Skip to content

SB 226: Should Utah Collect A Tax On Internet Sales?

March 18, 2013


Senate Bill 226 passed the Senate by one vote, but failed in the House. I voted against it for three reasons. First, our legislative attorneys concluded that it was substantially likely that we would have lost a lawsuit if sued. And I was convinced that we would be sued. Second, I feel that Congress is poised to finally act. Last, I was concerned it would be perceived as a tax increase as our economy struggles to recover.

The bill defines many practices that qualify as physical nexus, such as utilizing the services of drop shippers, contracting with an in-state company for pick-up services, or offering assembly or installation services, consistent with the United States Supreme Court case law. It would establish a rebuttable presumption that the in-state physical presence of persons helping to establish and maintain a market in Utah for an out-of-state retailer creates nexus for the out-of-state retailer.

This issue is on that ought to be decided by Congress and apply equally to all 50 states. But like on immigration, Congress has been derelict in its duties. In its absences, about a dozen states have established a patchwork of policies.


The U.S. Supreme Court has held that physical presence is required for a state to be able to compel an out-of-state retailer to collect use tax on property sold and shipped into the state via the following decisions:

Quill Corp., 504 U.S. at 317-18 (office supply retailer without physical presence lacked substantial nexus despite its significant share of the North Dakota market)

National Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551, 559-62 (magazine advertising sales office created physical presence nexus for unrelated direct mail catalog sales by the same entity).

The in-state activities of third parties can establish physical presence nexus for an out-of-state retailer if those activities are significantly associated with the out-of-state retailer’s ability to establish or maintain an in-state market, known as “attributional nexus”.

“Attributional nexus” is based on following United States Supreme Court cases:

Scripto, Inc. v. Carson, 362 U.S. 207 (1960) – Scripto involved the advertising division of Scripto, Inc. Scripto had no employees or property in Florida; its sales to Florida customers were generated by commissioned independent contractors. Id. at 208-09. The Court determined that the contractors’ presence and solicitation established the requisite nexus for Florida to require use tax collection. Id. at 211-12.

Tyler Pipe Industries. v. Washington State Dep’t of Revenue, 483 U.S. 232 (1987) – In Tyler Pipe the U.S. Supreme Court affirmed nexus (in the context of a direct tax) based on the in-state presence of third parties and that nexus existed despite the taxpayer’s own lack of physical presence. 483 U.S. at 250-51.

SB 226 purported to create a rebuttable presumption a person has substantial nexus with Utah if certain activities are conducted in Utah on the person’s behalf. These are as follows:

If an in-state person sells a similar line of products under the same or a similar business name or uses the same or substantially similar trademarks, service marks, or trade names. [Section[1] 59-12-107(2)(b)(ii)(A)]

An out-of-state retailer would have substantial nexus with the state if an in-state person conducts certain distribution, delivery, and fulfillment services for the out-of-state retailer.[Section 59-12-107(2)(b)(ii)(C)(D)(E)]
Any other activities that are significantly associated with the retailer’s ability to establish or maintain a Utah market for sales. [Section 59-12-107(2)(b)(ii)(F)]

All of these provisions hinge on the in-state physical presence nexus required by Quill and are consistent with the attributional nexus principles established in Scripto and Tyler Pipe.

Proponents of the bill argues that these attributional nexus provisions are not absolutes but rather are rebuttable presumptions of nexus. See proposed section [Section 59-12-107(2)(b)].

This means that a retailer has the opportunity to prove it does not meet the requisites for physical presence nexus by demonstrating the in-state activities are not significant enough to establish or maintain a market in Utah.

Creating a merely rebuttable presumption was critical in a New York case upholding that state’s “Amazon” law, which creates a presumption of nexus because of in-state solicitation by online affiliates. See, LLC v. N.Y. State Dep’t of Tax’n and Fin., 81 A.D. 3d 183, 197-99 (1st Dept. 2010) (declining to void the “Amazon” law in facial Commerce Clause and Due Process challenges).

In sum, the bill contains key language such as (1) creating a presumption that engaging in the enumerated activities by someone with substantial nexus in state will meet the collection obligation thresholds; and (2) a description of what circumstances may exist to rebut the presumption. These requirements are specifically included to help ensure that the statute, on its face, does not burden or discriminate against Interstate Commerce.


Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: