History 101: State Taxes

Are you familiar with these important state tax milestones?

Are you familiar with these important state tax milestones?

Happy President’s Week! In light of the holiday, we thought it would be fun to chronicle the history of some relevant state tax legislation enacted and court cases decided during the terms of notable presidents. Here are three important state tax milestones with which to be familiar.

1959: Passage of Public Law 86-272
President: Dwight D. Eisenhower

Congress enacted this state tax law to protect companies selling across state lines by providing a safe harbor for income tax purposes. Although it was originally slated to be temporary, the law still prohibits a state from imposing a net income tax on an out of state corporation if the corporation’s only in-state activity is the solicitation of orders. Orders must be for tangible personal property, where orders are sent outside the state for approval and are filled from inventory stock held outside the state. If a company engages in services in the state, the protection of P.L. 86-272 is lost.

This aspect of state taxes is still with us today, but note that it does only protect a company for sales of tangible personal property. There are many limitations to Public Law 86-272, but its benefits are still available for companies with the right fact pattern.

1992: Quill Corp. v. North Dakota, 504 U.S. 298
President: Bill Clinton

Quill Corp. was an office supply retailer that mailed its catalogs to customers and prospects in North Dakota. Although the company had no other physical presence in the state, the state claimed that the catalogs and the solicitation of business in the state created nexus (or state tax presence) for Quill such that the company should have collected sales tax from North Dakota customers. In its landmark ruling, the U.S. Supreme Court ruled that while the catalogs created a minimal connection with the state, it did not create ‘substantial nexus’ under the Commerce Clause of the U.S. Constitution. Therefore it ruled that North Dakota could not subject Quill to a sales tax collection obligation.

Quill is still relevant today, even though more focus is on the Internet as opposed to the “catalog.” Until Congress enacts legislation otherwise, the concept that a company must have substantial presence in a state before it must collect sales tax still holds. It is worth noting, however, that legislation (such as the Marketplace Fairness Act and the Online Sales Simplification Act) has been introduced frequently in the last several years that could change the effect of the Quill ruling.

2005: Borders Online LLC v. State Board of Equalization, 29 Cal. Rptr.3d 176 (Cal. Ct. App. 2005)
President: George W. Bush

In this decision, the California Court of Appeals ruled that the affiliation between Borders Books’ bricks and mortar stores and the company’s separately incorporated online store created nexus for the online retailer. The court’s decision was based largely on the fact that the two companies sold related products (books, videos, etc.) and that the brick and mortar locations accepted returns and exchanges for the online affiliate.

While this is a California case, it was largely watched across the country and several states interpreted cases similarly. Affiliate nexus is a growing area as states want to draw more companies into the state tax fold, as it were.

There are obviously many other decisions that have shaped state taxes, but these are a few that continue to be relevant in this ever-changing marketplace.

At Miles Consulting Group, we answer questions about nexus every day. In fact, almost all projects start with the question, “Where does the company have nexus?” After that determination is made, then we get to address issues such as the taxability of products, sourcing of revenue, whether related companies should file on a combined basis and many others. The navigation of multistate issues can be tough, but we can help. Contact us to find out more!

Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit and the California Manufacturers’ Partial Sales Tax Exemption. To learn more, contact us today at www.MilesConsultingGroup.com.

Photo Credit: Jiuguang Wang

One thought on “History 101: State Taxes

  1. Pingback: A New Approach to Oregon’s State Taxes: IP28 | Miles Consulting Group

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