In the Complete Auto Transit case, the Supreme Court articulated a four-part test to determine if a state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. scheme unduly burdens interstate commerce. The first prong of the Complete Auto test requires a taxpayer to have nexus (i.e. a connection) with a state before it can impose its tax jurisdiction. In Quill Corp. v. North Dakota, the Supreme Court explained that a business had to be physically present in a state before that state could require the business to collect use tax on its behalf.
The facts in Quill Corp. are as follows: North Dakota sent a notice to Quill Corp. that it owed use tax (a companion tax to the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. ) payments for purchases that North Dakota residents had made through Quill Corp.’s catalogue. Quill responded that it did not have nexus in North Dakota because it had no physical operations or employees and hence did not have to collect North Dakota use tax on sales made to North Dakota customers.
The Supreme Court sided with Quill, ruling that a taxpayer must have a physical presence in a state in order to require collection of sales or use tax for purchases made by in-state customers. Physical presence means offices, branches, warehouses, employees, etc. The existence of customers alone (i.e. economic presence) did not create sufficient nexus under the Commerce Clause for North Dakota to impose a sales tax collection burden on Quill Corp..
The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce. Today, a movement is afoot to simplify state sales tax systems in order to lobby Congress to overturn Quill and require remote sellers to collect sales and use tax.
Update: Professor John Mikesell from the Indiana University School of Public and Environmental Affairs writes that at the time of the Quill decision, his data (compiled for a brief filed in the Quill case) shows that there were 6,277 separate sales tax jurisdictions and 4,452 separate use tax jurisdictions. Thus, there were less use tax jurisdictions than sales tax jurisdictions at the time the case was decided, though the number was still substantial.
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