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A Canadian oil and gas importer whose only connection to New York is a pipeline is not carrying on its business in the state, and even if it were, imposition of a franchise tax would be barred by the Commerce Clause of the U.S. Constitution, an administrative law judge has determined in a potentially pivotal decision. The determination by Administrative Law Judge Jean Corigliano in Matter of Wascana Energy Marketing (U.S.) Inc., 817866, apparently marks the first New York case addressing the question of whether the presence of a product establishes taxable nexus. Corigliano said the mere fact that Wascana Energy had customers in New York state and exploited the New York market did not mean the company was doing business in the state. The company reported $41.2 million in revenues from sales of natural gas to New York buyers between 1994 and 1997. Peter L. Faber of McDermott, Will & Emery in Manhattan, local counsel for Wascana, said the determination is a rare instance where an administrative law judge, who lacks power to declare a statute unconstitutional, invokes her discretion to declare unconstitutional the application of the statute to a particular taxpayer. The determination relied heavily on the U.S Supreme Court’s 1992 holding in Quill v. North Dakota, 504 U.S. 298, in which McDermott, Will & Emery also represented the taxpayer. The dispute involves a company in Saskatchewan, Canada, that sells natural gas to utilities and other wholesalers, but not to end users. Its products enter New York at various interconnect points along the Canadian border. The Division of Taxation argued that Wascana was subject to the corporation tax imposed under Article 9 of the tax law because it carried on its business activities within New York state. But the administrative law judge flatly rejected that argument, and also rebuffed the Division’s post-hearing attempt to introduce what it termed “public documents” purporting to show that title to the product passed at metering stations in New York. The U.S. Supreme Court’s decision in Quill made clear that goods sold in a particular state by an out-of-state seller belong to the seller until they are actually received by the buyer. Consequently, while in transit, ownership of the item remains with the out-of-state seller. The U.S. Supreme Court observed that a state may have authority under the Due Process Clause to levy a tax, but that the authority to do so could evaporate under the Commerce Clause. PHYSICAL PRESENCE Shortly after Quill was decided, the New York Court of Appeals in Orvis Co. v. Tax Appeals Tribunal, 86 NY2d 176 (1995), was asked to apply the federal decision to the state’s tax jurisdiction over two interstate venders. In Orvis, the Albany judges said a state can impose an obligation to collect use taxes if it can show that the vendor had more than a trivial presence in the state. In the Wascana Energy matter, the petitioner had no office, no employees and no agents in New York. The only property it owned in New York was the natural gas, which it sold at virtually the moment the product crossed the border. The Division contended that Wascana exposed itself to New York’s taxing authority by regularly and systematically exploiting the New York market. Wascana agreed that it had no remedy under the Due Process Clause. However, it claimed that Quill required physical presence to overcome the Commerce Clause hurdle, and that element was lacking in this matter. Corigliano concurred. “I cannot agree with the Division that the reach of Tax Law � 186 extends to every utility business which systematically and continuously exploits the New York marketplace,” Corigliano wrote. “The Division argues that the term ‘doing business’ is broadly defined in the regulations and encompasses petitioner’s activities. I agree. But the issue is not whether the petitioner was carrying on a business, but whether that business was carried on in New York.” Further, Corigliano said that even if Wascana was carrying on its business in New York, imposition of the franchise tax would still be precluded under the Commerce Clause. “Something more than ownership of tangible property while it is in the custody of a common carrier is required to make a finding of physical presence,” Corigliano wrote. She rejected the Division’s claim that transfer of title within New York created substantial nexus. Faber said the decision is not precedent, but would become so if the Division were to appeal to the Tax Appeals Tribunal and lose. Unlike the taxpayer, the Division cannot appeal a determination of the Tribunal. R. David Wheat of Thompson & Knight in Dallas was counsel of record for the petitioner. Kathleen D. O’Connell appeared for the Division of Taxation. Marc Carey, spokesman for the Tax Division, said officials are reviewing the determination and considering their options. “Obviously, the case revolves around some very interesting nexus issues,” Carey said. “We are reviewing the decision to see how we would next proceed.”

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