NO. 07-09-00250-CV
IN THE COURT OF APPEALS
FOR THE SEVENTH DISTRICT OF TEXAS
AT AMARILLO
PANEL B
JULY 14, 2010
GALLAND HENNING NOPAK, INC., APPELLANT
v.
SUSAN COMBS, SUCCESSOR TO CAROLE KEETON
STRAYHORN, COMPTROLLER OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS; AND GREG ABBOTT,
ATTORNEY GENERAL OF THE STATE OF TEXAS,
APPELLEES
FROM THE 345TH DISTRICT COURT OF TRAVIS COUNTY;
NO. D-1-GN-06-001409; HONORABLE C. W. DUNCAN, JR., JUDGE
Before QUINN, C.J., and CAMPBELL and HANCOCK, JJ.
OPINION
Appellant, Galland Henning Nopak, Inc. (Nopak), appeals an order of the trial
court granting defendants’, Carole Keeton Strayhorn, Comptroller of Public Accounts of
the State of Texas,1 and Greg Abbott, Texas Attorney General (collectively, “the State”),
1
Susan Combs is the current Texas Comptroller of Public Accounts and, as a
successor in interest, is a party to this appeal in her official capacity.
motion for summary judgment and denying Nopak’s motion for summary judgment. We
affirm.
Background
The Texas Comptroller of Public Accounts discovered that Nopak, a Wisconsin
corporation that manufactures and sells pneumatic and hydraulic cylinders and valves,
had been filing employee wages for its Texas-based employee, David Sebbas. Due to
this discovery, the Comptroller established a franchise tax account and gave Nopak
thirty days to file its franchise tax reports. After Nopak failed to respond to the
Comptroller’s notice, the Comptroller estimated Nopak’s franchise tax liability for the
years of 1995 through 2004. Nopak subsequently requested a redetermination of the
assessment resulting in the Comptroller issuing a decision finding that there was a
sufficient nexus between Nopak’s business and Texas to justify the imposition of the
franchise tax assessed. Nopak then filed the instant lawsuit claiming that Nopak’s
business had insufficient nexus with Texas to allow the assessment of franchise taxes.
As a result of Nopak’s lawsuit, a hearing was held before the Administrative Law
Judge of the Comptroller’s Office. During this hearing, Nopak called Sebbas and
Joseph Dechant, general sales manager for Nopak, to testify. Sebbas and Dechant
testified that Sebbas was employed by Nopak as a regional manager, servicing the
needs of distributors in seven and a half states, including Texas. Dechant and Sebbas
then testified regarding the responsibilities of a regional sales manager.2 After
2
The testimony regarding the responsibilities of Nopak’s regional sales
managers will be addressed in the analysis below.
2
requesting some briefing from the parties, the Administrative Law Judge of the
Comptroller’s Office found that Nopak had a substantial nexus with Texas and was,
therefore, subject to the franchise tax assessment. Nopak appealed this decision to the
district court. Both parties filed motions for summary judgment based on the evidence
that had been admitted at the administrative law hearing.3 The district court granted the
State’s traditional summary judgment motion and denied Nopak’s summary judgment
motion. Nopak timely appealed.
By one issue, Nopak appeals the district court’s grant of summary judgment in
favor of the State and denial of Nopak’s motion for summary judgment. Nopak
contends that the imposition of the Texas franchise tax against Nopak constitutes a
violation of the United States Constitution because Nopak does not have a substantial
nexus with the State of Texas.
Standard of Review
We review a trial court's decision to grant or to deny a motion for summary
judgment de novo. See Tex. Mun. Power Agency v. Pub. Util. Comm'n of Tex., 253
S.W.3d 184, 192 (Tex. 2007). Although the denial of summary judgment is ordinarily
not appealable, we may review such a denial when both parties moved for summary
judgment and the trial court granted one and denied the other. Id. When reviewing
competing motions for summary judgment, we review the summary judgment evidence
presented by each party, determine all questions presented, and render the judgment
3
Both Dechant and Sebbas were deceased by the time that the district court
considered the competing motions for summary judgment.
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that the trial court should have rendered. Id.; FWT, Inc. v. Haskin Wallace Mason Prop.
Mgmt., L.L.P., 301 S.W.3d 787, 792 (Tex.App.--Fort Worth 2009, pet. denied). When
the trial court does not specify the basis on which it granted summary judgment, the
judgment will be affirmed on any meritorious ground expressly presented in the motion.
State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 380 (Tex. 1993).
Law and Analysis
Nopak contends that it is entitled to summary judgment because it established,
as a matter of law, that it lacks a substantial nexus with the state and, therefore, the
imposition of the Texas franchise tax would be an unconstitutional abridgement of
interstate commerce. The State responds that the evidence established, as a matter of
law, that the activities of Nopak created a substantial nexus between the company and
Texas and, therefore, the assessment of the Texas franchise tax against Nopak was
constitutional and authorized by the laws of Texas.
The United States Constitution specifically grants Congress the power to regulate
commerce among the several states, which implicitly prohibits the states from actions
that interfere with interstate commerce, such as taxation. See U.S. CONST. art. I, § 8;
Rylander v. Bandag Licensing Corp., 18 S.W.3d 296, 298-99 (Tex.App.—Austin 2000,
pet. denied). However, the Commerce Clause does not prohibit all direct state taxation
of interstate commerce. Rylander, 18 S.W.3d at 299. A state tax on a foreign
corporation will be sustained if the “tax is applied to an activity with a substantial nexus
with the taxing State, is fairly apportioned, does not discriminate against interstate
commerce, and is fairly related to the services provided by the State.” Complete Auto
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Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977).
Nopak’s challenge to the assessment of the Texas franchise tax is limited to whether a
substantial nexus exists between Nopak and Texas.
Texas imposes a franchise tax on each corporation that does business in the
state. TEX. TAX CODE ANN. § 171.001(a) (Vernon 2008); INOVA Diagnostics, Inc. v.
Strayhorn, 166 S.W.3d 394, 396 (Tex.App.—Austin 2005, pet. denied). A foreign
corporation has a substantial nexus with Texas if the corporation can be taxed without
violating the United States Constitution. 34 TEX. ADMIN. CODE §§ 3.546(b) (2010)
(Comptroller of Pub. Accounts, Taxable Capital; Nexus), 3.554(a) (2010) (Comptroller of
Pub. Accounts, Earned Surplus: Nexus). The Supreme Court has established a bright-
line rule to determine whether a taxing state has a sufficient nexus with the taxpayer to
allow taxation: does the taxpayer have a “physical presence in [the] state.” INOVA
Diagnostics, Inc., 166 S.W.3d at 402 (citing Quill Corp. v. North Dakota, 504 U.S. 298,
314, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992)). This bright-line test distinguishes
companies whose only connection to the taxing state is by common carrier or the United
States mail from those that have a physical presence in the taxing state, such as a
small sales force, plant, or office.4 See Quill Corp., 504 U.S. at 315. Thus, the
constitutionality of the imposition of the Texas franchise tax on Nopak depends on the
determination of whether Nopak had a physical presence in Texas. As a guide to this
determination, the Comptroller has indicated that a representative of a foreign
corporation in the state “to promote or induce sales of the foreign corporation’s goods or
4
We fully agree with Nopak’s contention that the physical presence required in
Quill Corp. is not satisfied simply by Sebbas having chosen to live in Texas.
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services . . .” is indicative of a physical presence in the state. 34 TEX. ADMIN. CODE §
3.546(c)(4).
The facts in this case are not in dispute. The dispute revolves around whether
the activities of Sebbas were sufficient to create a substantial nexus between Nopak
and Texas. The evidence establishes that Nopak is a foreign corporation that sells
products in Texas; Sebbas was a regional manager for Nopak during the relevant time
period and Texas was included in his region; and, other than the activities of Sebbas,
Nopak’s only connection to the state was by common carrier and the United States mail.
It is the job of Nopak’s regional managers “to support the sales efforts of our distribution
. . . companies with whom we have agreements.” The regional managers are “more or
less our liaison” with the distributors of Nopak’s products. Sebbas described his job as
“mak[ing] sure that Nopak . . . is taking care of . . . the distributor, period, and that they
are satisfied with their services.”
Being mindful that a corporation has a physical presence with the state if, inter
alia, it has a sales force in the state, see Quill Corp., 504 U.S. at 315, we will look to the
types of activities that Sebbas performed in the state to determine whether they were
sufficient to establish that Nopak had a substantial nexus with the state. Dechant
testified that one purpose of Sebbas’s presence in Texas was to allow customers to see
a representative of Nopak periodically “to keep us in a dominant position among the
salespeople.” Dechant further testified that Sebbas was presented by many distributors
to be an expert on the Nopak product line and able to answer questions that the
customers of the distributor might have. Dechant and Sebbas both testified that Sebbas
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would communicate advantages of Nopak products to distributors and their customers.
While we fully acknowledge that Sebbas was not authorized to directly solicit or take
orders for Nopak’s products, we conclude that his Texas activities were “to promote or
induce sales” of Nopak’s products and, therefore, were sufficient to conclusively
establish that Nopak had a physical presence in the state. See Tyler Pipe Indus. Inc. v.
Wash. State Dep’t of Revenue, 483 U.S. 232, 250, 107 S.Ct. 2810, 97 L.Ed.2d 199
(1987) (approving of the state court’s holding that “the crucial factor governing nexus is
whether the activities performed in this state on behalf of the taxpayer are significantly
associated with the taxpayer's ability to establish and maintain a market in this state ....”
(emphasis added)). As such, we affirm the trial court’s implied determination that the
assessment of the Texas franchise tax against Nopak does not violate the Commerce
Clause.
Nopak further contends that Sebbas’s activities in Texas were, at best, de
minimis activities that should be ignored for taxing purposes. The substantial nexus
requirement requires more than de minimis contact with the state before taxes may be
assessed against a foreign company doing business through interstate commerce. See
Wis. Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 231, 112 S.Ct. 2447,
120 L.Ed.2d 174 (1992). Texas has defined de minimis activities to include “those
[activities] that, when taken together, establish only a trivial additional connection with
Texas. An activity regularly conducted within Texas pursuant to a company policy or on
a continuous basis shall normally not be considered trivial.” 34 TEX. ADMIN. CODE §
3.554(c)(3). An activity is more than de minimis if it serves an independent business
function, separate from requesting orders, that the company would have reason to
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engage in whether or not it employed a sales force. See Wis. Dep’t of Revenue, 505
U.S. at 228-29. In Texas, an example of an activity that is an independent business
function in the state is the “investigating, handling, or otherwise assisting in resolving
customer complaints.” 34 TEX. ADMIN. CODE § 3.554(d)(7).
Looking at the activities performed by Sebbas on behalf of Nopak, the evidence
establishes that his primary job was investigating, handling, or otherwise assisting in
resolving customer complaints. While Nopak focuses on the infrequency with which
Sebbas would go with a distributor to the distributor’s customer to “put out fires” relating
to those customer’s complaints, there was evidence presented that Sebbas would take
similar actions when it was a distributor that had a complaint regarding Nopak’s
products or service. Based on the testimony of Dechant and Sebbas, it is hard to
identify any services that Sebbas provided Nopak beyond extolling the virtues of
Nopak’s products to distributors and attempting to resolve customer complaints. In
addition, it appears that it is Nopak’s policy to have regional managers located
throughout the country so that Nopak will have a continuous presence with its
distributors. That the perception of Nopak having a local physical presence is a reason
for Nopak to employ regional managers is shown through Dechant’s testimony that,
“There’s an old axiom in our business that out of sight [is] out of mind, so we firmly
believe that they need to see a representative of our company periodically . . . .” Thus,
Sebbas’s activities were performed in accordance with a company policy and on a
continuous basis. Consequently, we affirm the trial court’s implied finding that Sebbas’s
activities in Texas were more than de minimis and, therefore, justified the assessment
of Texas franchise taxes against Nopak.
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Conclusion
For the foregoing reasons, we conclude that the trial court did not err in granting
the State’s motion for summary judgment and denying Nopak’s motion for summary
judgment. Therefore, we affirm the judgment of the trial court.
Mackey K. Hancock
Justice
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