Economic Nexus: States Eye Expanding Scope of Their Taxing Jurisdiction.

• Author: Gorrod, William H.
• Position: Regulatory update

Over the last few years, numerous states have enacted laws or regulations that test the limits of their authority to require out of state retailers to collect and remit sales and use tax. Some states have also sought to require online retailers to provide information to assist the states with collecting sales and use tax from the purchasers. Online retailers should track recent developments regarding state sales and use tax collection and information reporting requirements to stay up to date on their compliance obligations.

States typically impose sales and use tax on sales of tangible personal property--unless a specific exemption applies--and also impose tax on certain enumerated services. While sales and use taxes are often referred to collectively, they are two related, but separate, taxes.

Sales taxes are generally imposed on taxable sales made within a state and do not apply to out of state sales, such as online purchases. For such purchases shipped from out of state, however, use tax generally applies where the purchaser will receive or use the items within the state.

Nexus Defined

While use tax is imposed on the purchaser, if the seller has sufficient contacts with the purchaser's state--known as "nexus"--then the state has the authority to require the out of state retailer to collect and remit the use tax.

If the seller does not have nexus, then the state lacks the jurisdiction to require the seller to collect and remit the use tax, and the purchaser is responsible for reporting and remitting his or her own use tax. Since many purchasers do not comply with requirements to remit the tax, and state tax department enforcement of such obligation for small purchases by many individuals is expensive and impractical, many states are seeking to assert nexus to the extent of the constitutional limitations on their taxing authority and to test the boundaries of such power.

Generally a retailer has nexus with a state if it has a physical presence, such as employees or property, within the state. In Quill Corp. v. North Dakota, 504 U.S. 298(1992), the U.S. Supreme Court provided this physical presence standard, and since that time, states have increasingly asserted this physical presence standard to include the activities of third parties, such as agents, independent contractors and affiliates, acting within the state on a retailer's behalf.

Information Reporting and Notification Requirements

In 2010, Colorado enacted a sales and use tax...