facilities, and all transactions are conducted remotely. Folio's sister corporation, Saks Fifth Avenue of Ohio, operates retail stores in Ohio and accepts returns of Folio's merchandise, but does not sell Folio's products directly. The Tax Commissioner assessed Folio for use tax on its sales to Ohio residents, claiming that Folio had substantial nexus with Ohio due to its affiliation with Saks–Ohio.

694 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.

Issue

Does SFA Folio Collections, Inc. have a substantial nexus with Ohio that requires it to collect use tax on sales made to Ohio residents?

Does SFA Folio Collections, Inc. have a substantial nexus with Ohio that requires it to collect use tax on sales made to Ohio residents?

Rule

A state tax will survive a Commerce Clause challenge if the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.

A state tax will survive a Commerce Clause challenge if the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.

Analysis

The court applied the rule from Quill Corp. v. North Dakota, which requires a physical presence in the state for a vendor to be obligated to collect use tax. The court found that Folio did not have a physical presence in Ohio and that the activities of its sister corporation, Saks–Ohio, did not create the necessary nexus. The court emphasized that the mere distribution of catalogs and acceptance of returns by Saks–Ohio did not constitute sufficient contact to impose tax obligations on Folio.

The court applied the rule from Quill Corp. v. North Dakota, which requires a physical presence in the state for a vendor to be obligated to collect use tax. The court found that Folio did not have a physical presence in Ohio and that the activities of its sister corporation, Saks–Ohio, did not create the necessary nexus. The court emphasized that the mere distribution of catalogs and acceptance of returns by Saks–Ohio did not constitute sufficient contact to impose tax obligations on Folio.

Conclusion

The Supreme Court reversed the decision of the Board of Tax Appeals, concluding that Folio did not have the required substantial nexus with Ohio to be compelled to collect use tax.

The Supreme Court reversed the decision of the Board of Tax Appeals, concluding that Folio did not have the required substantial nexus with Ohio to be compelled to collect use tax.

Who won?

SFA Folio Collections, Inc. prevailed because the court found that it lacked the physical presence in Ohio necessary to establish a substantial nexus for tax collection purposes.

SFA Folio Collections, Inc. prevailed because the court found that it lacked the physical presence in Ohio necessary to establish a substantial nexus for tax collection purposes.

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