Continuing Trends in State Tax Litigation: Nexus and Challenging State Tax Laws in Federal Courts

Sales and use tax nexus continues to be a big issue in state tax cases. There are three important U.S. Supreme Court cases that have shaped the law in this area. One of the cases, called National Bellas Hess, Inc. v. Dept. of Revenue of Ill., involved a mail order seller who only shipped goods into a state by U.S. Mail. The Court said it was not fair to make the seller collect and send in use tax to that state. The Court thought this would be a burden on trade between states and violate the Commerce Clause. This use of the Commerce Clause is called the dormant or negative Commerce Clause.

The Court mentioned that even in 1965, there were more than 2,300 places that could impose sales taxes. It could be tough for a seller to figure out the tax rate for a sale, and the rules for filing tax returns and sending in taxes could be different in each place. If an out-of-state seller made sales in many places, it would be even harder for them to follow all the rules. This would be especially tough for a seller who made a lot of sales but only a few in each place. The Supreme Court has set out some rules for when a state can tax an out-of-state business. The tax must have a connection to the state, be fair, not discriminate against out-of-state businesses, and be related to the services provided by the state. A recent case in Florida showed that there is still a lot of debate about when a state can tax an out-of-state business. American Business, a Florida company that sold flowers and gifts online, charged sales tax on items delivered in Florida, but not on items delivered out of state. The tax department said they had to pay sales tax on out-of-state sales, based on a law and regulation that said Florida florists have to pay tax on sales to retail customers no matter where the items are delivered. A florist business in Florida was told they had to pay taxes on their out-of-state sales. They said this was unfair and violated the Constitution. The court agreed, saying the taxes were not allowed under the Commerce Clause. The business is waiting to see if the Florida Supreme Court will agree. This case shows that businesses can challenge taxes if they think they are unconstitutional. It’s a tough fight, but sometimes they can win. States have laws to collect use tax from people who buy things online from out-of-state sellers. Colorado passed a law that requires big out-of-state sellers to notify their customers about the use tax and report their customers’ purchases to the state. A trade group sued Colorado, saying the law was unconstitutional. The Supreme Court had to decide if the lawsuit could be brought in federal court or if it had to be brought in Colorado state courts. The Tax Injunction Act is a law that limits federal courts from getting involved in disputes over state taxes. In the Direct Marketing case, the Supreme Court had to decide if this law stopped the lawsuit. They decided that it did, because the state’s notice and reporting requirements were considered part of the tax process. This means that any challenges to these requirements have to be brought in state courts, not federal courts. The Supreme Court looked at federal law to understand the Tax Injunction Act. They said that the Act doesn’t apply to laws that come before taxes are assessed or collected. This means that companies can challenge these laws in federal court instead of in state courts. The outcome of these challenges could affect whether other states make similar laws. If federal courts uphold the laws, other states might make similar laws more quickly. If federal courts strike down the laws, other states might get rid of their laws faster and be less likely to make similar ones in the future. Justice Kennedy agreed with the rest of the Court about a law related to taxes, but he wrote separately because he thinks it’s not fair to the states. He believes that the rule that says a business must have a physical presence in a state to pay taxes is outdated because of the internet and new technology. He thinks the Court should change this rule, but it’s not clear if the other judges agree. He says Congress could also change the rule, but they haven’t done so yet.

Source: https://www.floridabar.org/the-florida-bar-journal/continuing-trends-in-state-tax-litigation-nexus-and-challenging-state-tax-laws-in-federal-courts/