A&M Tax Advisor Weekly
In the decades since the physical presence nexus standard for use tax collection was established by the U.S. Supreme Court decision in Quill Corp. v. North Dakota in 1992, electronic commerce has grown to enormous proportions. Thanks to the physical presence rule established for remote sellers in Quill, many online sellers have not been required to collect tax in all states where the seller has customers. Some say online sellers have an unfair advantage over brick and mortar sellers who cannot escape the requirement to collect tax. While states have long waited for Congress to step in to legislate a solution, such proposed legislation rarely gains traction in Congress. With the U.S. Supreme Court now having agreed to hear the South Dakota v. Wayfair, Inc., case, the Quill physical nexus standard and the various means by which states have sought to make end-runs around that standard, may all soon change. What should remote sellers do in the meantime?
In recent years, states have reacted with increasingly innovative tactics to better capture the commerce directed toward their marketplaces. They have tried various approaches to attributing a physical presence to online sellers and, more recently, have passed legislation designed to directly challenge the Quilldecision. On Friday, January 12, 2018, the U.S. Supreme Court granted certiorari in South Dakota v. Wayfair, Inc. Later this year, the Supreme Court will render a decision in South Dakota v. Wayfair, Inc. that may modify the Quill decision, allow it to stand, or overturn the decision entirely. In the meantime, remote sellers must contend with the already unwieldy physical nexus rules as well as various approaches that have been developed by select states in conferring use tax nexus, which are outlined below.
Traditional Sales and Use Tax Nexus Based on Entity’s Activities:
In the Quill case, the Supreme Court reaffirmed its earlier finding in the National Bellas Hess case, which stated that “substantial nexus” for sales and use tax purposes is physical presence of property and/or employees physically entering the state on a regular and systematic basis. Therefore, a seller must have a physical presence in the taxing state before the state can require the seller to collect its use tax. National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), Quill Corporation v. North Dakota, 504 U.S. 298 (1992).
A seller’s activities can be subject to use tax collection requirements if the seller has physical presence in the taxing state, even if the seller’s activities in the state have no relation to the transaction being taxed. National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977).
Traditional Agency Sales and Use Tax Nexus:
In-state activities performed on behalf of the seller by third parties and/or related parties could result in agency nexus for the seller. Scripto v. Carson, 262 U.S. 207 (1960), in Tyler Pipe Indus., Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232 (1987). Together with the cases noted earlier, these U.S. Supreme Court decisions preclude a state from asserting the duty to collect sales or use tax upon an out-of-state seller absent proof that the out-of-state seller itself, or through an agent or representative soliciting on the out-of-state seller’s behalf, is physically present in the state.
Various State Approaches to Asserting Nexus…