As an ecommerce retailer, the idea of being physically present in many jurisdictions may be a concept that is hard to get used to. How could you be “present” is California, when you live and work in New York?! Well, the basis of being present begins with nexus. Nexus must exist before a state has adequate jurisdiction to require a seller to collect and remit sales and use taxes. The basic requirements to determine when jurisdiction exists are outlined in the Due Process Clause, and then more extensively in the Commerce Clause of the U.S. Constitution.
Cases involving nexus began to pop up decades ago. In the very first case that addressed nexus for purposes of sales and use taxes, the U.S. Supreme Court examined the Due Process Clause to find that a mail-order vendor based in Missouri lacked the ‘‘minimal connection’’ required to enforce taxation in Illinois. This limitation was then later upheld in the quintessential nexus case of Quill Corp. v. North Dakota. In Quill, an Illinois-based office equipment retailer solicited sales in North Dakota by catalog. North Dakota believed that Quill had a statutory requirement to collect tax on its sales to North Dakota residents because the company ‘‘engaged in the regular solicitation of sales’’ by catalog or mail. The North Dakota Supreme Court upheld that Quill had nexus because the state “had created an economic climate that foster[ed] demand for Quill’s products, and maintained a legal infrastructure that protected that market.” This decision went against the previous case decided by the U.S. Supreme Court a number of years earlier and introduced a new economic theory of nexus.
When Quill reached the U.S. Supreme Court, the decision was reversed based on the grounds that the economic nexus theory relied on was flawed. The court explained that the contacts Quill had with North Dakota might have satisfied the “minimum contacts” nexus test required by the Due Process Clause, but those same contacts were insufficient to meet the Commerce Clause’s substantial presence standards. Today, states must somehow define substantial presence relative to physical presence. This is important for ecommerce companies because it may feel as though you don’t have a physical presence anywhere, except where you live and work, but in today’s market that just isn’t true.
It has been established through a long line of court cases that maintaining a continuous, ongoing physical presence in a state creates nexus, yet courts still struggle to define the degree to which any non-continuous or insignificant physical ties are enough to create substantial presence. The confusion stems from the fact that the Supreme Court has never defined how substantial a physical presence must be before it amounts to “substantial nexus.”
In attempting to delineate the boundaries of substantial presence, the issue has become even more confused by the addition of new terminology. Two state cases over nexus have added the additional standards of having “more than the slightest presence” as opposed to “substantial nexus requiring a significant physical presence”. It would appear that the gap is slowly being narrowed, but with over 11,000 taxing jurisdictions, it can’t happen fast enough.
Nexus cases are fact intensive, which is why it is imperative that retailers with a presence in multiple states investigate how each state has defined substantial presence specific to their business operations. Before getting too bogged down in the minute details though, always refer to the basics of nexus.