SEATTLE UNIVERSITY LAW REVIEWVolume 29, No. 3SPRING 2006
The Rush to the Goblin Market: The Blurring of Quill's Two Nexus Tests
H. Beau Baez III(fn*)
I. Introduction
Morning and evening
Maids heard the goblins cry:
'Come buy our orchard fruits,
Come buy, come buy...
Figs to fill your mouth,
Citrons from the South,
Sweet to tongue and sound to eye;
Come buy, come buy(fn1)
Like the enticing goblin cry in Christina Rossetti's poem, some lower courts have rushed to the goblin market and bought arguments that are "sweet to tongue and sound to eye"(fn2) but ultimately destructive to the clear meaning of the Supreme Court's decision in Quill Corp. v. North Dakota (fn3)
The Quill decision placed Due Process Clause(fn4) and Commerce Clause(fn5) constraints on the fifty states by limiting their ability to impose sales and use tax collection requirements on out-of-state businesses that conduct business in their states, without regard to the market share those businesses command.(fn6) This was certainly good news for the out-of-state businesses but bad news for their in-state competitors, who must compete at a four to eleven percent sales tax disadvantage depending on the jurisdiction,(fn7) which is the profit margin in many industries.(fn8)
Prior to Quill, the Supreme Court was often unclear on the jurisprudential underpinnings of its state sales and use tax decisions.(fn9) Quill was the first case in which the Court analyzed these underpinnings and clearly identified their constitutional foundations.(fn10) The result was a bifurcated analysis that addresses the only two constitutional provisions implicated in state sales and use tax jurisdictional questions-the Commerce Clause and the Due Process Clause.(fn11) The Court's bifurcated analysis has created confusion, and taxpayers, administrative agencies, and state courts have struggled in applying the tests required under these two clauses.(fn12)
The first step to eliminating this confusion is a subtle, yet straightforward observation: the Court in Quill merely required use of two familiar, widely-used constitutional tests-minimum contacts and physical presence-to provide what it thought would be a convenient and useful method of analyzing sales and use tax jurisdiction problems.(fn13) The Due Process Clause nexus test is based on notions of fairness(fn14) and relies on the "minimum contacts" test of International Shoe Co. v. Washington*(fn15) and its progeny.(fn16) The Commerce Clause nexus test is based on the need for a free flow of goods within the national economy(fn17) and relies on a bright-line physical presence test(fn18) reminiscent of the Pennoyer era.(fn19) When both tests are satisfied, a business has "sufficient nexus"(fn20) with a state to come under that state's sales and use tax jurisdiction.(fn21)
The difficulty in applying Quill is not its complexity, but rather its simplicity. Its stated purpose was to bring certainty to the area of sales and use tax collection-to drain the tax jurisdiction swamp, not to make it murkier.(fn22) The solution to the problem is surprisingly simple: apply the Due Process Clause and the Commerce Clause in reverse order. Currently, courts go through a quick, perfunctory Due Process Clause analysis and then move into a detailed Commerce Clause analysis.(fn23) This approach invariably leads courts to consider fairness(fn24) within a Commerce Clause context.(fn25) Instead, courts should look first at the Commerce Clause nexus test and then at the Due Process Clause nexus test. Using this approach, courts are unlikely to import fairness considerations into the Commerce Clause analysis. As a consequence, they will apply the bright-line physical presence test mandated in Quill more consistently. This preserves the simplicity Quill purported to create without altering Quill in any significant way.(fn26)
Part II of this Article begins with a brief introduction to sales and use taxes in the United States.(fn27) Although these taxes are complementary in nature, they are treated differently for constitutional purposes.(fn28) This Part then examines the Due Process Clause and Commerce Clause constraints on state taxation,(fn29) which are animated by very different concerns.(fn30) Next, this Part explores footnote eight in Quill to dispel the notion that Quill established a facts-and-circumstances test.(fn31) The section concludes by discussing the problems lower courts have had in applying the Quill nexus tests. The primary problem encountered by the lower courts, exemplified by four lower court opinions,(fn32) involves fact patterns near the bright-line that involve some quantum of physical presence but something less than a permanent physical presence in the taxing jurisdic-tion.(fn33)
Part III will then look at ways of bridging the apparent Quill chasm. First, there is a step back to an earlier era in Due Process Clause jurisprudence with an examination of the physical presence test that existed prior to International Shoe.(fn34) The idea is to take the lessons from that era (i.e., due process cases decided using a physical presence test) and transfer them into the Commerce Clause context. After all, it seems pointless to relitigate issues that were decided eighty years ago. Once a nexus is established, the next logical question is "When does it end?" The Article spends some time in this Part looking at the various approaches states have taken in answering that question.(fn35)
Part III also proposes a model statute to deal with the perceived unfairness of taxing very small businesses through a minimum filing threshold.(fn36) With the power to tax comes the responsibility to tax efficiently.(fn37) Administrative costs are associated with having an out-of-state business comply with a state's regulatory taxing authority, both to the business and to the state.(fn38) A bright-line physical presence test might require very small businesses-those with $ 100 of sales tax liability or less a year-to file sales and use tax returns. The states would be better off creating a mechanism to exempt these small businesses because the cost of collecting this revenue might exceed the tax collected.
The conclusion of Part III discusses the ethical and professional considerations the tax profession is dealing with not only at the practical level, but more importantly at the philosophical level. At its root, the fundamental problem facing the profession today is the question whether truth is relative or universal.(fn39) To the extent people reject objectivity, their philosophy will likely be reflected in their court submissions, which may then appear in a court opinion.
This Article hopes to make a contribution by helping states strengthen their sales tax base and assisting taxpayers in understanding their legal obligations. Whether state revenues are up or down,(fn40) it cannot be emphasized enough that "taxes are the life-blood of government, and their prompt and certain availability an imperious need."(fn41) A bright-line test, admittedly an artificial construct, has the primary advantage of providing notice to those that cross the line that they must collect the tax. Taxation is not just another area of government regulation: in the words of Justice Oliver Wendell Holmes, Jr., "[t]axes are what we pay for civilized society."(fn42)
II. Understanding Sales and Use Taxes,
the Quill Nexus Standards,
and their Application
The primary focus of this Article is the application of the Due Process and Commerce Clauses to sales and use taxes, but a discussion of these constitutional constraints without some context might be confusing. Thus, a short history and basic understanding of how these taxes work are necessary.
A. Sales and Use Taxes
Apples and quinces,
Lemons and oranges,
Plump unpecked cherries,
Melons and raspberries,
Bloom-down-cheeked peaches,
Swart-headed mulberries,
Wild free-born cranberries,
Crab-apples, dewberries,
Pine-apples, blackberries,
Apricots, strawberries;-
All ripe together (fn43)
Most Americans live in states with a sales tax, but few understand how this pervasive tax operates. The sales tax is a tax on commerce with all purchases of tangible personal property, including wild free-born cranberries, subject to it unless specifically excluded by statute.(fn44) It is a tax on consumption(fn45) charged to consumers(fn46) in the jurisdiction in which the sale occurs, with the retailer assigned the legal responsibility for collecting the tax based on a percentage of the gross receipts from the sale.(fn47) The use tax is complementary to the sales tax, and is largely restricted to goods purchased outside the state.(fn48) It seems odd to have two taxes that are basically identical-to tax the same items(fn49) at the same rates(fn50) with the same exemptions,(fn51) and to require retailers to collect both taxes(fn52)- but the system works like this only because of a historical anachronism of constitutional proportions that has been preserved to this day.
The modern retail sales tax was introduced during the Great Depression as a way for the states to generate revenue at a time when revenue from state income tax was in dramatic decline.(fn53) Constitutional litigation following the introduction of the sales tax focused on the legitimacy of the...
