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BNA Article Argues that Quill Safe Harbor Extends to Sales of Intangibles Through the Internet.

The Bureau of National Affairs (BNA) has published an article which argues that the activities involved in selling intangible goods, such as songs and digital books, by means of the Internet are not sufficiently connected to states so as to permit states to tax them. The article confines its analysis to an explication of Commerce Clause "nexus," but it also asserts along the way that the selling of intangibles on the Internet may also be protected from taxation by the Due Process Clause.

By way of background, federal law requires that a state to have "substantial nexus" to a seller in order to require that seller to collect sales and use tax. The definition of "substantial nexus" has always been a subject of contentious debate between states and businesses. Generally, however, it means having a physical presence in the state , whether by salesperson, contractor, location or a number of different events Quill Corp. v. North Dakota, 504 U.S. 298 (1992), National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967)). Owning or leasing tangible personal property or real property in the state, and resident employees working in the state or regularly soliciting business in the state, are factors usually considered to establish sales-and-use-tax nexus.

In Bellas Hess, The Supreme Court held that the Due Process Clause and the dormant Commerce Clause prohibited Illinois from subjecting the out-of-state seller to tax liability, where the firm transacted business in the state only by means of the U.S. mail and common carriers.

25 years later, Quill once again brought the nexus issue before the Supreme Court. In Quill, like Bellas Hess, the seller kept its physical presence in the forum state to a minimum, using telephone calls and catalogues to solicit approximately $1 million in sales of office supplies. The products were delivered by U.S. mail and common carrier. Nonetheless, the North Dakota Courts found that the out-of-state seller was responsible for collecting the use tax. The Supreme Court refused to overturn Bellas Hess, and held that the lack of a physical nexus in a state is sufficient grounds to exempt a corporation from having to pay sales and use taxes to a state.

The article argues that the internet is a common carrier for state tax purposes:

Although we typically think of railroads or UPS and Federal Express as common carriers, the Internet, too, is a common carrier. The Internet shares many of the same features and serves the same purposes of other, more traditional common carriers. Moreover, the Internet is merely a continuation of the economic and technological innovations that the Supreme Court rejected as a basis for overturning Bellas Hess.

States may not impose liability for the collection of sales tax on Internet sellers of digital products unless the vendor is physically present in the state attempting to impose the obligation to collect. The bright-line physical presence standard for establishing substantial nexus under the dormant Commerce Clause is not limited to any industry in particular.

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