Does an out-of-state publisher have Utah sales tax nexus just because it owns a subsidiary that is already registered and collecting tax in Utah?

Plain-English summary

A publisher of books and periodicals, headquartered outside Utah with no Utah office, inventory, or other business location, sold its products two ways: wholesale, at arm's length, to independent distributors and to its own wholly-owned Subsidiary (treated identically to the independent distributors); and directly to Utah consumers by mail and phone, solicited exclusively through direct mail. The Subsidiary was separately registered and remitted Utah sales and use tax. The publisher planned to merge the Subsidiary into itself, which it acknowledged would create Utah nexus going forward (the Subsidiary's sales force would become the Company's employees) -- but it wanted a ruling that it had no nexus for the period before that merger, arguing the Subsidiary's Utah nexus shouldn't be attributed to it.

The Commission agreed with the taxpayer's position, but on a conditional, fact-dependent basis rather than a blanket rule:

• Direct-mail solicitation alone, standing on its own, didn't give the Company Utah nexus.
• Owning a subsidiary with its own Utah nexus doesn't automatically give the parent nexus too. It only would if the Commission found the parent sufficiently controls or dominates the subsidiary to justify piercing the corporate veil -- looking at factors like whether the two file unitary or separate corporate returns, and whether the parent's books and records show it setting the subsidiary's policies and procedures.
• On the facts presented -- arm's-length wholesale pricing, no employees/inventory/office in Utah, and no evidence of the parent dominating the subsidiary -- the Company had no Utah nexus before the merger.

The Commission also addressed the upcoming merger directly: under Utah Code Ann. § 59-12-112, if the Subsidiary had any unpaid Utah tax liability at the time of the merger, that liability transfers to the Company as the successor.

What this means for you

Multistate businesses with in-state subsidiaries

Owning a subsidiary that's registered and collecting tax in a state doesn't automatically create nexus for the parent. But keep your corporate formalities genuinely separate -- arm's-length pricing, separate books, and the subsidiary setting its own policies -- because control/domination evidence is exactly what would let the state attribute the subsidiary's nexus to you.

Companies planning a merger with an in-state subsidiary

If you're absorbing a subsidiary that already has nexus somewhere, budget for that subsidiary's pre-merger tax liabilities: Utah Code Ann. § 59-12-112 makes the successor responsible for them, separate from whatever nexus analysis applies to the pre-merger parent.

Accountants and tax professionals

This ruling predates the 2018 Wayfair decision and Utah's later economic-nexus statute (physical-presence law was still controlling in 1998). The corporate-veil/domination-and-control framework for parent-subsidiary nexus attribution may still be relevant today for physical-presence-style nexus questions, but confirm against current law before relying on the specific 1998 nexus conclusions here.

Common questions

Q: Does a parent company automatically have nexus wherever its subsidiary has nexus?
A: No, not automatically. The state would need evidence the parent sufficiently dominates or controls the subsidiary to justify treating them as one for nexus purposes.

Q: What factors show a parent "dominates or controls" a subsidiary for this purpose?
A: The ruling points to whether the companies file unitary or separate corporate returns, and whether the parent's books and records show it setting the subsidiary's policies and procedures.

Q: What happens to a subsidiary's unpaid tax when it merges into its parent?
A: Under Utah Code Ann. § 59-12-112, the successor (the surviving company after the merger) becomes responsible for the subsidiary's unpaid sales/use tax liability as of the merger date.

Q: Does this ruling apply to my company?
A: No. It binds the Commission only for the requesting company and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes and rules:

• § 59-12-112 (successor liability for a predecessor's unpaid sales/use tax)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/97-077.htm

Original ruling text

97-077

Response January 16, 1998

97-077

November
20,1997

Subject: Request for Ruling

Dear
Mr. Jones:

Our
client wishes to obtain a written response from the Department which concurs
with our option that it did not have nexus
with Utah and is not liable for sales and use tax on its sale of tangible
personal property to customers in the state. Our client will register
voluntarily with the department, collect and remit sales and use tax on all
future transactions which fall under

Utah
Sales and Use Tax laws and regulations.

Following
are the facts as they have been represented to COMPANY A by our client:

• The Company is a publisher of books,
  periodicals and other related materials. The company is

headquartered
outside of Utah and has no office, inventory or other business location in your
state.

*
Our client has not previously been contacted by Utah.

*
The Company distributes the majority of its products through independent
distributors and a wholly owned subsidiary.
All sales to the distributors and Subsidiary are made for resale. The
transaction with the Subsidiary are treated at arm's length and it receives the
exact same terms as the independent distributors.

*
The Subsidiary is registered and remits sales and use tax in all relevant
jurisdictions, including Utah in which it does business, or maintains
documentation on exempt sales. To the best of the Company's Knowledge, the
independent distributors also collect and remit sales and use tax as required
by law.

*
The Company also sells books, periodicals 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 company.
Solicitation of these orders is made exclusively by

direct
mail.

*
The Company is planning to merge the Subsidiary into the Company. The Company
will

then
conduct the Subsidiary's business activities. This merger will create nexus as
the sales

force
of the Subsidiary will now be employees of the Company. Therefore, the Company 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 Company has not previously collected sales and use tax in your state
because it did

not
have substantial nexus as required under U.S. Supreme Court rulings to date.

The
issue raised by our client is whether a state may attempt to attribute nexus to
the Company by virtue of Subsidiary's activities. The Company and Subsidiary
are legally separate entities. The sales, at wholesale, of books and related
materials to the Subsidiary have always been conducted at arm's length. The
pricing structure between the Company and the Subsidiary has been developed
using the same arm's length transaction standard that exists between the
Company and independent distributors.

Further,
the Subsidiary's employees are not authorized to, nor do they in fact, solicit sales
on behalf of the Company, or engage in any other activities on behalf of the
Company. Based on these facts, we are of the opinion that the Subsidiary's
activities could not have been attributed to the Company for purposes of
requiring the Company to register and collect tax on its direct mail sales.

Given
the aforementioned, our client is requesting a written opinion from the
Department

concurring
in our analysis. As mentioned previously, the Company will register, collect
and

remit
tax as soon as it commences its new activities.

The
facts, as represented to the State, are the understanding of the facts as
represented to COMPANY A by our client. Such facts remain the representation of
our client, and have been offered as such to the department.

Should
you have any questions or require additional information, please contact NAME
at XXXXX or NAME at XXXXX.

Very
truly yours,

NAME

January
16, 1998

NAME

ADDRESS

CITY
STATE ZIP

Advisory
Opinion - Nexus attributable to parent corporation

Dear
NAME,

We have received your letter of
November 20, 1997, which concerns whether the Company described has had
sufficient nexus in the past to warrant collection of Utah�s sales and use
taxes.

The facts presented are as follows. The Company does not remit sales and use tax in Utah, but owns a
Subsidiary that does. The Company�s
only contact with Utah is its direct-mail sales. The Subsidiary receives the same treatment from the Company as
does the Company�s independent distributors.

No facts are supplied that would
attribute nexus to the Company because of its direct-mail sales. Nor would the
Subsidiary�s nexus with Utah necessarily result in nexus for the Company. Where there is evidence that a parent
corporation sufficiently controls or dominates a subsidiary, the corporate veil
may be pierced and the parent corporation also considered to have nexus. Among the factors that would determine
whether the parent corporation does control the subsidiary would be whether or
not the companies file unitary or separate corporate returns and whether the
companies� books and records indicate that the parent corporation sets policies
and procedures for the subsidiary. No
evidence of such domination is presented in your letter. Assuming that the Company does not
sufficiently dominate or control the Subsidiary, the Company would not have
nexus with Utah prior to the merger.

The merger itself deserves
additional comment. Should the
Subsidiary have tax liability at the
time of the merger, Section 59-12-112 of the Utah Code Ann. places
responsibility for those taxes on the successor.

Please let us know if you have any
other questions.

For
the Commission,

Joe
B. Pacheco,

Commissioner

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