Voluntary registration or voluntary waiver of constitutional protection?

• Author: Madden, David
• Position: State sales and use tax collection

The voluntary registration process serves an important function for state taxing authorities and taxpayers alike. States rely on voluntary registration to enforce sales and use tax collection. For taxpayers, it is often an important component of a sales and me tax audit settlement. Out-of-state sellers that have not collected and remitted sales and use tax to a state in the past but found, on audit, to have nexus in a state may agree to register in exchange for a reduction in their assessments. Similarly, out-of-state sellers not under audit often approach states voluntarily in exchange for waivers of penalties or interest or both on back taxes. However, a Virginia Department of Taxation (Department) ruling this past year illustrates that voluntary registration may carry hidden dangers.

In Ruling of Commissioner, P.D. 00-137 (Va. Dept. Tax. 2000), the Department ruled that an out-of-state furniture seller was liable for uncollected Virginia use tax on furniture deliveries that a common carrier made into the state, after the seller had voluntarily registered to collect Virginia sales and use tax during a previous audit. In 1994, the Department audited the seller and determined that it should have collected use tax on sales of furniture delivered into Virginia on private trucks. In settlement of that audit, the furniture seller voluntarily registered to collect tax prospectively, even though it had begun using a common carrier to deliver furniture into the state two years previously. When the Department audited the seller again three years later, it assessed tax on furniture sales that the common carrier delivered. The Department reasoned, "once an out-of-state dealer voluntarily registers, nexus is no longer an issue."

This ruling runs counter to constitutional precedent; under the U.S. Constitution, a tax on interstate commerce will not pass Commerce Clause scrutiny unless applied to an activity "with a substantial nexus with the taxing state" (Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977)). The U.S. Supreme Court has held that substantial nexus is not established when a vendor's only contact with a state is by a common carrier (Quill Corp. v. North Dakota, 504 US 298 (1992)). While the Department acknowledged that the furniture seller "did not have sufficient contact with Virginia during the audit period to establish nexus," it nevertheless concluded that nexus becomes irrelevant once an out-of-state seller voluntarily registers...