September 29, 2017 The Tax Lawyer

The Rising Trend of Sales Tax Nexus Expansion

Volume 70, No. 4 - Summer 2017

Matthew T. Szudajski

Abstract

     This Article provides a comprehensive examination of post-recession sales tax nexus expansion developments as a primer for what is likely to be continued rapid developments and judicial conflict. States advanced expansive approaches to sales tax nexus as the nation emerged from the Great Recession. Those approaches included attributional nexus techniques like click-through nexus, affiliate nexus, and conventional agency nexus, as well as alternative techniques like use tax notice requirements and negotiated presence. The post-recession state-level sales tax nexus expansion phenomenon was accelerated by Justice Kennedy’s call to find an appropriate case for the United States Supreme Court to reexamine the bright-line physical presence rule for sales tax nexus. The states responded provocatively with economic nexus, more notice requirements, more click-through nexus, more affiliate nexus, more conventional agency nexus, and more negotiated presence. All this state action has provoked federal activity legislatively and judicially. Congress responded by enacting the Trade Facilitation and Trade Enforcement Act of 2015 with provisions making the Internet Tax Freedom Act’s state and local taxation limitations permanent. The United States Supreme Court denied certiorari on Colorado’s use tax notice requirements for out-of-state retailers. Moving forward, states are likely to continue to expand sales tax nexus within the bright-line physical presence rule. Economic nexus’ viability is hobbled by ongoing litigation in Alabama and South Dakota. The viability of attributional nexus techniques, like click-through nexus, affiliate nexus, and conventional agency nexus, remain strong. Alternative sales tax nexus expansion techniques, like use tax notice requirements and negotiated presence, also remain viable. These dynamics are likely to cause further innovation in expanding attributional nexus through e-commerce and integrated business activities, further innovation in alternative techniques like use tax notice requirements and negotiated presence, and more state-level variations in sales tax nexus criteria.

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