As a business owner, you should be concerned about nexus as it relates to your sales and use tax liability.
The United States Constitution limits the several states’ power to require a business to pay sales tax based on their nexus in the state. The concept of nexus is derived from the Commerce Clause and the Due Process Clause of the U.S. Constitution. The practical effect of these Federal limitations, is that a state cannot tax business that takes place entirely outside of the state. Obviously, business that takes place entirely within a state can be taxed by the state, consistent with the U.S. Constitution. Unfortunately, nexus isn’t quite this simple…
The history of nexus goes back to the Supreme Court in 1977, in the case of Complete Auto Transit v. Brady (U.S. 1977). In this case, the Supreme Court held that a state could not require an out of state company to comply with a state tax unless a substantial nexus existed between the company and the state. After much debate, twenty years later, in the case of Quill Corporation v. North Dakota (U.S. 1992), the Supreme Court attempted to clarify that this substantial nexus required a physical presence of the business within the state. Unfortunately, the Supreme Court’s opinion was not clear enough as there is still much debate over what exactly qualifies as physical presence.
This ambiguity has led to the states being able to make their own laws regarding what exactly qualifies as physical presence within the state. Thus, the states set the threshold for the types of activities conducted by a business that triggers the business to have nexus within that state. Then, pursuant to the laws of the state, if a business engages in any of those activities within the state, it is said to have established nexus sufficient enough for the state to require the business to collect and remit sales tax. The biggest problem here, is that the states have consistently tried to bypass the restrictions imposed by Federal Law because the law has too many loopholes.
As the United States government has recognized the complexity of nexus law, it has proposed a bill that is supposed to cover nexus regulations across the entire nation, called the Business Activity Tax Simplification Act of 2015. Federal law can obviously override state nexus laws, and those in favor of the proposed bill hope that it will serve exactly that purpose. The hope is, the proposed bill would essentially strip states of their broad power to impose sales and use tax on businesses that are based outside of the state, but do business within the states’ borders.
Specifically, advocates hope the proposed bill will expand the federal prohibitions on the states’ power to tax interstate commerce. Currently, Federal prohibitions only apply to sales of tangible personal property. The proposed bill will broaden the scope of the applicability of Federal prohibitions on all forms of property, even intangible personal property and services. Secondly, the bill will prohibit the states’ ability to tax an out of state business unless the business has a physical presence in that state. This is already laid out in the current prohibitory Federal Laws, however advocates hope this will further serve to clarify it. Lastly, the proposed bill lays out the standards that apply to deciding if a business has physical presence in the state.
Ironically, the components of the proposed bill are exactly what the majority opinion in Quill stated, and unfortunately will most likely accomplish the same outcome. Thus, it seems this proposed bill is only an attempt to codify Quill, which clearly has not fixed the issue. It seems as though the legislature needs to go back to the drawing board if they hope to make a real effect. We will keep you up to date on this hot topic, however, most likely this proposed bill, if passed, will not make any effect on the current nexus issues as it is essentially codifying Quill.
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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?