For decades the States have sought to increase the amount of use taxes collected and remitted by out of state retailers for the sale of goods. The Supreme Court has ruled that, unless Congress acts otherwise, the states could not impose a requirement on out of state sellers to collect and remit the use taxes unless the seller had a physical presence in the state. A connection referred to as the “nexus.”
As a result, many States have turned to income or franchise taxes (in this context, franchise means “right to do business”). For such taxes, States have attempted to use a broader definition of “nexus” that involved a “significant economic presence” rather than a physical presence — a tax on “doing business” in the state.
In two cases before the U.S. Supreme Court, business taxpayers were challenging the definitions of nexus used by West Virginia and New Jersey. Arguments used by the business taxpayers were that the earlier sales and use tax nexus decisions should apply to the income and franchise taxes as well, and that there should be one consistent standard.
The U.S. Supreme Court declined to hear the cases. And in doing so, the court is saying that the narrower definition of nexus does not necessarily apply to these other taxes, and that the States can use different standards. The decision by the Supreme Court not to hear the cases sends a signal to the States to be more aggressive. It also means that there is no easy answer to the question what constitutes “doing business” for taxation purposes for businesses “doing business” in multiple states.