The Physical Presence Requirement for Sales/Use Tax Nexus: Heading Towards Extinction?
Two notable events in March 2015 provided additional hope to states (and potential headaches to taxpayers) that the physical presence nexus requirement may be nearing an end.
In 1967 and again in 1992, the United States Supreme Court ruled that a taxpayer must have physical presence in a state in order to be required to collect and remit that state’s sales/use tax.  Since then, taxpayers and states have fought constantly over what exactly constitutes physical presence, and states have been very aggressive (and mostly successful) at expanding the concept of physical presence to attribute certain in-state activities and presence of third parties to out-of-state taxpayers. The most recent example of this are the various “click-through nexus” laws that have been enacted in approximately 20 states around the country, beginning with New York.  These laws are aimed at large internet retailers, such as Amazon and Overstock, which pay commissions to in-state residents who, through their own websites, provide links to the retailer’s website which result in in-state sales. Given the changes in our economy since 1967 (and even since 1992), most notably the shift towards e-commerce, states have argued that the physical presence requirement for sales/use tax nexus should be eliminated since it is much simpler these days for taxpayers to make sales to a resident of a state without ever establishing physical presence in that state.
Well, two notable events occurred in March that provide additional hope to states (and potential headaches for taxpayers) that the physical presence nexus requirement may be nearing an end. First, on March 3, 2010, the United States Supreme Court issued its decision in Direct Marketing Ass’n v. Brohl, Executive Director, Colorado Dep’t of Revenue.  In that case the Court addressed a procedural issue relating to Colorado’s controversial use tax reporting law that was enacted in 2010, and while this decision does not address the validity of the law itself (that will be decided by courts in the future), the decision is notable for the concurring opinion of Justice Kennedy. In that opinion, Justice Kennedy (who voted with the majority), decided to provide a brief history of the physical presence nexus requirement, and concluded with the following invitation to revisit that requirement:
“The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online business may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away – regardless of how close or far the nearest storefront…As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.
Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier…It should be left in place only if a powerful showing can be made that its rationale is still correct.
The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to not the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”
A week later, on March 10, 2015, Senators Enzi (WY) and Durbin (IL) introduced the Marketplace Fairness Act of 2015 into the 114th Congress.  Like its predecessors, this Act would permit states, in certain circumstances, to require out-of-state sellers with no physical presence to collect and remit sales/use tax on sales to in-state consumers. As in prior versions, there is a small seller exemption that would apply to sellers with less than $1 million in annual remote sales in the United States in the prior calendar year. New to the 2015 Act, however, is a provision prohibiting a state from beginning to require compliance from remote sellers (i) for one year following the date of enactment and (ii) from Oct. 1 through Dec. 31 (i.e., the holiday shopping season) of the first calendar year following the date of enactment.
While for many years the nexus debate centered on whether or not the physical presence requirement should be abolished, it may be the case now that the debate has shifted from the question of “if” to the question of “when.” Indeed, in the March/April 2015 issue of the Journal of Multistate Taxation and Incentives, Kevin Sullivan, the Connecticut Commissioner of Revenue Services, wrote an article titled “Time for States to Ramp Up Sales Tax Economic Nexus,” suggesting the time had come for states to go after remote sellers despite Quill. Taxpayers are advised to keep a close watch on the nexus debate; we will continue to monitor nexus developments and include significant updates in future issues of the HA&W SALT Newsletter.
Contact Jeff Glickman, partner-in-charge of HA&W’s State and Local Tax practice, at [email protected] for more information.
 National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
 See, e.g., N.Y. Tax Laws § 1101(b)(8)(vi).
 575 U.S. ___ (2015). The full opinion can be found by clicking here.
 The text of the bill (S.698) can be found by clicking here. Previous bills were introduced into Congress in both 2011 and 2013, but none of those passed.
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