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States look to tax cyberspace.

States would like to collect sales tax for on-line computer services, but they first must prove a nexus exists for such services.

In Quill v. North Carolina, 1992, the Supreme Court determined guidelines for a state nexus. The Court held that a service physically present within the state is taxable but that a service present in the state only via U.S. mails or common carrier is tax exempt. Paull Mines, general counsel of the Multistate Tax Commission (MTC), told the Journal that on-line services may fall into a gray area between the two guidelines, but "there are strong reasons to conclude that states have a clear nexus with on-line services.

"Some people contend that the MTC is trying to prove this by arguing that the flow of electrons constitutes a physical presence," continued Mines." The laws of physics say those electrons have mass and thus constitute physical presence, but that is not the basis of our argument."

Mines said that most on-line services have local numbers that people can dial to access them. "These local numbers are established by contract and are used to promote or maintain the market in a taxing state," said Mines. "The MTC thinks this effectively proves the existence of a nexus."

Mines said another support for the MTC position is the number of system operators--the people who manage the electronic bulletin boards--who work all over the United States. "They are the representatives for the on-line services," said Mines, "and they are in every state.

"The MTC is not saying these services should be taxed," said Mines. "We are just saying that jurisdiction to tax exists."

Susan W. Martin, chair of the American Institute of CPAs state and local taxation committee and former member of the MTC executive committee, said the MTC's aggressive position is "fundamentally deficient on constitutional grounds." Martin said the MTC was trying to redefine the physical presence standards that were reaffirmed in Quill. "If the states want to change these standards they must first get Congress to act," said Martin. In April the AICPA submitted comments on the MTC discussion draft on nexus guidelines for applying state sales and use taxes to remote sellers in which it disagreed with many of the draft's positions.
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Author:Wagenbrenner, Anne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1995
Words:373
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