CRS Annotated Constitution

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Nexus.—Nexus is a requirement that flows from both the commerce clause and the due process clause of the Fourteenth Amendment.942 What is required is “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.”943 In its commerce–clause setting, the nexus requirement serves to effectuate the “structural concerns about the effects of state regulation on the national economy.”944 That is, “the ‘substantial–nexus’ requirement . . . limit[s] the reach of State taxing authority so as to ensure that State taxation does not unduly burden interstate commerce.”945

Often surfacing in cases having to do with the imposition of an obligation by a State on an out–of–state vendor to collect use taxes[p.230]on goods sold to purchasers in the taxing State, the test is a “physical presence” standard. The Court has sustained the imposition on mail order sellers with retail outlets, solicitors, or property within the taxing State,946 but it has denied the power to a State when the only connection is that the company communicates with customers in the State by mail or common carrier as part of a general interstate business.947 The validity of general business taxes on interstate enterprises may also be determined by the nexus standard. However, again, only a minimal contact is necessary.948 Thus, maintenance of one full–time employee within the State (plus occasional visits by non– resident engineers) to make possible the realization and continuance of contractual relations seemed to the Court to make almost frivolous a claim of lack of sufficient nexus.949 The application of a state business–and–occupation tax on the gross receipts from a large wholesale volume of pipe and drainage products in the State was sustained, even though the company maintained no office, owned no property, and had no employees in the State, its marketing activities being carried out by an in–state independent contractor.950 Also, the Court upheld a State’s application of a use tax to aviation fuel stored temporarily in the State prior to loading on aircraft for consumption in interstate flights.951

Given the complexity of modern corporations and their frequent diversification and control of subsidiaries, state treatment of businesses operating within and without their borders requires an appropriate definition of the scope of business operations. Thus,[p.231]States may impose a tax in accordance with a “unitary business” apportionment formula on concerns carrying on part of their business within the taxing State based upon the company’s entire proceeds. But there must be a nexus, or minimal connection, between the interstate activities and the taxing State and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.952

Apportionment.—This requirement is of long standing,953 but its importance has broadened as the scope of the States’ taxing powers has enlarged. It is concerned with what formulas the States must use to claim a share of a multistate business’ tax base for the taxing State, when the business carries on a single integrated enterprise both within and without the State. A State may not exact from interstate commerce more than the State’s fair share. Avoidance of multiple taxation, or the risk of multiple taxation, is the test of an apportionment formula. Generally speaking, this factor is both a commerce clause and a due process requisite, and it necessitates a rational relationship between the income attributed to the State and the intrastate values of the enterprise.954 The Court has declined to impose any particular formula on the States, reasoning that to do so would be to require the Court in engage in “extensive judicial lawmaking,” for which it was ill–suited and for which Congress had ample power and ability to legislate.955

Rather, “we determine whether a tax is fairly apportioned by examining whether it is internally and externally consistent.”956 “To be internally consistent, a tax must be structured so that if every State were to impose an identical tax, no multiple taxation would result. Thus, the internal consistency test focuses on the text of the challenged statute and hypothesizes a situation where other States have passed an identical statute. . . .

“The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in–state component of the activity[p.232]being taxed. We thus examine the in–state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity.”957 In the latter case, the Court upheld as properly apportioned a state tax on the gross charge of any telephone call originated or terminated in the State and charged to an in–state service address, regardless of where the telephone call was billed or paid.958A complex state tax imposed on trucks displays the operation of the test. Thus, a state registration tax met the internal consistency test because every State honored every other States’, and a motor fuel tax similarly was sustained because it was apportioned to mileage traveled in the State, whereas lump–sum annual taxes, an axle tax and an identification marker fee, being unapportioned flat taxes imposed for the use of the State’s roads, were voided, under the internal consistency test, because if every State imposed them the burden on interstate commerce would be great.959

Supplement: [P. 232, add to text following n.959:]

A deference to state taxing authority was evident in a case in which the Court sustained a state sales tax on the price of a bus ticket for travel that originated in the State but terminated in another State. The tax was not apportioned to reflect the intrastate travel and the interstate travel.40 The tax in this case was different from the tax upheld in Central Greyhound, the Court held. The previous tax constituted a levy on gross receipts, payable by the seller, whereas the present tax was a sales tax, also assessed on gross receipts, but payable by the buyer. The Oklahoma tax, the Court continued, was internally consistent, since if every State imposed a tax on ticket sales within the State for travel originating there, no sale would be subject to more than one tax. The tax was also externally consistent, the Court held, because it was a tax on the sale of a service that took place in the State, not a tax on the travel.41

However, the Court found discriminatory and thus invalid a state intangibles tax on a fraction of the value of corporate stock owned by state residents inversely proportional to the corporation’s exposure to the state income tax.42


942 It had been thought that the tests of nexus under the commerce clause and the due process clause were identical, but, controversially, in Quill Corp. v. North Dakota ex rel. Heitkamp, 112 S.Ct. 1904, 1909–1911 (1992), but compare id., 1916 (Justice White concurring in part and dissenting in part), the Court, stating that the two “are closely related,”(citing National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 756 (1967)), held that the two constitutionally requirements “differ fundamentally” and it found a state tax met the due process test while violating the commerce clause.
943 National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 756 (1967). The phraseology is quoted from a due process case, Miller Bros. Co. v. Maryland, 347 U.S. 340, 344–345 (1954), but as a statement it probably survives the bifurcation of the tests in Quill.
944 Quill Corp. v. North Dakota ex rel. Heitkamp, 112S.Ct.1904,1913 (1992).
945 Ibid.
946 Scripto v. Carson, 362 U.S. 207 (1960); National Geographic Society v. California Bd. of Equalization, 430 U.S. 551 (1977). The agents in the State in Scripto were independent contractors, rather than employees, but this distinction was irrelevant. See also Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 249–250 (1987) (reaffirming Scripto on this point). See also D. H. Holmes Co. v. McNamara, 486 U.S. 24 (1988) (imposition of use tax on catalogs, printed outside State at direction of an in–state corporation and shipped to prospective customers within the State, upheld).
947 National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), reaffirmed with respect to the commerce clause in Quill Corp. v. North Dakota ex rel. Heitkamp, 112S.Ct.1904 (1992).
948 Some in–state contact is necessary in many instances by statutory compulsion. Reacting to Northwestern States, Congress enacted P.L. 86–272, 15 U.S.C. Sec. 381 , providing that mere solicitation by a company acting outside the State did not support imposition of a state income tax on a company’s proceeds. See Heublein, Inc. v. South Carolina Tax Comm., 409 U.S. 275 (1972); Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 112S.Ct.2447 (1992).
949 Standard Pressed Steel Co. v. Dept. of Revenue, 419 U.S. 560 (1975). See also General Motors Corp. v. Washington, 377 U.S. 436 (1964).
950 Tyler Pipe Industries, Inc. v. Dept. of Revenue, 483 U.S. 232, 249–251 (1987). The Court noted its agreement with the state court holding that “‘the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.”’ Id., 250.
951 United Air lines v. Mahin, 410 U.S. 623 (1973).
952 Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 165–169 (1983); ASARCO Inc. v. Idaho State Tax Comm., 458 U.S. 307, 316–17 (1982).

Supplement: [P. 231, add to n.952:]

Hunt–Wesson, Inc. v. Franchise Tax Bd. of Cal., 120 S. Ct. 1022 (2000) (interest deduction not properly apportioned between unitary and non–unitary business).

953 E.g., Pullman’s Palace Car Co. v. Pennsylvania, 141 U.S. 18, 26 (1891); Maine v. Grand Trunk Ry., 142 U.S. 217, 278 (1891).
954 The recent cases are, Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978); Mobil Oil Corp. v. Comr. of Taxes, 445 U.S. 425 (1980); Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (1980); ASARCO v. Idaho State Tax Comm., 458 U.S. 307 (1982); F. W. Woolworth Co. v. New Mexico TaxationRevenue Dept., 458 U.S. 354 (1982); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983); Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 251 (1987); Allied–Signal, Inc. v. Director, Div. of Taxation, 112S.Ct.2251 (1992). Cf. American Trucking Assns., Inc. v. Scheiner, 483 U.S. 266 (1987).
955 Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278–280 (1978).
956 Goldberg v. Sweet, 488 U.S. 252, 261 (1989).
957 Id., 261, 262 (internal citations omitted).
958 Id. The tax law provided a credit for any taxpayer who was taxed by another State on the same call. Actual multiple taxation could thus be avoided, the risks of other multiple taxation was small, and it was impracticable to keep track of the taxable transactions.
959 American Trucking Assns., Inc. v. Scheiner, 483 U.S. 266 (1987).

Supplement Footnotes

40 Indeed, there seemed to be a precedent squarely on point. Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948) . Struck down in that case was a state statute that failed to apportion its taxation of interstate bus ticket sales to reflect the distance traveled within the State.
41 Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995) . Indeed, the Court analogized the tax to that in Goldberg v. Sweet, 488 U.S. 252 (1989) , a tax on interstate telephone services that originated in or terminated in the State and that were billed to an in–state address.
42 Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) . The State had defended on the basis that the tax was a “compensatory” one designed to make interstate commerce bear a burden already borne by intrastate commerce. The Court recognized the legitimacy of the defense, but it found the tax to meet none of the three criteria for classification as a valid compensatory tax. Id. at 333–44. See also South Central Bell Tel. Co. v. Alabama, 526 U.S. 160 (1999) (tax not justified as compensatory).
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