Nexus for state sales and use tax.

• Author: Delong, Thomas

Long before the U.S. Supreme Court decided Quill v. North Dakota, 504 US 298 (1992), upholding a physical presence requirement for destination-state use tax collection, states have struggled for ways to require out-of-state sellers to collect and remit state sales and use tax. With the Quill opinion reinforcing prior Supreme Court authority, states that attempted to enact legislation in anticipation of a relaxation of the (perceived) strict physical presence standard found themselves in a difficult situation.

From the state's perspective, collection of use tax by an out-of-state seller requires only collection of a tax and remittance to the state. If a transaction tax attaches at the time the product sold is delivered to the in-state resident, the seller has the best means and opportunity to collect the use tax statutorily due. Further, with the explosion of electronic commerce and Internet sales growing geometrically, potential erosion of the (taxable) sales and use tax base presents a daunting picture to most state tax administrators.

On the other hand, out-of-state sellers point to state registration requirements, additional administrative burdens and Supreme Court case law as several reasons why collection of the states' use tax should not be their concern. The fact that sales of the same product by instate sellers with offices, stores or other business locations in the state to the same resident customers would require that sales tax be charged, is simply a choice in the form of doing business.

The primary concern of sellers of tangible personal property to residents of other states is the sales and use tax nexus standards applied in states where customers reside or accept delivery of their products. Therefore, it is the destination state(s) where "nexus focus" must lie.

Recent changes to Idaho's nexus statute, in its attempt to respect Quill (yet at the same time expand its "reach" to out-of-state sellers) highlight this focus. The Idaho statute summarized below is strikingly similar to nexus laws applied in most states, just more recent in enactment.

One State's Response

As discussed in Quill, "physical presence" comes in several forms, yet is limited by what constitutes de minimis presence. (Of course, states and sellers will dispute exactly how much contact...