Virginia Rules that Owning Resale Inventory in the State Does Not Require Sales Tax Registration

A recent Virginia ruling illustrates how states are permitted to set nexus requirements that are less stringent than the constitutional requirement.

By Jess Johannesen, SALT senior associate

In 1977, the United States Supreme Court ruled that as a matter of constitutional law, a “substantial nexus” must exist between a taxpayer and state before a state may impose a tax on said taxpayer. [1] For sales and use tax purposes, a United States Supreme Court 1992 opinion held that the taxpayer must establish a physical presence in the state in order to meet the “substantial nexus” requirement. [2]

Over time, states have broadened the meaning of physical presence beyond simply having employees or property in the state. This trend has led to the evolution of nexus concepts that certain states employ in order to broaden a state’s authority to impose sales and use tax, including concepts such as attributional nexus, click-through nexus (an article in the July 2015 SALT Newsletter discusses both attributional and click-through nexus concepts) and even a recent and controversial development in Alabama in regard to extending economic nexus/factor presence nexus standards to sales and use tax (refer to the October 2015 SALT Newsletter’s Alabama article).

While state statutes set forth the nexus standards that the state employs, the United States Supreme Court still has the final say to interpret the constitutionality of those standards. The Court will strike down a state nexus standard as unconstitutional only if it does not meet the Court’s substantial nexus requirement; however, there is no prohibition if the state chooses a nexus standard that requires a more substantial nexus than the Court would require.

For example, assume that the United States Supreme Court ruled that the substantial nexus standard required an employee to be in a state for at least 10 days. If a state’s laws provided that nexus was established when a taxpayer’s employee was in the state for only eight days, then this would be viewed as an unconstitutional imposition of nexus since the state’s law is more restrictive than the 10-day constitutional standard.

On the other hand, if a state’s laws provided that nexus was established when a taxpayer’s employee was in the state for at least 15 days, then that law is not unconstitutional since a taxpayer whose activity in the state would meet the state standard will always satisfy the constitutional standard as well. However, if the employee was in the state for 12 days, then under the state’s law the taxpayer would not have nexus, even though the taxpayer satisfied the constitutional rule. While these situations are not common, a recent Virginia Ruling provides an example of how it can occur. [3]

In the ruling, the taxpayer is an online retailer with several locations outside Virginia. The taxpayer maintains an inventory of their products in fulfillment center warehouses located in Virginia. Online sales by the taxpayer to Virginia customers are packed and shipped directly to the customers by the fulfillment centers. The taxpayer has no offices, no employees, no business locations and no warehouses in Virginia, but the taxpayer does maintain ownership of the resale inventory and may withdraw or increase their inventory at their own discretion. Further, the fulfillment centers do not take ownership of the taxpayer’s inventory.

Virginia has statutory definitions of a “dealer” as well as statutory guidance for when a dealer has sufficient activity within the state to require to register for sales and use taxes. [4] The ruling does not dispute that the taxpayer qualifies as a “dealer” for purposes of the state’s sales and use tax. However, the ruling finds that the taxpayer does not have sufficient activity within the state that requires the taxpayer to register for sales and use tax regarding sales made to Virginia customers, noting that the statute does not identify maintaining resale inventory as a basis for requiring a taxpayer to register for and collect and remit Virginia sales and use tax. [5] Many states would simply consider the presence of the taxpayer’s inventory in the state to establish clear physical presence, resulting in the requirement to register for sales and use tax, and such a rule would meet the constitutional standard. This scenario is similar to the previous example; Virginia has set forth a nexus standard that does not extend as far as the constitutional standard would allow.

This ruling demonstrates the importance of understanding and applying both the constitutional nexus standards as well as each state’s statutory nexus requirements. A taxpayer is required to comply with a state’s sales and use tax laws only if it meets both. Although it is more common for a state to set its nexus standard in line with the constitutional standard, situations like the one discussed in the Virginia ruling may exist in other states.

As your company navigates the complex multi-state sales and use tax landscape, have you considered if there are unique state laws that could reduce your company’s tax compliance burden and save you money? HA&W’s SALT team can assist with state tax nexus studies that address both income tax and sales and use tax issues in order to help determine where your company may or may not have a tax compliance obligation.

Contact Jess Johannesen, SALT senior associate, at or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at for more information.

[1] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

[2] Quill Corporation v. North Dakota, 504 U.S. 298 (1992).

[3] Virginia Public Document Ruling No. 15-194, 10/16/2015.

[4] Va. Code Ann. §58.1-612(B); Va. Code Ann. §58.1-612(C)

[5] The statute also does not identify mere ownership of tangible personal property located in the state as a basis for requiring a taxpayer to register for and collect and remit Virginia sales and use tax.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.