Important Tax Cases: Scripto v. Carson and the Agency Theory of Nexus

August 26, 2005

Long before the Supreme Court decided that retailers had to have physical presence in a state before it could be required to collect sales or use tax, the Supreme Court ruled that it didn’t take much to establish physical presence. In Scripto v. Carson, decided thirty years before Quill v. North Dakota, the Supreme Court had to decide whether a Georgia retailer with no offices in Florida could nonetheless be required to collect use tax on sales made in Florida. The Supreme Court ruled that the Commerce Clause nor the Due Process clause stood in the way of such a requirement, meaning that retailers could be physically present in a state through those acting on their behalf (i.e. their agents).

Scripto, a maker of writing utensils, used 10 wholesalers (or brokers) to solicit sales from within Florida. These brokers were not full-time employees of Scripto, but were independent contractors paid on a commission basis. The state of Florida tried to assess Scripto for uncollected use tax on sales made by the brokers in Florida. Scripto, naturally, challenged the assessment, arguing that it had no plants, employees, or offices in Florida, and thus insufficient nexus with Florida to obligate it to collect use tax on Florida sales. Scripto lost at the trial and appellate level in Florida state court.

The U.S. Supreme Court agreed with the rulings of the Florida courts. Justice Clark, writing for the Court, held that the difference between regular employees and independent contractors was “without constitutional significance.” If the Court permitted such distinctions, Justice Clark argued, it would be opening the states up to a flood of tax avoidance techniques. Rather, he wrote, “…[t]he only incidence of this sales transaction that is nonlocal is the acceptance of the order.” The functional reality was that Scripto had a very real (and regular) presence in Florida that required the collection of Florida use tax on its sales.

The Scripto case is important because it revealed that the Supreme Court, in tax cases under the Due Process and Commerce Clause, will care more about function rather than form. In other words, the activities conducted on Scripto’s behalf by the brokers were more important to the Court than the fact that the brokers were not technically employees of Scripto. This ruling continues to impact retailers today, with the California Court of Appeals recently relying partially on Scripto to rule that Borders Online could be forced to collect California use tax because its sister organization, Borders Books and Music, performed certain functions on its behalf. Understanding Scripto is crucial to understanding the agency theory of nexus.


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