The rise of internet sales has created a tax problem for states. States are having difficulty getting revenue from these sales because the sellers lack nexus. In the legal community, that nexus is known as a connection with a state which allows for it to exercise jurisdiction over a vendor. Nexus is a growing concern for internet sellers because they are not physically present and states have begun overreaching in their extension of jurisdiction over them. Last year, Oklahoma enacted the Oklahoma Retail Protection Act of 2016. The purpose of the act was to (1) expand nexus to include a presumption of its existence in cases where a vendor has certain relationships or arrangements with people who do have a physical presence in the state, and (2) require out-of-state vendors to provide annual reports to their customers acknowledging the potential use tax liability on their purchases without disclosing which particular items were purchased.
This first part, which expands the jurisdiction of Oklahoma to cover more out-of-state vendors than it did previously, ultimately only applies a presumption to vendors who fall into a particular category. That presumption can be overcome with proof that the person with physical presence who has a relationship with the vendor does not establish or maintain the sales market in Oklahoma for that vendor. But is even a presumption of nexus in those cases crossing a line? In Quill Corp. v. North Dakota, the United States Supreme Court made it very clear that physical presence must be required by a vendor for it to have nexus within a state. To extend that to “physical presence of anyone associated with the business” is, at the very least, stretching the holding in Quill.
Meanwhile, the second requirement of the Oklahoma Retail Protection Act of 2016 requires out-of-state vendors that are not required to collect tax to send records to their customers to whom sales have been made within the state. These records need to identify the total sales made by the vendor to its in-state customer without revealing the particular items purchased. As this requirement appears to be on vendors who have no physical presence whatsoever, even by a third party, it is questionable whether Oklahoma has the authority to enforce such a burden on companies who are located entirely outside of their state.
Ultimately, potential challenges certainly exist to both provisions of the Oklahoma Retail Protection Act of 2016. Time will tell whether vendors are willing to put up a fight. To allow a state to force an out-of-state vendor with absolutely no physical presence within the state to send annual reports to its customers seems to stretch its authority past its limit. Furthermore, it would be difficult to enforce this provision should a vendor fail to comply. Meanwhile, expanding the definition of nexus to allow for certain relationships with individuals to extend nexus to a company located entirely outside of the state appears to come in deep conflict with the holding in Quill. But as states lose sales tax revenue to out-of-state internet sales, it is certain that they will find new and creative ways to collect sales tax elsewhere, even if that requires expanding their jurisdiction to companies that should otherwise not be taxed.
Other states, meanwhile, have made similar changes to their laws. For example, Tennessee proposed a rule in November 2016 that extends nexus to out-of-state dealers who engage in the regular or systematic solicitation of consumers in Tennessee through any means and make sales exceeding $500,000 to Tennessee consumers during the calendar year. Similarly, Washington found nexus in advertising. These “economic nexus” laws find nexus at a certain sales threshold. The idea behind them is that a company which takes advantage of the economy of a state should similarly bear the burden of taxation within that state.
About the Author: Jeanette Moffa is an associate attorney of the Law Offices of Moffa, Sutton, & Donnini, P.A. Ms. Moffa concentrates in the area of State and Local Taxation with a heavy emphasis on sales and use tax. In addition to Florida and multi-state sales and use tax issues, she also works on appellate administrative law cases. In addition to being an attorney, she is an adjunct professor at Broward College.