Problem 3: 

Pee-Wee's Bike-O-Rama (PWB) is incorporated in the state of Denial. PWB conducts all of its
operations directly through a single corporation; it has no subsidiaries or other affiliated legal
entities. PWB sells "custom" assembled, high-end bicycles to customers (individual end-users) in
several states. PWB sells its bikes through employee salesmen and through independent
contractors. The company advertises in national publications, such as Bicycling Magazine, Us
Weekly, and Hustler. Individuals go to the company's salesperson or independent agent and work
with them to order a "customized" bike which includes only those specific features that the
individual desires. The salesperson or independent contractor then forwards the order to PWB
headquarters in the state of Inebriation for approval. Once an order is approved, employees at
PWB headquarters in the state of Inebriation then custom assemble the bike to the customer's
specifications. The bike is then shipped via UPS to the individual customer.1 PWB has the
following activity in the following states. All of states assert nexus to the full extent allowed by
the U.S. Constitution and federal law.

State of Inebriation: 
Headquarters building; Employees/payroll; Sales office; Warehouse; Sales of bikes to local
customers; approval of sales orders taken in other states; assembly of bikes according to customer
specifications.

State of Bitterness: 
Solicitation of sales of bikes through a resident employee sales force. Each salesperson works out
of their home and travels to individual customer homes and bike events to solicit sales. Each
salesperson has a company van and carries sample bikes.

State of Intoxication: 
Same as the state of Bitterness, except that the sales employees work out of sales office in the
state.

State of Denial: 
Solicitation of sales of bikes through a resident employee sales force. Each salesperson works out
of their home and travels to individual customer homes and bike events to solicit sales. Each
salesperson has a company van and carries sample bikes. In addition, on very, very, very rare
occasions, the salesperson may take a part from one of the sample bikes and give it to a customer
to replace a defective part on a customer's PWB bike. Again, this is very rare.

State of Boise: 
Same as state of Denial.  

1 Yes, it would be nice if PWB used the services of beloved trucker Large
Marge to deliver the bikes, but UPS offered a lower rate and less spookiness.

State of Exhaustion: 
Same as state of Bitterness, except that PWB uses independent contractors to sell bikes and such
independent contractors do not work out of their homes. Instead, they have a sales office. The
independent contractors sell PWB bikes and they also sell bikes on behalf of several other
companies.

State of Emergency: 
PWB owns an amusement park, "Pee-Wee's Big Adventure" (PWBA) in the state of Emergency.
PWBA has nothing to do with the bike business. PWB has no employees in the state of
Emergency and makes no bike sales into the state of Emergency. It contracts with Five Flags,
Inc., a major amusement park management company that is not related to PWB, to run PWBA on
a day-to-day basis. Everyone working at PWBA is an employee of Five Flags.

State of Remoteness: 
No employees or bike sales. But PWB does own 10 acres of land in the state as an investment.

A. Can the state of Bitterness tax some of PWB's bike income? Why or why not?

B. Can the state of Intoxication tax some of PWB's bike income? Why or why not?

C. Can the state of Denial tax some of PWB's bike income? Why or why not?

D. Can the state of Boise tax some of PWB's bike income? Why or why not?

E. Can the state of Exhaustion tax some of PWB's bike income? Why or why not?

F. Can the state of Emergency tax some of PWB's bike income? Why or why not?

G. If you determined that any of the states could not tax PWB's bike income, how, if at all,
could those states restructure their corporate tax laws to tax some of the bike income?

H. Can Bitterness require PWB to collect Bitterness sales/use tax on its sales into the state?
Why or why not?

I. Assume the answer to Part H is YES. Assume further that PWB has NOT been collecting
the tax in Bitterness. Upon audit, should PWB argue that it is selling a service rather than
tangible personal property? Why or why not?

J. If a few individuals in Remoteness contact PWB and order bikes, and PWB ships the bikes
into Remoteness via UPS, can Remoteness require PWB to collect Remoteness sales/use
tax? Why or why not? (Assume the sales/use tax law in Remoteness covers sales of bike
like those sold by PWB).

Answer rating: 100% (QA)

A The state of Bitterness can tax some of PWBs bike income if it can establish nexus which refers to a connection between the business and the state s... View the full answer