Since Quill in 1992, states only have the power to impose taxes on businesses if they have a “physical presence” in the State. For example, in order for a state to be allowed to require a company to charge sales tax, the company must have a place of business in the State, employees in the State or have a representative in the State. However, as the economy has shifted, more and more States are enacting an “economic nexus” to impose a tax on businesses.
But, what is economic nexus?
“Economic nexus” is a presence (or “nexus”) standard in which States are able to impose taxes on businesses that have no physical presence on the taxing State other than having a certain amount of sales on that State. States normally set up a threshold gross amount of sales that a business must have in order to create an “economic nexus” with that State. As an example, in 2002, the Multistate Tax Commission (“MTC”) developed the idea of an economic nexus when it allowed substantial nexus in situations where there is no physical presence as long as sales during the tax period are greater than $500,000.
Even though this trend has been growing across the States, it is not constitutional in my view. “Economic nexus” plainly contradicts the decision made by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which, the Supreme Court held that a state cannot impose use tax obligations on an out-of-state business unless the business has a physical presence in the state.
Tennessee has now joined the bandwagon of States that directly contradict Quill’s physical presence standard. On June 16, 2016, the Tennessee Department of Revenue (DOR) submitted a new sales and use tax regulation for publication in which they create an economic nexus threshold standard. Under this new proposed regulation,
Tennessee’s DOR publication provides that “out of state dealers who engage in the regular or systematic solicitation of consumers in this state through any means and make sales that exceed $500,000 to consumers in this state during any calendar year also have a substantial nexus with this state.”
The Tennessee regulation requires that all dealers that meet this economic nexus threshold must register with the DOR by January 1, 2017. The regulation requires that out-of-state dealers to report and pay the appropriate tax to the DOR on sales of tangible personal property and other taxable items delivered to Tennessee consumers by July 1, 2017. This regulation will become effective 90 days after is filed by the Secretary of State’s Publication Division. With more and more states adding an economic nexus threshold, out-of-state sellers have had to adapt to the volatile nexus landscape in order to continue their business.
States like Alabama, South Dakota, Vermont and New York already have an economic nexus standard in place that allows them to tax out-of-state retailers without any physical presence in the State. The threshold for those states ranges between $100,000 to $1 million in sales.
With this trend continuing to grow in many States across the nation, States that have enacted those legislations should foresee a constitutional challenge since the “economic nexus” of only providing a threshold amount of sales contradicts the decision made in Quill Corp. In that seminal case, it was held that the states cannot impose sales tax collection and compliance burdens on an out-of-state business merely for having customers on the state.
Since more and more States continue to challenge the decision made the Supreme Court in Quill, it is expected that at some point in the near future that the Supreme Court will accept to hear a case on “economic nexus.”
Gerald “Jerry” Donnini II is a partner of the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Donnini concentrates in the area of Florida and Federal tax matters, with a heavy emphasis on the tobacco, convenience store and petroleum industries . He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Us Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com.
Mr. Donnini also regularly represents cigarette, beverage, and tobacco distributors against the Division of Alcohol and Tobacco in connection with refund claims and audit defense. While at Nova Southeastern University, Shepard Broad Law Center, Mr. Donnini was the Notes and Comments Editor of Nova Law Review and Vice President of the Sports and Entertainment Law Society. Prior to attending law school at Nova in 2008, Jerry was an accountant for National Retail Properties, Inc. Mr. Donnini earned his LL.M. in Taxation at New York University. You can contact Mr. Donnini via email at JerryDonnini@FloridaSalesTax.com or call 954-642-9390.