State Tax Nexus Issues in a Mobile Economy: The Evolving Legal Landscape

As a general proposition, when a state asserts substantive jurisdiction over the subject matter of a tax, the state should also have enforcement jurisdiction over a person who can effectively remit the tax. Administrative and compliance considerations may justify an exception when the item to be taxed falls below a certain threshold. Because the administrative and compliance costs associated with foreign persons may be higher than for domestic persons, the appropriate thresholds for foreign persons may be higher. An alternative to granting a tax exemption to persons who fall below a threshold is to lower their administrative and compliance costs through a simplified compliance regime. In the American sub-national system, the major impediments to the alignment of substantive and enforcement jurisdiction are the Quill physical presence test and the income tax safe-harbor of P.L. 86-272. These physical presence tests have had the unintended consequence of stimulating “economic development nexus ” rules that are even more protective of remote businesses, thus driving substantive and enforcement jurisdiction even further out of alignment. Finally, the tax law has responded to mobility in various ways, as illustrated by the diverse approaches to the problem of sourcing intangibles for income tax purposes