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Factor Presence Nexus Constitutional in Ohio: Other States to Follow?

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The majority of tax laws, specifically sales tax laws, were adopted before the Internet existed. Lawmakers could not have foreseen how much of a presence Internet sales would have at the time the laws were created. Now, lawmakers are stuck trying to catch the laws up with modern technology. A recent opinion from the Ohio State Supreme Court, Crutchfield Corp. v. Testa, helps to clarify what type of laws are and are not constitutional when it comes to nexus and states trying to reach internet sales. Crutchfield v. Testa, Slip Opinion No. 2016-Ohio-7760. This opinion is very important because it has long been debated whether the constitutional standards set in place in National Bellas Hess, Inc. v. Department of Rev., 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), apply only to sales tax or other taxes as well. Now, from this opinion, we have an answer from Ohio.

The law that was challenged was the Commercial Activity Tax (CAT). This tax does not discriminate based on physical presence, as it is a threshold tax. The tax is imposed on any business that has at least $500,000 of gross sales into Ohio. CAT was set in place in an attempt to tax sales made through the Internet that the state cannot reach otherwise.

In a 5-2 decision, the Supreme Court of Ohio ruled the CAT is constitutional as it determined that the $500,000 threshold was sufficient to find a substantial nexus between the Taxpayer’s and the state of Ohio, thus not violating the dormant commerce clause. Unfortunately for the challengers, the Court explained in its holding that it did not consider this type of tax a sales tax and that Quill should not be extended beyond sales and use taxes. The court stated: “Quill’s holding that physical presence is a necessary condition for imposing the tax obligation does not apply to a business-privilege tax such as the CAT, as long as the privilege tax is imposed with an adequate quantitative standard that ensures that the taxpayer’s nexus with the state is substantial.” Crutchfield v. Testa, Slip Opinion No. 2016-Ohio-7760 at ¶4.

Factor presence nexus is a new trend in the legislative tax world as it allows states to be able to reach online sales they otherwise would not be able to reach. The courts are very unpredictable in holdings relating to these issues as there are so many grey areas. Likewise, courts are also inconsistent in categorizing a tax as a sales and use tax or a different type of tax. This is an extremely important distinction as sales and use taxes clearly afford the protections of Quill, and other taxes may or may not. This opinion will encourage states to push the envelope even further as this opinion holds this type of tax constitutional. In effect, this opinion gives other states the green light to pass laws like this that may be borderline unconstitutional. The Supreme Court seldomly hears tax cases across the board so for now states have another weapon to use to reach sales they otherwise would not have been able to tax.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at or call 954-642-9390.

Other recent “Sales Tax Nexus” posts by Jerry Donnini:

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2 Responses to Factor Presence Nexus Constitutional in Ohio: Other States to Follow?

  • Posted by Brian on October 12, 2017 1:55pm:

    I disagree, as there have been several cases that have dealt with similar issues of economic nexus, including Geoffrey in NM, but until recently, none of them have encouraged states to attempt to circumvent Quill via economic nexus, and thus far, those efforts have failed, as they did in SD this year. Unless SCOTUS is willing to take up a case that has the potential to overturn Quill, any efforts at establishing an economic nexus standard will be doomed to failure.

    • Posted by Jerry on October 12, 2017 2:22pm:


      Thanks for the comment. What other recent cases are you aware of? Also, how do you reconcile the OH case with the SD litigation?

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