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.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Following Wayfair, Wyoming Issues Guidance for Remote Sellers
- Quill Killed! Court Overrules Physical Presence Requirement
- Kill Quill? South Dakota Awaits Supreme Court Answer
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?