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Determining State Sales Tax Obligations
IMR, Sept. 30, 1994
A 1992 U.S. Supreme Court decision specified that states cannot collect sales and use taxes on purchases made by their residents unless the seller has a physical presence in that state, says Amy Eisenstadt, director of state tax research and analysis for KPMG Peat Marwick. Eisenstadt says that the physical presence test would be met any time the seller or an agent of the seller traveled into the state to take orders from its residents. This condition is known as "nexus." According to Eisenstadt, mailing advertising into another state would not constitute nexus, and a seller having no other contact with that state would not have to collect the state's sales and use taxes.
However, states may try to intimidate sellers into thinking they have nexus when they do not. The state of Ohio sent Specialty Business Forms Inc., a Kalamazoo, Mich., distributorship, an application to "voluntarily register and begin collecting the Ohio use tax." Ken Sherman, CFC, the company's president, did not think he should be required to collect the tax since the only contact he has with Ohio consumers is through direct mail and advertising. However, the material he received from the state suggested to him that "anyone advertising in any publication that is mailed to anyone in Ohio" would have nexus. He thought this was an unrealistic expectation of the state, and he was right. When questioned, a representative of the department that had contacted Sherman admitted to him that federal law prohibits Ohio from enforcing the part of its tax code that would require him to remit use tax. Apparently, the language remains in the law in case the federal government changes its mind.
Some states also maintain that exhibiting at trade shows constitutes nexus. However, Jeff Wood of the Direct Marketing Association says trade shows constitute nexus only if selling takes place on the show floor. In other words, you might owe use taxes if you took an order at a trade show, but you would not owe use taxes on an order that came as a result of exhibiting at that show.
Over the years many unsuccessful bills dealing with the issue of taxing interstate sales have been introduced in Congress. A bill currently before the Senate, the Tax Fairness for Main Street Business Act of 1994, would replace the physical presence test with a sales-threshold test. Eisenstadt says passage of the bill is unlikely.