Internet Sales Tax Eyed for Arizona

Arizona Republic:Arizona could gain as much as $708 million in 2012 by taxing more Internet, Home Shopping Network, catalog and other out-of-state sales, according to the National Conference of State Legislatures.  The catch: It would have to greatly simplify its sales-tax structure, with changes approved by state and federal lawmakers.”

All law students study International Shoe v. State of Washington, 326 U.S. 310 (1945), in constitutional law.  The court was asked to decide if the State of Washington could collect unemployment taxes from corporation that had no contacts or office within Washington other than it employed 11 – 13 shoe salesmen permanently in the state.  The court said:

“due process requires only that, in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’ . . . it has been generally recognized that the casual presence of the corporate agent, or even his conduct of single or isolated items of activities in a state in the corporation’s behalf, are not enough to subject it to suit on causes of action unconnected with the activities there.”

“Whether due process is satisfied must depend, rather, upon the quality and nature of the activity in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure. That clause does not contemplate that a state may make binding a judgment in personam against an individual or corporate defendant with which the state has no contacts, ties, or relations.”

The lesson of this case is that a state cannot tax or collect money from a person or an entity that does not have minimum contacts with the state.  This is also referred to as “nexus,” i.e., the person or entity must have a nexus with the taxing authority.

A more recent and also controlling U.S. Supreme Court case is Quill Corporation v. North Dakota, 504 U.S. 298 (1992).  Quill operated an office supply business that sold its products from a catalog mailed to potential customers.  It sold over $1,000,000 goods to 3,000+ customers in North Dakota, which sued Quill to force it to collect use tax on sales to North Dakota residents and pay the use tax to the state.  Quill did not have any contacts with North Dakota.  In ruling that the Due Process clause of the United States Constitution prohibited North Dakota from taxing Quill, the Supreme Court said:

“The Due Process Clause “requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax. . . . We expressly declined to obliterate the ‘sharp distinction . . . between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as a part of a general interstate business.’ . . . “

“we have framed the relevant inquiry as whether a defendant had minimum contacts with the jurisdiction ‘such that the maintenance of the suit does not offend `traditional notions of fair play and substantial justice.’ . . . In that spirit, we have abandoned more formalistic tests that focused on a defendant’s ‘presence’ within a State in favor of a more flexible inquiry into whether a defendant’s contacts with the forum made it reasonable, in the context of our federal system of government, to require it to defend the suit in that State. In Shaffer v. Heitner, 433 U.S. 186, 212 (1977), the Court extended the flexible approach that International Shoe had prescribed for purposes of in personam jurisdiction to in rem jurisdiction, concluding that ‘”all assertions of state court jurisdiction must be evaluated according to the standards set forth in International Shoe and its progeny.”