'Economic pressure' enough for sales tax? Relying on Quill may be hazardous.

• Author: Newton-Clarke, Rebecca
• Position: PERSPECTIVE

An out-of-state company can't be required to collect sales tax in a state unless the state has a strong enough connection to it. Determining whether this connection, or nexus, exists is increasingly complicated. More than twenty years ago, though, the U.S. Supreme Court provided some certainty for companies. The Court ruled in the case of Quill Corp. v. North Dakota that a seller has to have some "physical presence" in a state before the state can require the company to collect tax on its sales to customers there.

This physical presence can be through employees, agents, or related companies in the state or through property or activities in the state. However, it requires something more than making online or mail-order sales to customers in the state and shipping the items sold by mail.

When the Supreme Court issued its decision in Quill, it expressed some doubt, recognizing that commerce was becoming less dependent on traditional sales at brick-and-mortar companies. The Court invited Congress to clarify nexus for sales tax purposes, but so far Congress has not done so.

Meanwhile, states are getting more aggressive. Sales and use taxes were originally envisioned in the context of physical products. Pure e-commerce transactions such as sales of software downloads, digital products, cloud computing, and streaming entertainment have disrupted the traditional marketplace beyond even what was accomplished by mail-order and online sellers of goods. A number of states have amended or stretched their sales and use tax laws to encompass these kinds of transactions.

Click-Through Nexus

Companies have also seen states engaging in various nexus-expansion approaches, such as so-called click-through nexus. This kind of law, pioneered by New York State, asserts nexus over a company that enters into an agreement with state residents to post links to the company's products on their websites in exchange for compensation.

Now states are lining up to challenge the physical presence rule more directly. Although the Supreme Court has consistently declined to revisit sales tax nexus since Quill, at least one sitting justice has shown support for overturning the physical presence rule. Last year, Justice Anthony Kennedy suggested in a concurring opinion in Direct Marketing Association v. Brohl that the Court should revisit its "questionable" decision in Quill. He called the delay in doing so unwise and suggested that extensive remote sales into a state might create...