Income Tax/Tax Liabilities of Napoleon in South Dakota

Determine whether Napoleon may be liable to South Dakota State and/or Massachusetts for state income and/or sales taxes associated with sales in those particular jurisdictions. Be sure to explain in detail your answer. You need to be thorough and systematic in your explanation. Also discuss factors that would bear on whether there is nexus in these jurisdictions and why there is or is not nexus.(60 Points)
REQUIRED: Please consider the following items in analyzing whether or not Napoleon is subject to tax in the jurisdiction:

If you determine that there is nexus in one or more of the jurisdictions, then what alternatives would you suggest to your clients in order to reduce Napoleon’s risk of being subject to state income or sales tax in that state, yet still be able to conduct business with those customers. (15 points.)
How would your answer in 1. above change if Napoleon shipped all of its inventory to
Amazon’s warehouse in Texas so that customers would order Napoleon’s products only through the Amazon website? Amazon would have the responsibility for packaging and shipping the order. Consider the following scenarios: a) Amazon purchases the product from Napoleon and Amazon fulfills customer orders; and b) where Napoleon has the product on consignment to Amazon with Amazon fulfilling customer orders. (25 points.)

FACTS:

Napoleon, Inc. (“Napoleon” or “Company”), is a Texas-based company which sells high-end replica uniforms and swords. Napoleon’s customers are movie and television production companies, theaters and individuals who enjoy historical re-enactment battles. The Company does not conduct any advertising activities either through print or by social media, but maintains a website which functions as an electronic catalog. Customers become aware of Napoleon’s business either through word-of-mouth or through an internet search. Once the customer finds Napoleon’s website, they can read product descriptions, order merchandise, pay electronically, and have their purchases mailed directly to their homes or offices.

Napoleon’s headquarters, warehouse, call center, and all other facilities are located in Denton, Texas. All of Napoleon’s personnel live in Texas and all management decisions, website maintenance, shipping of inventory and all other functions take place in Denton. When product is shipped, it is sent through common carrier.

Total gross sales exceeds $3.5 billion annually, with net income before taxes of approximately

$1 billion. Napoleon has revenues of $50 million and net income of $10 million attributable to customers residing in South Dakota. These customers ordered over the internet and received their products in South Dakota.

Similarly, Napoleon has revenues of $60 million and net income of $17 million from customers residing in Massachusetts who also order through the internet and receive the product in Massachusetts.

You serve as tax advisor to Napoleon.

REQUIREMENTS:

Determine whether Napoleon may be liable to South Dakota State and/or Massachusetts for state income and/or sales taxes associated with sales in those particular jurisdictions. Be sure to explain in detail your answer. You need to be thorough and systematic in your explanation. Also discuss factors that would bear on
P.L. 86-272 apply in this situation?
Has the state adopted the Wayfair standard in defining nexus?
If you determine that there is nexus in one or more of the jurisdictions, then what alternatives would you suggest to your clients in order to reduce Napoleon’s risk of being subject to state income or sales tax in that state, yet still be able to conduct business with those customers. (15 points.)
How would your answer in 1. above change if Napoleon shipped all of its inventory to

whether there is nexus in these jurisdictions and why there is or is not nexus. (60 points.)

REQUIRED: Please consider the following items in analyzing whether or not Napoleon is subject to tax in the jurisdiction:

Amazon’s warehouse in Texas so that customers would order Napoleon’s products only through the Amazon website? Amazon would have the responsibility for packaging and shipping the order. Consider the following scenarios: a) Amazon purchases the product from Napoleon and Amazon fulfills customer orders; and b) where Napoleon has the product on consignment to Amazon with Amazon fulfilling customer orders. (25 points.)

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