SALT Blawg – State and Local Tax Blog
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Crutchfield appealed from imposition of the CAT upon revenue it earned from sales of electronic products within Ohio. Crutchfield is based outside of Ohio, maintains no employees in Ohio, and maintains no facilities in Ohio. The sole business that Crutchfield conducts in Ohio is via the shipment of goods from outside the state to consumers within the state using the United States Postal Service or common-carrier delivery services. Crutchfield contested the issuance of CAT assessments contending that substantial nexus within a state is a necessary prerequisite to imposing the tax pursuant to the United States Constitution’s dormant Commerce Clause and that Crutchfield lacked substantial nexus with Ohio since it did not maintain a “physical presence” within the state.
Responding, the State advanced two (2) arguments. First, it argued that the Commerce Clause does not impose a physical presence requirement and, thus, the $500,000 sales-receipts threshold set forth by the statute satisfies the Commerce Clause’s requirement of substantial nexus. Second, the State argued that assuming arguendo the Commerce Clause does impose a physical presence standard, Crutchfield’s computerized connections with Ohio consumers involves the presence of tangible personal property in Ohio and the presence of that property on computers located in the state constitutes physical presence. The Ohio Supreme Court found in favor of the State based upon its first argument and therefore it did not address the State’s secondary argument.
At first glance, the Ohio Supreme Court’s decision stands in stark contradiction to the United States Supreme Court’s decision in Quill v. North Dakota, 504 U.S. 298 (1992), which held that for a state to subject a company to a use tax collection obligation, it must have a physical presence in the taxing state. However, the Ohio Supreme Court distinguished Quill in a number of ways. Primarily, the tax at issue in Quill was a sales and use tax, whereas the tax at issue in Crutchfield was a business privilege tax. The Ohio Supreme Court found that Quill’s holding does not apply to business privilege taxes. This is not the first time a court has drawn such a distinction. See Couchot v. State Lottery Comm., 659 N.E.2d 1225 (Ohio 1996) (“There is no indication in Quill that the Supreme Court will extend the physical-presence requirement to cases involving taxation measured by income derived from the state”); Capital One Bank v. Commr. of Revenue, 899 N.E.2d 76 (Mass. 2009) (declining to “expand the [United States Supreme] Court's reasoning [in Quill] beyond its articulated boundaries” and upholding imposition of tax on out-of-state banks in relation to in-state servicing of credit cards based on the volume of business conducted and profits realized); MBNA Am. Bank, N.A. v. Indiana Dept. of State Revenue, 895 N.E.2d 140 (Ind. Tax 2008) (“Based on [Quill] and a thorough review of relevant case law, this Court finds that the Supreme Court has not extended the physical presence requirement beyond the realm of sales and use taxes”); KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d 308 (Iowa 2010) (“We * * * doubt that the United States Supreme Court would extend the ‘physical presence’ rule outside the sales and use context of Quill ”).
The United States Supreme Court has not addressed the physical presence nexus standard issue since its landmark decision in Quill twenty-five (25) years ago. Many argue that the Supreme Court in Quill could not and did not anticipate the internet boom and, with it, the vastly different way that business would be conducted. Since then, the Court has denied certiorari for every case since Quill where nexus was at issue, e.g., Tax Com'r of State v. MBNA America Bank, N.A. 640 S.E.2d 226 (W. Va. 2006), cert. denied, 551 U.S. 1141 (2007); Capital One Bank v. Commissioner of Revenue, 9 N.E.2d 76 (Mass. 2009), cert. denied, 557 U.S. 919 (2009); Geoffrey, Inc. v. South Carolina Tax Com'n, 37 S.E.2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993); Lanco, Inc. v. Director, Div. of Taxation, 908 A.2d 176 (2006), cert. denied, 551 U.S. 1131 (2007); see also, Direct Marketing Ass'n v. Brohl, 135 S.Ct. 1124, 1134-1135 (2015) (Kennedy, J., concurring) (“The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper's favorite store is a click away—regardless of how close or far the nearest storefront…Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term. Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill.”). If the United States Supreme Court grants Crutchfield’s petition for certiorari, we might finally receive an answer to Quill’s application in the age of the internet.