Nevada is a state with the reputation for attracting risk takers who roll the dice, spin the wheel, and rely on the draw of cards. A company, however, usually does not like to gamble. The directors and officers of the entity are paid to manage the company and make money. Risks will occasionally be taken to pursue a business transaction. If possible, the company wants to avoid lawsuits and litigation when a business transaction goes south. However, a corporation is even more risk averse when there is a potential for criminal prosecution.

A corporation that does business in Nevada can find itself in a precarious situation if a local prosecutor threatens to file charges against the out of state corporation for a consumer protection violation. If the company is doing business in Nevada and a customer complains about the company, then an investigator with a badge may come knocking on the corporate door. And subpoenas may follow shortly thereafter.

Assume for purposes of a hypothetical, there is a large corporation named Big Kahuna, Inc. (BKI) that conducts business with customers throughout the United States including Nevada. BKI's “one-of-a-kind deluxe widgets" are sold to customers in various states nationwide. The company has sales personnel on the east coast (New York) and the west coast (California), but not in numerous other states like Nevada where it does business. Despite the national customers, BKI does not have any office or warehouse in many states in which it does business. The company does not even have a local telephone number for any office in those states where it does business.

BKI customers call the company's New York and California offices to place orders. Despite the lack of sales personnel and facilities in the customer states, BKI's sales revenue for widgets is $500,000 to $1 million in various states, including Nevada. Based on its marketing efforts and quality product, the company's widget sales flourish. All good things, however, must end.

One day, a disgruntled BKI customer gets buyer's remorse and is not happy with his batch of widgets. Since the customer does not have the resources to fight BKI in court, the customer goes to Big Brother for help. The customer files a complaint with Nevada's Office of Consumer Protection Division. The customer alleges he has been wronged by BKI and wants his money back because he thinks the widgets do not work the way he expected them to. BKI has a valid enforceable sales contract with the customer and sees no reason to refund the customer's money. The widgets are high quality and the company will not be able to resell them if they are returned. The Consumer Protection investigators do an initial investigation and notice that BKI is not a registered “foreign corporation” in the state of Nevada. As a result, the investigators contact BKI and want to know why the company is not registered in Nevada since it is doing business in Nevada. The letter mentions there are significant fines and penalties that can be imposed against businesses that fail to register under Nevada law. BKI comes to you for legal advice. What can they do? Were widget sales in Nevada a bad idea?

There are some options to consider. Do nothing? Do something? Should BKI schedule a meeting with the prosecutor and bring its checkbook? Should BKI send a nasty response (i.e. see you in court) to the investigators? Perhaps a more measured approach is appropriate. Is BKI's conduct deceptive? The company and its employees do not lie, cheat, or steal from customers. Before even examining the transaction, BKI may want to examine what it is required to do under Nevada law. It might surprise you to know that despite the fact that BKI is selling its products to customers in Nevada, it may not be doing business in Nevada. In essence, BKI has a defense to the registration requirement. “Doing business” under Nevada law is not what you might think. Now, put common sense aside and look at the law.

Does BKI as a company need to register as a foreign corporation in Nevada? The applicable statutory provisions are NRS 80.010 and NRS 80.015. Based on the Nevada Supreme Court's decision in Sierra Glass & Mirror v. Viking Industries, Inc .[1], there is a viable legal argument that such a company is not required to register with any governmental agency of Nevada because the company is not “doing business” in Nevada.

Nevada applies a two-pronged test to determine if a company is “doing business” in the state and thus subject to the registration requirement. [2] “Courts look first to the nature of the company's business functions in the forum state, and then to the quantity of business conducted in the forum state.” [3] In Sierra Glass, a foreign corporation (Viking) sued a Nevada corporation (Sierra) for breach of contract. The foreign corporation manufactured and sold windows in 30 different states including Nevada. [4] Sierra argued that Viking was not entitled to bring suit in Nevada because it was a foreign corporation and had failed to comply with the registration requirements.

The Nevada Supreme Court sided with Viking. It noted that Viking had $20 million in annual sales across 30 states, including $3 million from sales in Nevada. [5] Viking employed one salesperson based in Nevada who regularly visited sales prospects across the state. The company maintained a listed telephone number in Las Vegas that rang at the salesperson's home. Despite these activities in Nevada, the Court agreed with Viking that its associations with Nevada were interstate, not intrastate, in nature. [6]

In the hypothetical, the company was formed in Delaware, with its principal place of business in Ohio. It sells its product throughout the United States, including Nevada. However, there is nothing to indicate that the company has “localized” itself in Nevada. The company does not have any business premises in Nevada, does not have any employees or agents based in Nevada, and does not dispatch anyone to Nevada to visit prospective customers. The company has no business telephone number in Nevada. A small fraction of the company's active/billable customer base is located in Nevada, and the Nevada customers generated about $50,000 in revenue for the company. Since the company's qualitative and quantitative ties with Nevada are much less than those of Sierra, the company is not “doing business” in Nevada within the meaning of NRS 80.010.

Further, while the list of exempt business activities in NRS 80.015 is not exhaustive, the company's activities in Nevada may also fall within two of the exemptions set forth in that section. The company is “soliciting or receives orders outside of this state through or in response to letters...or other forms of advertising, accepting those orders outside of this state and filling them by shipping goods into this state.” [7] More importantly, the company also is ‘transacting business in interstate commerce.”[8]

While it may not seem like a common sense meaning of words, it is true that doing business is not really doing business under Nevada law. Consider what a famous egg once said to a little girl: “When 1 use a word, it means just what I choose it to mean -neither more nor less.” The girl responded: “The question is, whether you can make words mean so many different things.” And the egg replied: “The question is: which is to be master - that's all.” [9]

Look at the company's business activities in Nevada because they might not really be “doing business” under Nevada law. The Nevada Supreme Court's interpretation of those two words is the master one.

Craig S. Denney is counsel for Downey Brand LLP in Reno, Nevada. He defends individual and corporate clients in state and federal investigations in Nevada and California. Prior to joining the firm, he served as a federal prosecutor in Nevada.

[1] Sierra Glass & Mirror v. Viking Industries, Inc., 107 Nev. 119, 808 P.2d 512 (1991)

[2] Id . at 122

[3] Id.

[4] Id . at 121

[5] Id.

[6] Id. at 123

[7] NRS 80.015(1)(f)

[8] NRS 80.015(1)(m)

[9] Alice in Wonderland by Lewis Carroll