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September 22, 2014 The Tax Lawyer

A Conceptual Analysis of Nexus in State and Local Taxation

Volume 67, No. 4 - Summer 2014

Rick Handel


    In Quill Corp.  v.  North Dakota, 504 U. S. 298 (1992), the United States Supreme Court held the state of North Dakota could not constitutionally require Quill—a non-resident office supply and mail order company—to collect use taxes on sales made to in-state residents on the basis of Quill’s economic—as opposed to physical—presence in the state. For the first time in state tax nexus jurisprudence, the Court articulated a difference between Due Process and Commerce Clause nexus—a seller’s physical presence in the state is not required for Due Process nexus, but is required for Commerce Clause sales and use tax nexus.  The Court held that obligating Quill to collect use taxes, without its physical presence in the state, placed an unconstitutional burden on interstate commerce and, therefore, violated the Commerce Clause.

    The Quill decision left in its wake a flood of divergent state court decisions and commentator opinions on Due Process and Commerce Clause nexus analysis and the sufficient connection to a state necessary to satisfy the differing nexus requirements. The confusion and disputes continue in audits around the country. The controversy is also currently represented by general interest in the collection of use taxes on internet purchases, proposed federal legislation, and proposed and recently enacted state legislation, the agendas of state and local tax professional meetings, and the prediction by a Bureau of National Affairs article that nexus will be among the most active topics this year.

    This Article attempts to alleviate the confusion over Due Process and Commerce Clause nexus in the aftermath of the critical Quill decision.  It defines and discusses the difference between Due Process and Commerce Clause nexus and its implications on state and local taxation by analyzing the Supreme Court’s Due Process and Commerce Clause opinions before and after Quill. The Article expounds on the physical presence requirement of Commerce Clause nexus for sales and use tax purposes, including when the physical presence of a third party in a state will be imputed to the taxpayer, and whether the taxpayer’s physical presence is constitutionally required for other state taxes. It also discusses the effects of current and proposed federal and state legislation on a state’s ability to tax multistate businesses. This Article gives the reader a clearer understanding of the constitutional allowances and limits of Due Process and Commerce Clause nexus in the ongoing debate over state and local tax nexus.

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