Texas Sales and Use Tax: Taxing Jurisdiction

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July 05, 2018

States impose numerous taxes on individuals and businesses in order to raise funds for government programs, police protection, fire protection, welfare programs, transportation and other state and local services.

States have limited authority to impose tax. The power to impose tax is granted by the federal government in the United States Constitution. State tax statutes and regulations are subject to challenge if they conflict with the U.S. Constitution, federal statutes developed under the constitution or U.S. Supreme Court case law interpreting the Constitution. Moreover, several state constitutional provisions restrict the taxing authorities’ and state legislatures’ power with regard to the ability to impose tax on persons and businesses.

The primary U.S. Constitutional provisions affecting taxation are the due process clause and the commerce clause. The due process clause of the Fourteenth amendment to the U.S. Constitution grants due process of law. The commerce clause grants to Congress the power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”75 A state violates this provision when it discriminates against foreign commerce. Discrimination arises when the state imposes greater requirements on foreign commerce than on in-state commerce. In this context, “foreign” commerce may be either outside the United States or merely outside the taxing state. The due process clause works hand-in-hand with the fourteenth amendment grant of equal protection under the law.

The U.S. Constitution also prohibits states from taxing exports. Article I, Sec.9 of the U.S. Constitution, states that “[n]o tax or duty shall be laid on articles exported from any state.” Article I, Sec.10 of the U.S. Constitution states that “[n]o state shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws: and the net produce of all duties and imposts, laid by any state on imports or exports, shall be for the use of the Treasury of the United States; and all such laws shall be subject to the revision and control of the Congress.”

In addition, under the “full faith and credit” clause of the U.S. Constitution, each state must respect another state’s interpretation of its own laws. Article IV, Section 1 of the Constitution provides that “[f]ull faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state.” This becomes relevant in state taxation matters when there may be more than one state that lays claim to the authority to tax a particular transaction.

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The current federal test of constitutionality under the Commerce Clause arises from the state tax case of Complete Auto Transit v. Brady.76 The court determined a tax is constitutional as long as:

a. the tax applies to an activity that has a substantial nexus with the taxing state;

b. the tax burden is fairly apportioned among various states where the entity conducts business;

c. the tax doesn’t discriminate against interstate commerce; and

d. the tax paid fairly relates to the services the taxing state provides.

The primary U.S. Constitutional provisions affecting taxation are the due process clause and the commerce clause. The due process clause of the Fourteenth amendment to the U.S. Constitution grants due process of law. The commerce clause grants to Congress the power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”77

1. Nexus

The case of Quill v. North Dakota,78 explores both the commerce clause and the due process clause in setting forth the historical test for determining whether a state may constitutionally impose tax on an out-of-state business. The case determines the standard for what amount of nexus a business must have within a particular state in order to be subject to its taxing authority. Nexus is a Latin word that refers to “a means of connection; tie; link.”79 Therefore, in order for a state to impose its tax, it must first be able to show some sort of connection, or link, between the entity’s business activity and the taxing state.

The Quill case was a use tax case involving an office supply distributor from Illinois. Quill sent catalogs to prospective customers throughout the country, including North Dakota. The catalogs solicited orders for sales of office supplies and equipment. Quill did not have any offices, warehouses, or storefronts in North Dakota. None of its employees worked or resided there. Quill didn’t send any traveling salesmen or technicians into North Dakota. It solicited its business solely through catalogs, flyers, ads in national periodicals, and telephone calls. It made its deliveries to North Dakota customers from out-of-state locations by common carrier.

Even though Quill’s contact with North Dakota was so limited, it was the sixth largest supplier of office products in the state. It had 3,000 customers in the state which purchased almost $1 million of office supplies each year. When North Dakota sought to impose its tax on Quill, the office supplier filed suit, challenging the tax under the due process clause and the commerce clause. The Supreme Court determined that the state’s imposition of tax on Quill violated the commerce cause because Quill had insufficient nexus with the state. Specifically, Quill owned no property in North Dakota and hadn’t sent any of its representatives into the state.

2. Affiliate Nexus

While Quill left no question as to the standard for imposing sales and use tax collection responsibilities – a physical presence is required – there is great and passionate debate as to whether Quill established the same standard for business activity taxes. Some have called the economic presence standard “utter nonsense” and any attempts to enforce it “simply illegitimate.”80 The debate rests, in part, on this statement in Quill: Although we have not, in our review of other types of taxes, articulated the same physical presence requirement that Bellas Hess established for sales and use taxes, that silence does not imply repudiation of the Bellas Hess rule.”81

The Bellas Hess rule referred to by the Quill court was a bright line test first stated by the Court that there needed to be a physical presence in a state for use tax responsibilities to apply.82

The Supreme Court has denied review of many state cases, which have concluded that physical presence is not the standard that determines if business activity taxes can be imposed.

For example, in Steager v. MBNA America Bank, 640 S.E.2d 226 (2006), cert denied, 551 U.S. 1141 (June 18, 2007), the West Virginia Supreme Court upheld the imposition of corporate net income tax on a Delaware domiciled bank that provided credit card services to West Virginia customers.

In Quotron Systems v. Limbach,83 the Supreme Court of Ohio determined that

Ohio could impose its tax on fees for stock quotes that were received by Ohio customers using their own equipment from a New York company that performed services in New York.

In Lanco, Inc. v. New Jersey,84 the state of New Jersey imposed tax on a Delaware corporation that licensed property to its affiliate Layne Bryant. Although the Delaware corporation had no physical presence in New Jersey and had no employees or property there, the Court determined that the affiliate’s use of its intellectual property in the state was sufficient to create taxing nexus. The court considered the affiliate’s physical presence in the state sufficient to impose tax on the owner of the intellectual property.85

2016 Update. A Comptroller hearing decision determined an out-of-state business providing trash hauling consulting services to shopping centers in Texas established nexus in Texas because it contracted with local companies that provided the waste hauling services even though it didn’t directly provide the services itself. The contracts were determined to have a substantial nexus with the taxable waste removal activities, which were performed in Texas.86

3. Representatives in a State

A person may establish nexus by having other persons act on its behalf within a taxing jurisdiction and therefore trigger a responsibility to collect and remit use taxes. In cases that turn on whether substantial nexus is established for a seller of items by the presence of representatives acting on the seller’s behalf in a taxing jurisdiction, we have learned from the Supreme Court in the Tyler Pipe decision that “the crucial factor governing nexus is whether the activities performed in the [jurisdiction] on behalf of a taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in [the jurisdiction] for the sales.”87


In addition to Tyler Pipe, we have the longstanding rule from another Supreme Court decision, Scripto, Inc. v. Carson, that the characterization of the persons who are present in the taxing jurisdiction is of no significance whether they are called agents, representatives, independent contractors, or something else.88 For example, in the case of Cruise Intermodal Corp. v. Commonwealth, Pennsylvania Commonwealth Court Dkt., No. 667 F.R. 2004 (January 18, 2007), the court considered whether an out-of-state broker established taxing nexus by hiring independent truck drivers to deliver goods into the state of Pennsylvania. Cruise Intermodal had no employees or office located in Pennsylvania. However, it did lease the trucks from the independent owners in order to make the deliveries into the state. The court determined that the leases created a sufficient physical presence for Pennsylvania to impose tax collection responsibilities on Cruise Intermodal. In the case of Dell Catalog Sales L.P. v. Taxation and Revenue Dep’t,89 the court held that Dell established substantial nexus in New Mexico through the activities of a third party, BancTec, which provided warranty services to repair computers Dell sold to New Mexico residents. Relying on the nexus rules established in Tyler Pipe and Scripto, the court found it significant that 75 percent of Dell’s New Mexico customers purchased the additional service contract, which helped it create and maintain a market for its computers in New Mexico, that BancTec was required by its contract with Dell to represent Dell in a professional manner, and that BancTec made over 1,200 service visits during the audit period in question.

This decision contrasts a decision from Kansas in which the court determined there were insufficient contacts with the state to impose use tax collection responsibilities when an out-of-state seller sent technicians into Kansas an average of three times per year to perform services on the items sold.90 The Intercard case considered the tax collection responsibilities of a company that manufactured and sold electronic data cards and card readers to customers throughout the U.S., including Kansas. At the request of Kinko’s, one of its largest customers, Intercard’s employees made 11 visits to Kansas during the audit period to provide technical installation services.91 The State of Kansas determined that these 11 visits created nexus and declared that Intercard was doing business in the state.92 The Kansas Board of Tax Appeals reversed the assessment determining the 11 visits did not “transcend the slight physical test.”93 The Kansas Supreme Court affirmed, agreeing that the 11 visits Intercard’s employees made to visit Kansas customers were isolated, sporadic, and insufficient to establish substantial nexus.94

Overall, it’s important to note that state courts are divided on how the substantial nexus standard should be defined and applied in imposing tax collection obligations based on the seller’s representatives being present in the taxing jurisdiction. A New York court defined the standard this way:

While a physical presence of the vendor is required, it need not be substantial. Rather, it must be demonstrably more that a ‘slightest presence’ [citation omitted]. And it may be manifested by the presence in the taxing State of the vendor’s property or the conduct of economic activities in the taxing State performed by the vendor’s personnel or on its behalf.95

On the other hand, the Intercard court criticized the New York opinion for ignoring the Quill holding that sufficient physical presence is a necessary element of the nexus required for a state to impose a use tax collection duty. 96 The court stated:

Economic presence cannot negate this requirement. The Quill Court was wholly unconcerned with any economic benefit resulting from the continuous physical presence of a “few floppy diskettes” in North Dakota. Rather, Quill affirmed the “bright line” rule of Bellas Hess that the commerce clause protects out-of-state vendors from the imposition of use tax requirements where those vendors have no physical presence in the taxing state. The Quill Court admitted that the bright line test appears artificial at its edges: ‘Whether or not a State may compel a vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office. [Citation omitted.] This artificiality, however, is more than offset by the benefits of a clear rule. Such a rule firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes. This benefit is important, for as we have so frequently noted, our law in this area is something of a ‘quagmire’ and the ‘application of constitutional principles to specific state statutes leaves much room for controversy and confusion and little in the way of precise guides to States in the exercise of their indispensable power of taxation.’ [Citation omitted.]” Quill, 504 U.S. at 315-16.’97

Years later, states continue to wade through this nexus “quagmire” of assessing state taxes in a manner that fairly represents the value the states provide without running afoul of the other constitutional requirements.

In the Texas case of Gallend Henning Nopak, Inc. v. Combs,98 the Amarillo Court of Appeals considered whether a Wisconsin corporation was responsible for paying Texas franchise tax due to the contacts of its one Texas-based employee. The corporation had been filing employee wage reports for its Texas employee, which initiated the audit. The employee was a regional manager, which serviced distributors’ needs in seven and a half (7½) states, including Texas. The corporation contended the presence of a single employee was insufficient to establish nexus within the taxing state. However, the Court determined that the employee’s physical presence here went beyond a de minimis presence and was sufficient to establish nexus for Texas franchise tax purposes. The Court acknowledged that the employee’s “primary job was investigating, handling, or otherwise assisting in resolving customer complaints,”99 and determined that “[a]n activity regularly conducted within Texas pursuant to a company policy or on a continual basis shall normally not be considered trivial.”100 Since the Texas Tax Code does not treat the franchise tax as a “net income tax” with respect to Public Law 86-272, the constitutional nexus standards generally apply.

The U.S. Supreme Court recently denied requests from New Jersey and West Virginia to review business activity tax cases in which states sought to expand their taxing authority beyond the physical presence requirement established in Quill.101 But, the Court recently accepted South Dakota’s request to review its new statute requiring remote sellers without physical presence to collect and remit sales tax in direct conflict with Quill’s physical presence requirement.

2017 Update. The U.S. Supreme Court declined to review Brohl v. Direct Marketing Association, U.S. Supreme Court Dkt. 15-267 and 16-458, conditional crosspetition.

The case challenged Colorado’s law notice and reporting requirements on noncollecting retailers. The Tenth Circuit Court of Appeals held Colorado’s law did not violate the dormant Commerce Clause. The Court determined the reporting requirements neither discriminated against, nor unduly burdened, interstate commerce. It narrowly limited the application of Quill v. North Dakota, to sales and use tax collection. The Tenth Circuit Court of Appeals conclusion stands that the law requiring non-collecting retailers to report transactions to the state tax authorities and provide notice of selfreporting to customers did not violate the Constitution. The conditional cross-petition that sought to have the US Supreme Court overturn Quill, was also denied review. (cert.denied Dec. 12, 2016) Direct Marketing Association v. Brohl, U.S. Sup. Ct. Dkt 16-267, pet. for cert. filed Aug. 29, 2016.

2018 Update.
To the surprise of many, the U.S. Supreme Court recently granted review of South Dakota v. Wayfair Inc., a case addressing whether an online retailer must have physical presence in a state before it must collect and remit sales tax. South Dakota changed its state statute to directly challenge Quill by requiring online sellers with no physical presence to collect and remit sales and use tax if total sales exceeded a certain threshold or if the taxpayer had 200 or more separate transactions in that state. Several other states have recently adopted similar legislation or are taking similar positions. Therefore, this decision will likely affect how other states, including Texas, treat remote sellers in the future.


75 U.S. CONST., art. I, Sec. 8, cl. 3.
76 430 U.S. 274, 288, 97 S.Ct. 1075, 41 L.Ed.2d 326 (1977).

77 U.S. CONST., art. I, Sec. 8, cl. 3.

78 504 U.S. 298, 112 S.Ct. 1904, rehearing denied 510 U.S. 859, 114 S.Ct. 173, 126 L.Ed.2d 132 (1992).

79 Random House Unabridged Dictionary, © Random House, Inc. 2006.

80 See “An Apology Revisited: Intercompany Licensing of Intangibles in an Age of Tax Amnesties,

Capitulation, and Judicial Confusion” by Donald M. Griswold and Sara A. Lima, Tax Management,

Multistate Tax Report, Vol.15, No. 4, April 25, 2008.

81 Quill, 504 U.S. at 314.

82 See National Bellas Hess, Inc. v. Dep’t of Revenue, 386 U.S. 753 (1967).

83 62 Ohio St. 3d 447 (1992).

84 908 A.2d 176 (2006), cert denied, 551 U.S. 1131 (June 18, 2007).

85 See also Geoffrey, Inc. v. Comm’r of Revenue, No. C271816, (Mass. App. Tax. Bd. July 24, 2007).

86 Comptroller Hearing No. 112,189 (May 10, 2016).

87 Tyler Pipe Indus., Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232, 250 (1987).

88 362 U.S. 207, 211 (1960).

89 199 P.3d 863 (N.M. Ct. App. 2008), cert. denied 129 S.Ct. 1616 (2009).

90 See In re Intercard, Inc., 14 P.3d 1111 (Kan. 2000).

91 Id.

92 K.S.A. 79-3702(h).

93 Id.

94 Id.

95 Orvis Co. v. Tax Appeals Tribunal, 654 N.E.2d 954, 960 (1995), cert. denied 516 U.S. 989 (1995).

96 See In re Intercard, Inc., 14 P.3d 1111 (Kan. 2000).

97 See In re Intercard, Inc., 14 P.3d 1111 (Kan. 2000).

98 317 S.W.3d 841, (Tex. App. – Amarillo, July 14, 2010).

99 Id. at 845.

100 Id.


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