Economic nexus and the uncertainty of Quill's physical-presence test.

• Author: Evans, Marianne

In March 2007, two petitions for certiorari were filed with the U.S. Supreme Court that, if granted, could potentially decide one of the most important unanswered questions facing state taxpayers. That question involves the issue of economic nexus--specifically, whether it is Constitutional for a state to impose tax on a taxpayer with no physical presence in that state.

The question of nexus for sales and use tax collection responsibilities was addressed in Quill v. North Dakota, 504 US 298 (1992). There, the Court held that the Commerce Clause requires a physical presence in the state before a state can require an out-of-state seller to collect sales and use taxes. However, Quill did not specifically state that the physical-presence nexus requirement also applied to other types of taxes, such as income and franchise. This lack of clarity has generated uncertainty for taxpayers, because states are split on the question of whether an out-of-state taxpayer that does not have a physical presence in a state can be compelled to file income or franchise tax returns there.

Recent Cases

In both Lanco, Inc. v. Dir., Div. of Tax'n, NJ Sup. Ct., Dkt. No.A-89-05, 10/12/06, and Tax Comm'r of WV v. MBNA America Bank, N.A., 640 SE 2d 226 (WV 2006), the states' highest courts held that the physical-presence requirement applied only to sales and use taxes, and that physical presence was not required to establish nexus under the Commerce Clause for income and franchise tax purposes.

MBNA: The taxpayer in MBNA was principally involved in the business of issuing and servicing credit cards and extending unsecured credit to cardholders. Under West Virginia law, a financial organization is presumed to have nexus in the state if it solicits business with 20 or more persons in the state or has annual gross receipts of at least $100,000 from in-state sources; see WV Code [subsection] 11-23-5a and 11-247b. Thus, MBNA was deemed to have nexus with West Virginia under state law, even though it had no employees or property in that state.

The state supreme court concluded that Quill's physical-presence requirement applied only to sales and use taxes:

because Quill's physical-presence test for sales and use taxes was based in large part on the mail order industry's reliance on Bellas Hess, we are not compelled to apply Quill's physical presence standard to the present circumstances.

The court concluded that a reasonable construction of the language in Quill implies that...