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An example of this concept is New York State’s expanded definition of what constitutes a vendor for sales and use tax purposes as found in N.Y.
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In recent years, courts have held that a business – even if it has no physical location in a state – may, under certain circumstances, be liable for collecting sales tax on all goods shipped into that state.
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To determine what constitutes substantial nexus one must now look further to state and local rules and cases, which only adds more confusion to an already difficult area of state and local taxation. To this day, many believe that the problem with the Quill ruling was that the Supreme Court did not go far enough in defining what constitutes substantial nexus. Therefore, in order for a state to require a business to register for sales tax purposes, the company must have more than a de minimis physical presence in the state. This “slightest presence” is not sufficient to satisfy the standards of substantial nexus. De minimis activities are those that only establish the “slightest presence” in a taxing jurisdiction. In addition, the Court ruled the company’s practice of mailing computer disks into the state was a de minimis contact. On these facts, the Supreme Court ruled that Quill’s presence in the state of North Dakota did not meet the substantial nexus requirement of the Commerce Clause. However, Quill did provide computer disks to some customers in North Dakota for the purpose of checking inventory and ordering supplies. The company had no locations or employees located in the state and all deliveries were via common carrier. Quill was a mail order vendor of office supplies with customers located in North Dakota. In Quill, which remains the standard for sales and use tax nexus today, the issue of when a state can impose a sales and use tax collection responsibility on an out-of-state retailer was decided. Nexus cases have been in the courts dating back to the 1940’s and are still being heard today. If a sufficient connection, or nexus, exists pursuant to federal requirements, then a state must show that a business is “doing business in the state” in order to require collection and remittance of sales and/or use tax.
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The Due Process Clause establishes a minimum connection requirement, while the Commerce Clause provides a substantial nexus requirement. The United States Constitution limits what states can do in determining whether a business has nexus in their state. Whether a state can require an out-of-state seller to comply with its sales and use tax law is determined by a combination of federal and state laws. Nexus can be defined as a seller’s minimum level of physical presence within a state that permits a taxing authority to require a seller to register, collect and remit sales and use taxes. As a business owner you should be concerned about nexus as it relates to sales and use tax. By far, the single most asked question concerns nexus. As a State and Local Tax (“SALT”) Manager I field client’s multi-state sales and use tax questions on a regular basis.