Academic journal article Albany Law Review

Finishing What Quill Started: The Transactional Nexus Test for State Use Tax Collection

Academic journal article Albany Law Review

Finishing What Quill Started: The Transactional Nexus Test for State Use Tax Collection

Article excerpt


A. Due Process Limitations on Use Tax Collection

B. Commerce Clause Limitations on Use


A. The Bright-Line Rule: Contacts by Mail or

Common Carrier

B. Vendor's Retail Outlets in the Taxing State

C. Vendor's Personnel in the Taxing State

D. Independent Contractors in the Taxing State



With the rise of large mail-order companies such as L.L. Bean and the Home Shopping Network, the mail-order industry in the United States is expanding rapidly.(1) Small businesses are facing increased competition as more and more consumers choose to purchase merchandise from mail-order firms.(2) This growth is, in part, attributable to consumers' ability to evade state sales and use taxes when mail-order companies do not collect them.(3) Local businesses, which must collect sales tax on most retail sales, are at a disadvantage to the extent that their customers cannot realize the same cost savings. In addition, states lose billions of dollars in annual revenue due to their inability to collect taxes on out-of-state sales.(4)

This situation stems from the differences between sales and use taxes. Because the dormant Commerce Clause prohibits taxation of out-of-state transactions, states cannot tax sales occurring outside of their borders.(5) Therefore, to protect local businesses and state tax revenue, states that impose a sales tax on purchases made within their borders also impose a compensating use tax on outside purchases consumed within the state.(6) The subject of the use tax is an in-state transaction, the use of the product within the state, rather than an outside sale. The use tax thus "complement[s] the sales tax" by "fill[ing] gaps where the States could not constitutionally impose a sales tax."(7)

States generally impose both sales and use taxes on the consumer,(8) but enforcing use tax collection is difficult. While states rely on in-state retail vendors to collect and remit the sales tax,(9) the Due Process and Commerce Clauses restrict their ability to impose a use tax collection obligation on out-of-state retailers.(10) Thus, when the out-of-state retailers do not collect the use tax, consumers can realize a savings relative to similar purchases made within the state.(11)

Out-of-state vendors have resisted collecting the use tax on Due Process(12) and Commerce Clause(13) grounds.(14) These provisions of the United States Constitution allow a state to impose use tax collection obligations only on businesses that have a certain nexus with the state.(15) The Due Process Clause requires minimum contacts with the taxing state, while the dormant Commerce Clause requires a substantial nexus with the state.(16) Since Quill Corp. v. North Dakota,(17) only the dormant Commerce Clause substantial nexus requirement mandates that a mail-order vendor (also referred to as a "direct marketer") have a physical presence within a state before that state can require it to collect use taxes.(18) The existence of "`retail outlets, solicitors, or property within a State'" generally amounts to physical presence, but contacts solely by "`mail or common carrier'" are insufficient.(19) The Due Process Clause, according to Quill, does not require that a direct marketer be physically present in the state and, therefore, contacts by mail or common carrier may be sufficient to meet the due process minimum contacts nexus requirement.(20)

The concept of physical presence, then, remains important under the Commerce Clause. However, Quill only clarified that contacts made solely by mail or common carrier, regardless of the extent of solicitation within the state, do not amount to physical presence.(21) This Comment explores the contacts that do satisfy the physical presence requirement. …

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