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Nexus determinations after the U.S. Supreme Court's decisions in 'Quill' and 'Wrigley.'

On May 26, 1992, the U.S. Supreme Court decided Quill Corp. v. North Dakota, 112 Sup. Ct. 1904 (1992), holding that a person without substantial physical presence in a state could not, under the Commerce Clause of the U.S. Constitution, be compelled to collect and remit that state's sales and use tax. In so deciding, the Court partially overturned National Bellas Hess, Inc., 368 US 753 (1967). In the previous decision, the Court held that imposing sales and use tax collection on a mail-order seller with no physical presence in a state violated both the Commerce and Due Process Clauses of the U.S. Constitution. The Court's emphasis on the higher Commerce Clause nexus standard has raised significant state tax issues that the states are now beginning to address through statutory and case law and administrative pronouncements.

A large number of states had enacted legislation requiring the collection of sales and use taxes from vendors with no physical presence in a state. A number of these states, including Iowa and Connecticut, have issued bulletins stating their statutes have been rendered unenforceable as a result of Quill, but they will increase enforcement efforts against the ultimate consumers, both businesses and individuals, for payment of the use tax. New Mexico will also pursue such collection, but under recently enacted legislation it has barred the Department of Revenue from taking any action to collect use tax owed by individuals on property purchased and received before July 1, 1994, except for property purchased for business purposes.

While many states are now requesting customer lists and sales records from out-of-state sellers to more easily collect use tax from in-state residents, California has determined that administrative ease must take precedence over revenue. Therefore, it has established a $500 purchase price threshold for sending bills.

The states are finding the question of physical presence through agency relationships was not answered in Quill. The Ohio Board of Tax Appeals recently found that an out-of-state seller's use of a commonly owned delivery service did not rise to the level of an agency relationship. As a result, the seller could not be held responsible for collecting use tax from Ohio customers. California has changed its policy regarding vendors subject to its sales and use tax jurisdiction by requiring out-of-state vendors to collect sales tax if they have representatives in California, even if the representatives are independent contractors and the only transactions in which they engage are the assembling or installation of merchandise in the state.

In Wisconsin Dept. of Revenue v. William Wrigley, Jr. Company, 112 Sup. Ct. 2447 (1992), the Supreme Court, for the first time, defined the term "solicitation" for purposes of PL 86-272. PL 86-272 prohibits states from imposing a tax measured by net income on companies whose only presence in the state consists of solicitation of orders for goods approved and sent in from out-of-state. The Court determined that "solicitation" encompasses requests for purchases and activities entirely ancillary to such requests. Activities not meeting this definition could be engaged in if, in the aggregate, they are de minimis, i.e., they do not establish a "nontrivial additional connection with the state."

As a result of this decision, Massachusetts, New York State, New York City, Virginia and Iowa have changed the definitions spelled out in their regulations relating to nexus under PL 86-272. In some instances, the changes were merely cosmetic (i.e., examples were changed to those employed by the Court in reaching its decision). Some states, however, chose to tighten their definitions. Virginia, for example, has ruled that delivery of the goods in the seller's own truck will cause the seller to lose the protection since truck transportation is not an activity ancillary to the request for purchases and, if conducted regularly, cannot be considered de minimis. New York City has stated that leasing an unstaffed exhibit booth for display purposes is outside of the definition of solicitation and, therefore, is subject to tax. Under Massachusetts' proposed regulation, immunity will be lost if a company qualifies to do business in the state or if customer complaints are handled by an in-state employee in any fashion other than by referral to the out-of-state home office.

It is clear that the two Supreme Court decisions will affect nexus decisions in almost all of the taxing jurisdictions in which multistate taxpayers do business. It is also clear the changes resulting from the decisions will not be uniformly applied by the states. Businesses must carefully analyze these two decisions, as well as each state's interpretation of them, to protect themselves from unwarranted taxation.
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Author:Dennen, Sylvia
Publication:The Tax Adviser
Date:Jul 1, 1993
Words:766
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