Review Your Unused Sales Tax Permits

In late 2001, a Texas lighting-fixtures vendor sued one of its customers, a California company, for breach of contract. The vendor brought the suit in, surprise, Texas. The California customer tried to get the lawsuit thrown out because of lack of “personal jurisdiction.” That means the customer claimed it didn’t have enough presence in, or contact with, the state of Texas to be subject to suit there.

Earlier this year, a federal magistrate judge in San Antonio denied the California customer’s motion to dismiss the suit. Her principal stated reason suggests that companies might do well to periodically review their state sales- and use-tax permits. See Ergonomic Lighting System, Inc. v. Commercial Petroleum Equipment/USALCO, No. SA-02-CA-0031 (W.D.Tex. 03/05/2003).

What the Federal Judge Regarded as “Doing Business”

The federal magistrate judge listed several reasons for denying the California customer’s motion to dismiss the lawsuit.

• The first reason she listed was also the one she discussed in the most detail. The customer had obtained a Texas sales-tax permit in 1994. From 1999 to 2002 the customer had filed sales- and use-tax returns with the Texas tax authorities and had paid an aggregate of less than $1,000 in state tax. The magistrate judge appears to have taken this as tantamount to an admission of regularly doing business in Texas.
• The California customer had “engaged in business with either Texas-based corporations or with out-of-state corporations that have locations in the state.”
• The customer had an interactive Web site that could be accessed by Texas-based companies.
• The customer had “maintained exclusive distributorship arrangements with businesses that have distribution facilities in Texas.”

The magistrate judge concluded: “This evidence, in my opinion, clearly establishes that [the customer] conducted regular business in the Texas, sufficient enough for this court to conclude that [the customer] ‘purposefully availed itself of the Texas marketplace’ such that it could reasonably anticipate being called into court in Texas.”

Possible Lessons

1. Your company may have applied for sales- and use-tax permits in numerous states. It might be a good idea to review them periodically. Consider canceling any permits that you don’t need. Of course, check with counsel — and your sales execs — before doing so.

2. Consider including a forum-selection clause in your contracts, especially in important deals. A forum-selection clause will typically provide that any lawsuit will be brought in a specified jurisdiction. Such clauses are usually enforced (although there are some notable exceptions to that rule).

There are downsides to proposing a forum-selection clause. Such clauses often cause pushback from the other side in contract negotiations. If the other side has the bargaining power, it might respond, fine, but the chosen forum will be our home turf, not yours. Then you might have to choose between agreeing to sue or be sued in the other side’s jurisdiction, or not doing the deal.

Overall, you might decide you’re better off not proposing a forum-selection clause, or, if the other side proposes one, insisting that it be deleted. Then each side would accept the risk that someday it might be sued in a foreign jurisdiction. That’s a judgment call.

3. Watch out for contract clauses that say something along the lines of, “this contract is entered into in Paris, Texas, as of the date signed by the parties.” (Emphasis added.) That might be used to argue that the parties were doing business in Paris, Texas, and therefore were subject to suit there.

4. To state the obvious: The more business relationships you have in other jurisdictions, the more likely you are to being subject to suit in one of those other jurisdictions.