We've written regularly (here, here, here, and here) regarding the explosion of state activity directed at enhancing the collection of state and local sales and use taxes. This week, South Dakota asked the United State Supreme Court (see a copy of the cert petition here) to review and find constitutional its nexus law, which requires all retailers above specified sales thresholds to collect sales and use tax. In other words, South Dakota is asking the Court to set aside the current physical presence nexus rule reaffirmed in Quill v. North Dakota.
Included in South Dakota's Supreme Court petition are three maps we prepared that show the state of the law with regard to sales and use tax nexus. These maps place state laws into one of two buckets: 1) those which seek to expand nexus (arguably) within the constitutional framework articulated by the Supreme Court in a series of cases; and, 2) those which discard physical presence as the touchstone for nexus or which impose notice and reporting requirements on non-collecting sellers. In other words, we've divided these laws into the old and the new approaches states are taking to further collection of legally due sales and use taxes. (Note: “law” encompasses statutes, regulations, and administrative positions and practices, to the best of our knowledge.)
Non-Physical Nexus and Notice/Reporting
These “non-physical” nexus laws set a bright line sales thresholds (in dollars or number of transactions or both), with sellers exceeding these thresholds required to collect legally due and payable sales taxes. These measures were inspired initially by U.S. Supreme Court Justice Anthony Kennedy, who, in his concurring opinion in DMA v. Brohl, invited the legal system to present the Court with a case that would allow it to revisit its holding in Quill (except for Oklahoma's, which predated Justice Kennedy's opinion).
Laws requiring non-collecting retailers to notify buyers of potential use tax liability and to provide annual reports to buyers and states have also proliferated in the past two years. Although the concept was introduced in Colorado in 2010, the issue did not take off in state legislatures until the 10th Circuit Court of Appeals found the law to be constitutional.
As shown in our first map, several states have now combined these two approaches. Our second map includes states which considered but did not adopt one or both of these policies during this year's legislative sessions, but where we expect activity again in 2018.
Expanded Physical Nexus
The laws in our final map represent the more traditional approach by the states to the challenge of non-collecting remote sellers. These policies seek to expand collection as broadly as possible within the framework established by the Supreme Court. The first wave of this effort, beginning in the late 1990s and through the 2000s, was to adopt affiliate nexus policies to combat so-called “entity isolation” strategies. In essence, affiliate nexus bills attribute nexus to a remote seller based on the traditional physical presence of a legal affiliate engaged in business in the state.
The second wave was initiated by New York, the first state to adopt a “click-through nexus” statute. These laws attribute nexus to the remote seller based on the activities of an unrelated party, such as a website in the state directing sales to the remote seller.
The most recent trend in this area is exemplified by Ohio and Massachusetts, which this year adopted a statute (OH) and proposed a rule (MA) which establish what we are calling “electronic nexus,” which is asserting that the presence of software or other electronic property in the state establishes nexus for the remote seller.
If the Supreme Court does not take up the South Dakota case, or it rules against the state, we fully expect more activity by states with regard to expanded physical nexus, along with a proliferation of notice and reporting requirements.