With all the affiliate nexus bills that have been introduced lately in legislatures across the country I thought it might be interesting to take a look at where the concept of tax nexus comes from. Nexus is a Constitutional concept. Traditionally the "dormant Commerce Clause" protects sellers with no in-state presence from being obligated to collect sales or use tax. But, what is the dormant Commerce Clause?
The Commerce Clause: The U.S. Constitution gives Congress the power "to regulate commerce with foreign nations and among the several states..."
The dormant Commerce Clause: If Congress has not exercised its power, state and local governments are free to regulate local aspects of interstate commerce such as by imposing a tax on an out-of-state vendor.
If a state chooses to act under the dormant Commerce Clause the regulation must meet two requirements:
1) it must not discriminate against out-of-state competition, and
2) it must not be unduly burdensome.
Use taxes are not considered discriminatory even though they single out interstate commerce for taxation as long as the use tax rate is not higher than the sales tax rate.
A non-discriminatory use tax must also not be unduly burdensome. Three factors are generally looked at to determine this:
1) the existence of substantial nexus,
2) fair apportionment, and
3) fair relationship.
The first prong is the one that gets all the attention. A remote seller may only be subjected to use tax collection obligation if it has substantial nexus with the taxing state.
Q: How does a remote seller with no physical presence in a state get substantial nexus?
A: Through "attribution".
"Attributional nexus" is the nexus created when the physical presence or contacts of A are attributed to B in order to determine that substantial nexus exists. The crucial factor is whether or not the activities performed by A are significantly enough related to B's ability to establish and maintain a market in the state for sales. Is an affiliate related closely enough? We shall see.
The Commerce Clause: The U.S. Constitution gives Congress the power "to regulate commerce with foreign nations and among the several states..."
The dormant Commerce Clause: If Congress has not exercised its power, state and local governments are free to regulate local aspects of interstate commerce such as by imposing a tax on an out-of-state vendor.
If a state chooses to act under the dormant Commerce Clause the regulation must meet two requirements:
1) it must not discriminate against out-of-state competition, and
2) it must not be unduly burdensome.
Use taxes are not considered discriminatory even though they single out interstate commerce for taxation as long as the use tax rate is not higher than the sales tax rate.
A non-discriminatory use tax must also not be unduly burdensome. Three factors are generally looked at to determine this:
1) the existence of substantial nexus,
2) fair apportionment, and
3) fair relationship.
The first prong is the one that gets all the attention. A remote seller may only be subjected to use tax collection obligation if it has substantial nexus with the taxing state.
Q: How does a remote seller with no physical presence in a state get substantial nexus?
A: Through "attribution".
"Attributional nexus" is the nexus created when the physical presence or contacts of A are attributed to B in order to determine that substantial nexus exists. The crucial factor is whether or not the activities performed by A are significantly enough related to B's ability to establish and maintain a market in the state for sales. Is an affiliate related closely enough? We shall see.
Powered by Compendium Blogware
Comments for A Brief Introduction to Tax Nexus