Constitutional and Legislative Standards

By Jason Watson, CPA
Posted Monday, October 18, 2021

Time to go back to school. The Due Process Clause of the United States Constitution requires the seller to have some “minimum contacts” with the taxing state. The seller must reach out and purposefully avail itself of the benefits of that state. Historically, courts have held that a physical presence is required to meet the Due Process Clause, but that was dramatically changed in the Wayfair case.

Once this is satisfied, which is no easy task for a state, a four-part test of the Commerce Clause must be met.

Article 1, Section 8, Clause 3, of the Constitution empowers Congress to prohibit a state from unduly burdening interstate commerce and business activities. The law authors were very concerned with states colluding or combining forces near major trade hubs and routes, and thus created the Commerce Clause. A vision of gangs holding up covered wagons in California.

The United States Supreme Court in Complete Auto Transit v. Brady (1977) stated that a seller must meet the following four-part test to be forced to collect a tax:

• The seller must have substantial nexus (was physical presence with Quill and now it is substantial nexus with Wayfair) in state;

• The tax cannot discriminate against interstate commerce;

• The tax must be fairly apportioned; and

• The tax must be fairly related to services provided by state.

The common theme after nexus is fairness. The only time a tax is fair is when you pay the minimum amount, right?

Moving onto legislative standards. Public Law 86-272 was quoted earlier in this chapter and basically prevents a state from imposing income tax on businesses whose only activity in the state is the solicitation of orders, provided the orders are accepted and delivered from a point outside the state (interstate commerce). And this only refers to tangible personal property (TPP) and not services. At the time of this law, services were inherently personal and required a close, physical presence to perform (proximity). That has changed with telecommuting and the pure definition of a service (more on that in a bit).

So we have three standards yet states vary across the board based on the definition and triggering of nexus.