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Connecticut officials have come up short in their six-year-long bid to create a major new revenue stream by requiring Dell Computers’ catalog sales unit to start collecting sales tax on computers purchased by state residents. The theory that Dell’s in-state warranty repair technicians created sufficient “nexus” to Connecticut to force Dell to collect and pay Connecticut sales tax could have had groundbreaking impact — for state tax collectors here and across the country. But ruling last month in Dell Catalog Sales v. Dept. of Revenue Services, Judge Trial Referee Arnold W. Aronson stumbled over a small but vital factual flaw: Connecticut simply failed to prove, in the record, that Dell had any technicians physically operating in the state. “This is a big loss for Connecticut, there is no question about it,” University of Connecticut School of Law tax professor Richard D. Pomp maintained. Taxes on Dell’s in-state catalog sales alone could have generated $1 million or more a year in new revenue for the state, and recovered over $6 million already lost. In 1996, when the Connecticut Department of Revenue asked Dell Catalog Sales to start collecting sales tax on computers sold to state residents, the computer giant flatly refused. It contended that, since all its sales were conducted through the U.S. mail and by common carrier, two landmark U.S. Supreme Court interpretations of the Commerce Clause gave it a safe harbor. Connecticut challenged that theory. Despite Dell’s protests, DRS officials imposed an involuntary registration, assigning Dell Catalog a taxpayer number. Then it assessed $6.4 million in taxes for five years of in-state computer sales against the nation’s leading direct-to-consumer seller of computers, a subsidiary of Round Rock, Texas-based Dell. In doing so, DRS hoped to make a landmark case of its own — one that could potentially change the power balance between state taxing authorities and major “virtual” stores like Dell Catalog. It sought to prove that in-state technicians for Dell service vendor BancTec made enough repairs in Connecticut to create a physical presence here — a nexus that would legally justify forcing Dell Catalog to assume the role of tax collector for Connecticut. One critical lack of proof derailed the case before Aronson, who sits on the New Britain Judicial District’s tax session. On the path to judicial review, that much-debated legal theory gained significant steam, picking up the endorsement of tax law scholars, as well as a national association of state tax officials. “The missing ingredient in determining whether BancTec’s on-site service established nexus in Connecticut as a representative of Dell would be the frequency, if any, of the number of on-site service calls,” Aronson wrote in his July 10 decision. Dell and the DRS had supplied much of the key facts in the record by stipulation. “The stipulation of facts contains no information regarding the extent of BancTec’s activities in Connecticut,” Aronson continued. “However, we may infer that since Dell earned 90 percent of the price of the service contract and BancTec earned 10 percent in Connecticut, the number of on-site calls must have been minimal,” the judge reasoned. ‘ROADMAP FOR FUTURE CASES’ Aronson based his guesstimate on the 2000 Kansas case of Appeal of Intercard, in which 11 visits by technicians to install electronic card readers at Kansas Kinko’s stores was not deemed enough of a presence to trigger tax collection duties. Reached last week, DRS General Counsel John Dunham said the state will not appeal the loss, describing Aronson’s decision as “a roadmap for future cases.” State officials could open a new case based on different tax years. Dunham said the state would dig into the facts about the technicians’ actual presence in Connecticut. “If we revisit this issue, we’re going to find that evidence out,” said Dunham, noting the case “would be a landmark if we were to prevail.” The DRS, with the aid of Assistant Attorney General Paul M. Scimonelli, had intended to prove the controversial and intriguing theory. It was the subject of “Nexus Program Bulletin 95-1″ of the Multistate Tax Commission, a Washington, D.C., association of state tax officials. It was also advanced in a 1996 article in State Tax Notes, entitled “State Taxation of Mail-Order Sales of Computers after Quill: An evaluation of MTC Bulletin 95-1,” written by UConn’s Pomp along with Michael J. McIntyre, a Michigan law professor. This is Connecticut’s second attempt to chip away at the landmark 1967 U.S. Supreme Court ruling in National Bellas Hess v. Illinois, as well as another in 1992′s Quill v. North Dakota. In 1991, Connecticut attempted to hold a Saks Fifth Avenue’s catalog company taxable, in the state Supreme Court case of SFA Folio v. Bannon. The catalog company was held exempt from taxing duties since it was a separate corporation from the bricks-and-mortar stores, which unquestionably have a physical presence in the state. The lawyer who won the Saks Fifth Avenue case, Mary Ann Gall of Jones Day in Columbus, Ohio, headed Dell’s team in the current case. Pomp described Gall as a formidable litigator, who has repeatedly won cases nationally that limit corporations’ duties to collect taxes for states. Gall declined comment for this article. Joining her on Dell’s legal team were William H. Narwold and Charles D. Ray, of Cummings & Lockwood. State revenue departments like to have out-of-state companies collect use taxes, because they do it effectively. But the companies resist it. Besides imposing extra bookkeeping duties on them, the tax creates an additional disincentive to purchasers, on top of mail order’s other detriments — shipping, handling and delayed gratification. In theory, catalog customers must pay a use tax on mail order purchases equal to the sales tax. But in practice, consumers’ voluntary compliance is poor.

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