In re Appeal of Intercard, Inc., 83,802.

• Court: United States State Supreme Court of Kansas
• Citation: 270 Kan. 346,14 P.3d 1111
• Docket Number: No. 83,802.,83,802.
• Parties: IN THE MATTER OF THE APPEAL OF INTERCARD, INC. FROM AN ORDER OF THE DIVISION OF TAXATION ON ASSESSMENT OF COMPENSATING USE TAX.
• Decision Date: 08 December 2000

270 Kan. 346
14 P.3d 1111

IN THE MATTER OF THE APPEAL OF INTERCARD, INC. FROM AN ORDER OF THE DIVISION OF TAXATION ON ASSESSMENT OF COMPENSATING USE TAX

No. 83,802.

Supreme Court of Kansas.

Opinion filed December 8, 2000.

Richard L. Cram, of the Kansas Department of Revenue, argued the cause and was on the briefs for appellant Kansas Department of Revenue.

Mark A. Burghart, of Alderson, Alderson, Weiler, Conklin, Burghart & Crow, L.L.C., of Topeka, argued the cause and was on the briefs for appellee.

270 Kan. 347

David Clauser, of the Kansas Department of Revenue, and Paull Mines, Sheldon H. Laskin, and H. Beau Baez III, of Washington, D.C., appeared on the amicus curiae brief for Multistate Tax Commission

S. Lucky Defries, of Coffman, Defries & Nothern, of Topeka, and Stephen P. B. Kranz, Diann L. Smith, William D. Peltz, Bobby L. Burgner, and J. Hugh McKinnon, of Washington, D.C., appeared on the amicus curiae brief for Committee on State Taxation.

S. Lucky Defries, of Coffman, Defries & Nothern, of Topeka, and Peter J. Brann, and George S. Isaacson, of Brann & Isaacson, LLP, of Lewiston, Maine, appeared on the amicus curiae brief for Direct Marketing Association, Inc.

The opinion of the court was delivered by

LOCKETT, J.:

This is an appeal from a notice of assessment of compensating use tax issued against Intercard, Inc. (Intercard). The Kansas Department of Revenue (KDR) determined that Intercard had a substantial nexus to Kansas for the collection and remittance requirements of the Kansas Compensating Tax Act, K.S.A. 79-3701 et seq. Intercard appealed KDR's determination. The Kansas Secretary of Revenue upheld the assessment. Intercard appealed to the Board of Tax Appeals (BOTA). BOTA found that Intercard did not have a substantial nexus with the state of Kansas as required by the Commerce Clause of the United States Constitution and reversed the Secretary's determination. In addition, BOTA found that because KDR's assessment of compensating use tax was based on activity which did not establish a substantial nexus with the state, the Due Process Clause was violated as well. KDR appealed to this court claiming (1) Intercard's contacts in the state of Kansas were a substantial nexus for imposing the Kansas Compensating Tax Act; and (2) reasonable grounds for abating the penalties imposed by KDR do not exist.

In an appeal from an administrative agency decision, a party is limited to the issues it raises at the administrative hearing. Kim v. Kansas Dept. of Revenue, 22 Kan. App.2d 319, 321, 916 P.2d 47, rev. denied 260 Kan. 994 (1996). See In re Appeal of City of Lenexa, 232 Kan. 568, 587, 657 P.2d 47 (1983). Both parties agree and we find that BOTA's finding as to the Due Process Clause was gratuitous and will not be considered by an appellate court because neither party had argued or briefed the issue.

270 Kan. 348

The parties stipulated that Intercard is a corporation with its headquarters, offices, and manufacturing facility located in Missouri. Kinko's Copies (Kinko's) is Intercard's largest customer and uses Intercard's card reading system exclusively. The national headquarters of Kinko's is located in Ventura, California. The master contract between Kinko's and Intercard was negotiated by company officials in Ventura, California, and St. Louis, Missouri. Intercard has never registered with the Kansas Secretary of State as a foreign corporation doing business in the state of Kansas

Intercard is in the business of manufacturing and selling electronic data cards and card readers. The system allows a customer to use a card to purchase photocopies. The electronic data cards are of two types, copy cards and store cards. Copy cards are either given or sold to the purchaser's customers for payment of photocopies. The purchaser has discretion to give the copy cards to its customers or to sell them. Store cards are for in-store use only. Intercard sells its products to over 400 Kinko's stores nationwide. No other states subject Intercard to the collection and remittance requirements of its compensating use tax provisions.

Intercard's products are delivered to its customers by United Parcel Service. At times, a Kinko's store that has purchased an Intercard card reader requests that Intercard send a technician to its store to perform the electronic wiring needed to install the card reader, which takes approximately 4 hours. The labor charges for this work are listed separately on the invoice to the customer.

From April 1, 1992, to March 31, 1996, inclusively (audit period), Intercard technicians made 11 visits to Kinko's stores in Kansas to install card readers purchased from Intercard. The 11 contacts Intercard had with Kinko's stores in Kansas occurred during 3 months of the 48-month audit period. The contacts totaled 44 hours. Intercard has not sent technicians into Kansas since the installation of the 11 card readers was completed.

No solicitation took place in Kansas during the audit period regarding the products sold by Intercard. The sale of card readers to Kinko's stores in Kansas resulted from a master contract negotiated between Kinko's and Intercard outside Kansas. Intercard did not

270 Kan. 349

send employees, agents, or sales representatives into Kansas to solicit sales

On May 21, 1996, KDR conducted a field audit of Intercard's books. KDR determined that Intercard's installation of the card readers was a substantial nexus sufficient to support the imposition of the collection and remittance requirements of the Kansas Compensating Tax Act. As a result of the audit, KDR sent Intercard notices of assessment of Kansas retailers' sales tax of $399, including penalties and interest, and retailers' compensating use tax of $13,297, including penalties and interest. The additional Kansas retailers' sales tax assessment was based on amounts invoiced by Intercard for work its technicians performed in Kansas to install 11 card readers. The additional Kansas retailers' compensating use tax assessment was based on Intercard's sales of tangible personal property to customers located in Kansas during the audit period. Intercard neither billed nor collected retailers' sales or compensating use tax from customers in connection with any of the transactions noted in the audit report.

Intercard appealed KDR's determination to the Kansas Secretary of Revenue. The Secretary upheld the assessment. Intercard appealed to the BOTA. BOTA found that Intercard did not have substantial nexus with the state of Kansas and reversed the Secretary's determination. KDR appealed to this court. Direct Marketing Association, Inc., and the Committee on State Taxation submitted amicus curiae briefs in support of Intercard, and the Multistate Tax Commission (MTC) submitted an amicus curiae brief in support of KDR's position.

BOTA is a specialized agency that exists to decide taxation issues, and its decisions are given great weight and deference when it is acting in its area of expertise. However, if BOTA's interpretation is erroneous as a matter of law, appellate courts will take corrective steps. In re Tax Appeal of Univ. of Kan. School of Medicine, 266 Kan. 737, 749, 973 P.2d 176 (1999) (citing In re Tax Appeal of Boeing Co., 261 Kan. 508, 515, 930 P.2d 1366 [1997]).

BOTA's order abating the sales and compensating use taxes assessed by KDR found:

270 Kan. 350

"[P]ursuant to the first prong of Complete Auto [Transit, Inc. v. Brady], 430 U.S. [274,] 280, [51 L. Ed.2d 326, 97 S. Ct. 1076, reh. denied 430 U.S. 976 (1977)], the Taxpayer's activities in Kansas must establish a substantial nexus with the state in order for the assessment levied pursuant to K.S.A. 79-3701 et seq. to be constitutional as applied to the Taxpayer. The Board finds in this case, that the Taxpayer's activities in Kansas do not constitute a substantial nexus with Kansas. The Taxpayer's eleven visits to Kansas during the four-year audit period do not transcend the slightest physical presence test of Quill [Corp. v. North Dakota, 504 U.S. 298, 315 n. 8, 119 L. Ed.2d 91, 112 S. Ct. 1904 (1992)] and National Geographic [v. Cal. Equalization Bd., 430 U.S. 551, 556, 51 L. Ed.2d 631, 97 S. Ct. 1386 (1977)]. These visits were very minor activities in the Taxpayer's business, both in time spent and in revenue generated. They were in response to customer requests; had there been no requests, the Taxpayer would have had no physical contacts with the state. The Taxpayer initiated none of the contacts and did not use the contacts to promote the sales of its products. The Board finds no evidence that the installation activities in Kansas created a market for the card readers that were sold previous to each installation. Furthermore, the Taxpayer's undisputed testimony is that its physical contact with Kansas ended in March of 1994, roughly halfway through the audit period. The Board finds that the Taxpayer's contacts with Kansas were isolated and sporadic and did not establish a substantial nexus. The Board finds because the Department's assessment of compensating use tax is based on activity which does not establish a substantial nexus with the state, the Due Process Clause has been violated as well. The Department's assessment is invalid pursuant to the rule set out in Quill, because the Taxpayer's `connections with the State are not substantial enough to legitimate the State's exercise of power over him.' 504 U.S. at 312."

APPLICABLE KANSAS TAX STATUTES

K.S.A. 79-3702(h) defines a "retailer doing business" in Kansas as

"[a]ny retailer: (1) [h]aving or maintaining within this state, directly or by a subsidiary, an office, distribution house, sales house, warehouse or other place of business, or any agent or other representative operating within this state under the authority of the retailer or its subsidiary, irrespective of whether such place of business or agent is located here permanently or temporarily, or whether such retailer or subsidiary

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