Economic Nexus


Following several failed attempts by Oregon voters and the Oregon legislature to pass a gross receipts tax (see Not Dead Yet: Oregon Voters Propose Another Gross Receipts Tax in the Wake of Market-Based Sourcing and Oregon Proposes “Gross” New Tax),  Governor Kate Brown signed Enrolled House Bill 3427, Oregon’s corporate activity tax (CAT), into law on May 16, 2019.

Six online retailers recently sued the Massachusetts Department of Revenue over the pre-Wayfair enforcement of regulation 830 CMR 64H.1.7 (“Remote Sales Tax Regulation”). The complaint argues that, prior to the Supreme Court’s decision in South Dakota v. Wayfair, Inc., No. 17-494 (U.S. Jun. 21, 2018), the Remote Sales Tax Regulation violated the Due Process Clause of the U.S. Constitution and the Internet Tax Freedom Act. On Due Process, the six online retailers argue the Remote Sales Tax Regulation places an undue burden on, and discriminates against, interstate commerce. The online retailers also argue that the Remote Sales Tax Regulation violates the Internet Tax Freedom Act’s prohibition of discriminatory taxes on electronic commerce.

On May 3, 2017, in Romantix Holdings Inc. v. the Iowa Dept. of Revenue, the Court of Appeals of Iowa affirmed the Iowa Department of Revenue’s (the “Department”) determination that (1) a parent holding corporation was ineligible to join its Iowa subsidiaries’ consolidated Iowa income tax returns because the holding company was not subject to Iowa income tax; and (2) the holding company’s Iowa subsidiaries could not deduct certain expenses incurred and paid directly by the holding corporation but ratably allocated to the subsidiaries based on a percentage of revenue approach.  While the Court ruled against the taxpayer on both issues, this case more broadly holds that an in-state operating subsidiary’s use of an out-of-state holding company’s intangible property, including a business trademark, does not necessarily create nexus for the out-of-state holding company with Iowa.  The Court’s ruling potentially conflicts with determinations from other state courts under similar facts where intangible holding companies were held to have nexus based on the activities of in-state operating subsidiaries involving the out-of-state entities’ intangible personal property. See our prior coverage, Colorado District Court Holds Economic Nexus Exists for a Minnesota Intangible Holding Company and Agrees to a Modified Alternative Apportionment Method, June 19, 2017.      

On June 12, 2017, Congressman Jim Sensenbrenner (R-WI) reintroduced into Congress H.R. 2887, also known as the “No Regulation Without Representation Act of 2017” (the “Legislation”), which codifies the physical presence nexus requirement established by the U.S. Supreme Court in Quill v. North Dakota, 504 U.S. 298 (1992) (“Quill”).  The Legislation is interesting for several reasons: (1) it proposes to employ a result that is the exact opposite of the recent trend to overturn Quill; (2) it defines “tax” broadly to include net income and business activity taxes; and (3) it expands the law to require a physical presence for states to regulate a person’s activity in interstate commerce outside of the tax context.