Tax & Accounting Blog

Nexus: Quill and Its Challengers

Blog, Indirect Tax, ONESOURCE April 26, 2016

Nexus refers to sufficient connection with a political jurisdiction that gives that jurisdiction authority to require a person or business to collect and remit taxes.  Without nexus, laws requiring a business to collect tax violate the Constitution of the United States under the dormant commerce clause (which prohibits states from discriminating against interstate commerce) and the due process clause in the 14th amendment (which asks whether the obligation is fair and requires the taxpayer have minimum contacts with a state).

In 1992, the United States Supreme Court laid down the current law of the land regarding sales and use tax nexus: Physical Presence. A company must have physical presence (such as company owned property, employees or agents) in a state before that state can require the company to collect and remit sales and use tax on sales to that state. Even though the physical presence test laid out in Quill Corp. v. North Dakota is still the controlling precedent, some states have passed laws that directly challenge this test. 504 U.S. 298 (1992).

The bending of the rules set out by Quill began with so called “Amazon Taxes” or click-through nexus laws.  These laws are passed in an effort to capture use tax that should be paid by purchasers of items via the internet from out-of-state retailers.  The click-through nexus laws establish nexus for an out-of-state retailer that has affiliates in the state that directs in-state customers to the out-of-state retailer by linking to the retailer’s website.  The first state to pass this type of law was New York in 2008. Since then, many, many states have followed suit.

Another popular type of nexus law stretching the limits of Quill is an affiliate nexus law.  This type of law establishes nexus for an out-of-state retailer who has an in-state affiliated retailer who sells similar products under a similar business name.  Think of the in-state brick-and-mortar shop that might technically be a different company than the online retailer, but they are owned by the same company.  In this scenario, the in-state shop gives the online retailer nexus.

The newest evolution of nexus law seems to be a direct challenge to Quill: nexus laws based on economic presence. This type of nexus law establishes nexus when an out-of-state retailer meets a threshold of number of sales or money earned from sales to customers in the state.  Alabama and South Dakota are two states that have recently passed legislation along these lines.

The economic presence laws are practically begging the U.S. Supreme Court to strike down Quill or legislators to re-write a nexus standard more befitting of our ever increasing online lifestyle. In fact, South Dakota’s bill imposing economic presence nexus states:

…[T]he legislature recognizes that the enactment of this law places remote sellers in a complicated position, precisely because existing constitutional doctrine calls this law into question. Accordingly, the Legislature intends to clarify that the obligations created by this law would be appropriately stayed by the courts until the constitutionality of this law has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine…

As more states feel the pressure of eroding sales and use tax bases and pass nexus laws attempting to collect from out-of-state sellers, some believe it is only a matter of time before the constitutionality of these laws is finally decided upon by the U.S. Supreme Court.