By Shane Ratigan
The first statewide sales taxes were enacted during the Great Depression. The laws were sold as short-term fiscal measures to alleviate the economic devastation of the times. Given the crisis of the times, it is not surprising the laws were generally haphazard in their approach, incomplete, unclear and often vague.
OK, so not much has changed in 80 years, except now everyone agrees the laws are here to stay. The last state to enact a sales tax did so in 1969. The last state to eliminate a statewide sales tax … well, that’s never happened.
A sales tax is an excise tax on transactions. Traditionally, the types of transactions where a state could demand sales tax collection were easy to identify. Typical transactions in the last century were remarkably localized compared to modern commercial channels. Cross-border transactions were the exception. Today, cross-border transactions are the norm.
Vendors of all sizes and all niches are likely to engage in business transactions with parties all over the United States – and perhaps the world. The elimination of borders as a barrier to trade places particular emphasis on the essential question, “Which vendors are compelled to collect sales taxes?”
In this arena, one very important legal principle always takes center stage: nexus. In the legal sense, nexus describes the connection between two or more participants, interests or concepts. In the world of sales tax, nexus refers to the connection a retailer has with a state. Nexus is the legal connection that empowers a state to demand collection and remittance of a retail sales tax.
The U.S. Supreme Court developed its core concept of nexus in the field of taxation more than 125 years ago:
“The power of taxation, however vast in its character and searching in its extent, is necessarily limited to subjects within the jurisdiction of the State. These subjects are persons, property and business. Whatever form taxation may assume, whether as duties, imports, excises, or licenses, it must relate to one of these subjects.” Cleveland v Penn. 82 US 179, 186 (1873).
More recently, the Court gave us one deceptively simple “bright line” nexus rule in 1992:
“… a seller whose only connection with customers in the State is by common carrier or the United States mail” lack(s) the requisite minimum contacts with the State” Quill v N.D., 112 S. Ct. 1904 (1992).
This “bright line” rule for sales tax nexus is presented in the negative. The Quill rule instructs a vendor what is not nexus, but it leaves a vendor empty-handed if it is looking for exactly what is nexus, constitutionally speaking of course.
The Court has its own reasons for avoiding specifics in this area because it believes the rules of sales tax collection between the states falls confidently on the U.S. Congress to figure out.
Where does this leave us? Since states are eager to require collection and remittance, many have taken steps to expand their definition of nexus by regulatory and policy efforts. However,the limited utility of the Quill decision left them plenty of room for creativity.
About the Author
Shane Ratigan, JD, LLM, is content compliance manager working in sales tax law and sales tax compliance with Avalara, a Software-as a-Service end-to-end sales tax solution for businesses of all sizes. Contact him at [email protected].