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  Are You Liable for Out-of-State Taxes?
Overview of Business, Use and Sales Taxes Many states impose a business, use, or sales tax (or a combination of these) on nonresident businesses. Generally, a business tax is imposed on the income that the nonresident business derives from its activities within the state. Some states call this a tax for the privilege of doing business within the state. A use tax is levied on a resident's personal property for goods used, stored, or consumed within the state. A sales tax is collected on goods at the point of purchase. The difference between a use tax and a sales tax is that the use tax focuses on where the goods are used, while a sales tax is concerned with where the goods are sold. In order for a state to impose these taxes on a nonresident business, the state's tax scheme must comply with the federal constitutional requirements of both due process and the commerce clause. Due-Process Requirements Due process is concerned with ensuring that the nonresident's activities in the state give it notice that it could be subjected to tax and make it fair to subject it to tax. Essentially, the nonresident business must have enough contacts within the state that it logically follows that the state has jurisdiction over its activities. In past cases, the following actions have constituted sufficient contact:
Commerce-Clause Requirements The commerce clause is concerned with a separate issue: protecting the national economy. Specifically, the commerce clause (as it relates to taxing nonresident businesses) is aimed at preventing the states from imposing a tax that interferes with or suppresses interstate commerce. The U.S. Supreme Court has outlined a four-part test to determine whether a state's imposition of taxes on a nonresident business transgresses the commerce clause:
Although the commerce-clause analysis has four parts, it usually focuses on whether the nonresident business has a "sufficient nexus" to the taxing state. The Supreme Court, in Quill Corp. v. North Dakota, clarified the sufficient-nexus requirement. It provided that the nonresident business must have a physical presence within the state for taxes to be imposed. For example, employing a full-time sales representative in the state, or employing an independent sales representative who travels to the state many times annually, satisfies the requirement. On the other hand, a company that solicits business only through catalogs mailed to the state and ships all goods via a common carrier is not likely to satisfy the sufficient-nexus standard. Obviously there are gray areas — perhaps a company simply attends an out-of-state trade show where it writes orders, for example. Each state has its own interpretation of what satisfies the Quill physical-presence requirement and whether the requirement is applicable to sales, use, and business taxes (the tax at issue in Quill was a use tax). Therefore, if you receive a notice from another state that your business is subject to taxation in that state, gather all the facts and talk to an expert. Some states have voluntary disclosure programs that can be used to limit liabilities for penalties and taxes. While each state's interpretation of the law is different and needs to be analyzed in each situation, a nonresident business can successfully challenge the state's imposition of these taxes in certain circumstances. This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations. |
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Copyright © 2008 by Jordan Schrader Ramis PC. All rights reserved.
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This month's column discusses an issue of concern to any Oregon nursery that sells and ships its products to other states. In recent years, the revenue departments in several states have demanded that Oregon nurseries pay out-of-state business, use, or sales taxes for nursery products sold in those states. Whether Oregon growers must pay those taxes depends on the grower's connections to the state. The general rule of thumb is that a grower with a physical presence in a state (generally through a sales representative) will be subject to sales or use taxes or both. Growers with a lesser presence (such as mail or Internet-based marketing) have a reasonable argument against the imposition of these taxes. Whether to challenge an out-of-state tax assessment or not will depend on the money involved (both now and in the future) as well as the facts of the individual situation.