Interstate tax nexus guidelines from the U.S. Supreme Court.

• Author: Gerber, Barry

Over the past several years, state and local governments have become much more aggressive in their attempts to raise revenue both in the sales and use tax arena, and through corporate income taxes. The zealousness of state legislators and tax departments is amply evidenced by the number of court cases challenging their attempts.

The U.S. Supreme Court has finally spoken on the issues in two cases that will have far-reaching and long-term effects on our state and local tax scheme. Quill Corp. v. North Dakota, 5/26/92, addressed sales and use taxes, and Wisconsin Department of Revenue v. William Wrigley Jr., Co., 6/19/92, addressed corporate net income.

Quill involved an out-of-state mail order company's obligation to collect sales or use tax for goods sold in North Dakota, Wrigley involved the limits of PL 86-272, in conferring immunity from Wisconsin state net income taxes based on mere solicitation of goods by out-of-state sellers.

In Quill, the Court held that the Commerce Clause prohibited a state from imposing an obligation on an out-of-state mail order company (without any physical presence in the state) to collect sales or use tax on goods sold to in-state residents. Advertising and direct mail solicitation were not "dofng business" for sales or use tax purposes. A physical presence within the state was needed to provide the nexus required for the state to impose an obligation to collect ,ales and use tax on the company; economic presence was not enough. Thus, the case of National Bellas Hess, Inc., 386 US 753 119671, was affirmed.

By basing its decision solely on Commerce Clause grounds, the Court opened the door land in fact invited) Congress to legislate a solution to this problem. National Bellas Hess, which had barred the states from imposing these collection obligations on out-of-state companies on both Commerce Clause and Due Process grounds, had cast a doubt over whether such legislation would be constitutionally permitted. It now is certain that legislation, such as the ill-fated Equity and Interstate Competition Act of 1989, would have been valid if enacted.

Wrigley, on the other hand, dealt with the question of the definition of solicitation. PL 86-9.72 confers immunity from state net income-based taxes on interstate businesses whose only in-state activities consist of solicitation of orders for sales of tangible personal property, accepted or rejected outside the taxing state. The problem was determining which activities...