August 19, 2017 630-250-5700rcolombik@colombik.com

State Taxation on Mail Order

BY

RICHARD M. COLOMBIK, JD, CPA

RICHARD M. COLOMBIK & ASSOCIATES, P. C.

Attorneys at Law

One Pierce Place, Suite 460 East

Itasca, IL 60143

(630) 250-5700 

Quill Corp. vs. North Dakota

      On May 26th, 1992, United States Supreme Court held that a mail order house, may have the minimum contacts necessary in accordance with the due process clause of the constitution with the taxing state relative to imposition of tax, yet lack the substantial nexus, as required by the Commerce Clause, with the state to have such tax imposed. Therefore, mere lack of physical presence in a taxing state does not in and of itself bar the taxing state from asserting a tax against such company. 

      Due process does not bar enforcement of a state’s use tax against a company that has sufficient contacts.  However, the tax must also meet the Commerce Clause, “substantial nexus” test.  The Commerce Clause is not so much concerned about notice and fairness to an individual defendant as it is about the affects of state regulation on the national economy.  The Commerce Clause prohibits certain state actions that interfere with interstate commerce.  The Court in Spector Motor Service. Inc. vs. O’Connor, 340 U.S. 602 (1951) held that a tax on the “privilege of doing interstate business” was unconstitutional.

      If a tax on interstate commerce is unconstitutional, the question becomes whether a tax can ever withstand a Commerce Clause attack.  The Court has developed a four-part test in
Complete Auto Transit, Inc. vs. Brady, 430 U.S. 274 (1977).  The test is as follows:

      Is the tax;

  1. Applied to an activity with a substantial nexus with the taxing state;
  2. Fairly apportioned;
  3. Non-discriminatory against interstate commerce; and
  4. Fairly related to the services provided by the state?

      One of the many confusing issues by the Court in Quill is the language relative to “minimum contacts” and “substantial nexus”.  Both of these tests have a long history of Court interpretation as to what constitutes “minimum contacts”.

      “Minimum contacts” is a due process clause argument that comes from the well-read case of International Shoe Company vs. Washington, 326 U.S. 310 (1945). International Shoe stood for the concept that due process required a physical presence in a taxing state; that the mere drumming up of business alone would not constitute sufficient or minimum contacts with the state for the state to exercise jurisdiction over a corporation. Quill has advanced this concept so that physical presence in a state, is not a requisite to collect a tax.

      Quill had such substantial mail order presence by virtue of serving three thousand customers in the state of North Dakota and aggregate sales in excess of one million dollars in such state, that the mere activity of utilizing the U. S. Mail and common carriers for delivery of this magnitude of merchandise constituted sufficient contacts or “minimum contacts” for due process purposes.  This recognition of the advancement of mail order business changed a case precedent set over forty-six years ago by the United States Supreme Court.  In spite of this, the Court did not feel that the tax alleged against Quill was constitutional, since it did not meet the “substantial nexus” test as enunciated above under Complete Auto for imposition of tax.

      Therefore, mail order houses should be aware of the fact that even though they may attempt to assess a use tax against the mail order house, to be collected against the state’s residents must fail if it interferes with interstate commerce and does not satisfy the four-part test of Complete Auto.

      Congress has essentially been invited by the Supreme Court to legislate within this area. This might be a way that national politics and policy can return to the states untold millions of lost revenue.  The strictly worded language of the Court’s opinion belays the reality that our country needs additional tax revenues.  Do not be surprised if congressional change in the forefront utilizes a change in the state taxing laws to generate money where prior exemptions from interstate commerce existed.

Independent Contractor Employee

      Most employers are extremely concerned over the IRS ability as well as the IDES assertion of reclassifying independent contractors to employees.  This is very expensive for the employer, not only in the current year, but as to all years open on the statute of limitations. Generally three years for the Federal adjustment.  The corporation is liable, if such reallocation is proper, for FICA Tax, Medicare Tax and, if applicable, penalties.  The employees are still liable for Income Tax upon their income earned as well as the employee’s share of FICA, or an issue an

arises as to whether they had self-employment tax paid.  In Grooms vs. Commissioner, 1992 RIA TCM Para 92,291, employee was misclassified as an independent contractor.  As such, no taxes were withheld from the employee’s wages.  The employee did not timely file a correct tax return.  Even though there was misclassification, the employee was liable for taxes and required to file correct, timely returns.

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