Given the remarkably rapid rise of internet commerce, it is no surprise that cash-strapped states are looking for ways to tap into (i.e., tax) Internet commerce. To do so, states will expand the “nexus” of their taxing authority to reach online sales.
Nexus is a basic constitutional limitation on each state’s ability to require a “remote” seller—a seller located outside of the state—to collect and remit sales and use tax on sales made within such state. Nexus generally means the minimum level of contact a remote seller must have with a state before such state can legally require the taxpayer to collect sales and use taxes.
The U.S. Supreme Court has ruled that the Commerce Clause requires “substantial nexus” to any state (outside the seller’s primary residence) before any such state may force a seller to collect sales and use taxes. Courts traditionally defined “substantial nexus” in terms of physical contact, or direct in-state presence. Certain activities clearly fit within this traditional definition:
• Employing or sending a sales person to a nonresident state.
• Having a phone number in the nonresident state that is forwarded to a headquarters located in the resident state.
• Maintaining a post office box in a nonresident state.
• Installing or delivering products in a nonresident state.
• Attending a trade show in a nonresident state and having sales in that state.
• Hiring independent contractors in the nonresident state to provide warranty services on property sold in that state.
The explosion of internet sales and the rapidly advancing technology that makes it easier for remote sellers to sell into a state (without any physical contact or engaging in any of the activities listed above) makes it increasingly difficult to apply traditional concepts of nexus in the world of e-commerce. From the taxing state’s perspective, such difficulty translates into lost sales and use tax revenue.