SalesMap of USA with flight paths. Image with clipping path. and use tax nexus is a very fluid and evolving area of tax law, and although Congress has historically been considered to be the sole gatekeeper to change, states have recently become emboldened in their efforts to unilaterally lower nexus barriers.  For example, on March 22, 2016, South Dakota passed S.B. 106 which effectively establishes an economic nexus standard.  The law requires remote sellers to register and collect use tax on its sales into South Dakota if its sales into the state exceed $100,000 annually, or it makes 200 or more separate sales into the state; notwithstanding a complete lack of physical nexus.  The Department of Revenue, however, is not permitted to enforce the law “until the constitutionality has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine, or a final judgment applicable to a particular taxpayer.”  In other words, South Dakota’s legislature has effectively proposed a law that will be presented to the courts for consideration.  Many believe the effort is unconstitutional because the law seeks to vest authority in the courts that the U.S. Constitution actually vests in Congress.

There is little doubt the law is closely tied to the statements Justice Kennedy made in Direct Marketing Association v. Brohl, 135 U.S. 1124 (2015), in which Kennedy explicitly called the rulings in Bellas Hess and Quill into question, stating that “[t]he legal system should find an appropriate case for this Court to reexamine Quill and Bells Hess.”  South Dakota answered the call.

Because the U.S. Constitution specifically provides Congress with authority over interstate commerce, and the rule of stari decisis compels courts to follow established legal precedence, some believe the efforts to tear down the established nexus walls by states like South Dakota will not succeed – short of an act by Congress.  In light of Justice Kennedy’s statements in the DMA case, I would personally put my money on there being significant changes ahead.  At this point, however, National Bellas Hess and its progeny still form the law of the land.  Therefore, this article addresses some various examples of “physical presence” standards that have been established by different states.

In its less creative interpretations, physical presence means that a company (a) owns or leases property in the state (including but not necessarily limited to real estate, furniture, equipment, or inventory) or (b) has personnel either residing in the state or making frequent sales-related visits to the state.  For this purpose, “personnel” includes both employees and independent contractors.



The issue of in-state property was actually raised in the Quill case, although the court spent little time addressing it.  In its attempt to distinguish Quill from previous case findings (notably National Bellas Hess), North Dakota pointed out that Quill had provided purchasing software on floppy disks to three of its in-state customers.  Since these disks were tangible property owned by Quill within North Dakota, the state argued that the company had established a physical presence.  The court, however, considered the presence created by the disks to be de minimus.

Generally the permanent presence of any significant amount of real or personal property within a state will create nexus, whether the property is owned or leased, and whether or not the property is related to the taxpayer’s sales.  In National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), the National Geographic Society maintained offices in California for the purpose of soliciting advertising for the society’s magazine.  Although this function was not related to taxable sales, the court found that the offices themselves established enough of a physical presence to create nexus.

Similarly, in Time, Inc. v. Massachusetts Commissioner of Revenue, 1993 Mass. Tax LEXIS 17, 1993 WL 306201 (July 23, 1993), the court determined that nexus was established by the taxpayer’s maintenance of a small news bureau in Massachusetts, coupled with the company’s employment of in-state personnel who solicited advertising for its publications.  (Note that none of these activities were related to sales of the company’s publications or any other taxable property.)


Temporary presence:

The temporary presence of a taxpayer’s property within a state is often held to create nexus.  For example, when an out-of-state seller consistently delivers its merchandise to customers in its own vehicles, nexus is very likely to be asserted by the destination state.

In Brown’s Furniture, Inc. v. Wagner (1996) 171 Ill. 2d 410, a Missouri based furniture store made more than nine hundred deliveries into the state of Illinois during a ten month period.  After receiving complaints from a competing furniture business that Brown’s was not collecting tax on its Illinois sales, the Department of Revenue performed an audit and determined that the company had nexus in Illinois.  Brown’s Furniture contested the Department’s claim, and because the company did not maintain any permanent physical presence inside the state, an Illinois trial court found that Brown’s Furniture did not have nexus.  On appeal, and after considering the four-part test articulated in Complete Auto Transit, the Supreme Court of Illinois reversed, concluding that consistent and voluminous deliveries into the state by the taxpayer’s trucks brought it within the state’s taxing jurisdiction.

The North Carolina Tax Review Board considered an out-of-state company that sold specialty automobile racing transmissions to have nexus when the company first shipped the transmissions to in-state mechanics for assembly or modification to meet each customer’s specifications.  Even though the company delivered the transmissions into the state by common carrier, the company maintained ownership of the transmissions until they were delivered to the in-state customers.  Thus, it was concluded that the in-state transmission builders were transacting business on the corporation’s behalf when they assembled and delivered the custom transmissions. (Administrative Decision No. 443, North Carolina Tax Review Board, June 2, 2004.)

In Minnesota, a retailer that conducts business in the state for four days or more within a 12-month period must register and collect the state’s tax for the 12 subsequent months, even if the sales following the fourth day are made through the mail from an out-of- state location.  (Revenue Notice No. 00-10, November 6, 2000.)  In Ohio, out-of-state companies offering tangible personal property on approval to customers in the state become responsible for collecting the state’s use tax, since the sellers’ ownership of the property during the approval period is regarded as sufficient to establish nexus.  (Use Tax Information Release ST 2001-01, Ohio Department of Taxation, September 2001.)  Similarly, in Illinois, nexus is considered to be established when property owned by an out-of-state retailer is stored by an independent contractor inside of the state pending shipment to Illinois customers.  (General Information Letter IT 05-0042-GIL, Ill. Dept. of Rev., (2005).)

Florida found that a heavy equipment dealer located in Georgia had nexus with the state because it “deliberately and systematically” targeted Florida customers by advertising in a Florida publication, and it consistently used its own trucks and employees to deliver equipment to Florida residents.  (Rhinehart Equipment Co. v. Department of Revenue, Florida Department of Revenue, DOAH Case No. 11-2567 (DOR 2014-002-FOF), August 4, 2014.)

An out-of-state company that sold and leased industrial training films and videos in Connecticut was found to lack nexus even though customers were allowed three days to preview the items before purchase.  The court held that the presence created by the company’s ownership of the films and videos during the three-day preview period was de minimus.  (Cally Curtis Co. v. Groppo, 572 A.2d 302 [Conn. 1990], cert. denied 498 U.S. 824 [1990])

In Koch Fuels, Inc. v. Clark, 676 A.2d 330 (R.I. 1996), cert. denied 519 U.S. 930 (1996), the taxpayer delivered fuel oil to its customer in Rhode Island via common carrier vessels.  However, the taxpayer retained title to the oil until the oil reached the terminal’s inflow pipe (from the vessels’ outflow pipes), which was located within the state.  The Rhode Island Supreme Court held that the taxpayer retained control over the oil until title passed in the state, which constituted a sufficient physical presence to create nexus.

An out-of-state business that delivers its merchandise to customers in Indiana using its own trucks is considered to be doing business in the state. (Letter of Findings No. 04-20120449, Indiana Department of Revenue, February 27, 2013.)

A New Jersey court held that that a vessel charter business was doing business in the state and required to pay use tax based on the number of days a vessel was docked in Seaview, New Jersey.  The vessel was primarily chartered in the Caribbean, but because it was docked in New Jersey for sixty-nine days in 2005 and forty-six days in 2006, the Division of Taxation assessed tax based on a percentage of the original purchase price.  Because there was no reasonable explanation for why vessel was docked in New Jersey between charters, the court upheld the assessment under New Jersey law. (Lady Frances V, LLC v. N.J. Division of Taxation, (2009) 24 N.J. Tax 545.)


Rental of tangible personal property:

When an out-of-state lessor rents tangible personal property to persons within a state where the lessor would otherwise lack a physical presence, nexus will probably be asserted.  Nexus also will be asserted for an out-of-state lessee to whom such property is rented within the state.  Either legal ownership of property within the state or the right to exercise the incidents of ownership over the property will be generally regarded as establishing a physical presence that is more than incidental.

For example, the North Carolina Department of Revenue found that a company renting and selling workplace safety videotapes through the mail (from an out-of-state location) was doing business in the state.  The sole nexus-creating factor was the fact that the company owned the videos that were being rented to North Carolina customers.  (Secretary of Revenue Decision No. 98-298, North Carolina Department of Revenue, Wake County, September 28, 1999.)  Similarly, California considers any retailer that derives rentals receipts from a lease of tangible personal property in the state to have nexus.  (Cal. Rev. & Tax. Code § 6203, subd. (c)(3).)

Renting caps and gowns to customers in Alabama established substantial nexus, even if the in-state company’s representatives were not deemed to be agents of the taxpayer.  (Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007.)  In a more recent decision issued by the State of Alabama Tax Tribunal, it was held that Scholastic Book Clubs had nexus with the state even though it was found that no person inside the state was acting directly on its behalf.  (Scholastic Book Clubs v. State of Alabama, Docket No. S. 14-374, March 25, 2016.)



A license to use tangible or intangible property is usually regarded as a form of lease and/or sale of that property.  If the licensed property falls within the sales and use tax base of the licensee’s (user’s) state, the proceeds of the license will be taxable unless some other exemption applies.  Under these circumstances, the licensed property will probably be regarded as being physically present in the state, and nexus may be asserted accordingly.

For example: under Texas law, prewritten and custom computer programs are regarded as tangible personal property.  Transfers of programs (software) within the state are taxable, whether the transfers are made through physical media or by direct electronic download.  In Decision Hearing No. 108,626, Texas Comptroller of Public Accounts, September 19, 2014 (released November 2014), a Utah company that licensed software and digital content to Texas customers primarily via Internet downloads was found to have substantial nexus to the state.  Reason: the taxpayer owned tangible personal property (the software) that was physically present and generating license revenue in the state.

Similarly, under a New Mexico statute, taxable gross receipts include consideration received from licensing property that is used in the state.  (NMSA 1978 section 7-9-3.5(A).)  “Property” includes all licenses other than the licenses of copyrights, trademarks, patents or franchises.  (NMSA 1978 section 7-9-3(J).)  Accordingly, New Mexico can be expected to assert nexus based on a physical presence established by granting licenses to use software in the state.




Maintaining a permanent employee in a state will virtually guarantee an assertion of nexus.  Even if the employee is not involved in sales-related activities, the resulting physical presence is very likely to be regarded as greater than de minimus, resulting in the employer’s being required to register and collect the state’s sales and use tax.

A Tennessee revenue ruling illustrates how far this concept may be stretched.  The subject of the ruling was an out-of-state company with no physical presence in Tennessee.  The company acquired a subsidiary that also lacked presence except for having one employee that lived in the state.  The employee worked from home and accessed the subsidiary’s out-of-state servers remotely, using his own computer to do so.  His job was to ensure that the computer code on the subsidiary’s website was working properly, and he had no customer contact.

The Department of Revenue held that the employee’s presence created nexus for both companies.  Their “reasoning” was that the employee benefitted from police protection, public roads, the judicial system, and other services provided by the state, which (somehow) created a physical presence for his employer.  The state also held that the company “purposefully directed its activities to Tennessee residents,” based solely on the fact that the taxpayer had a substantial number of Tennessee customers.  (The relative numbers of customers in other states were not even considered.)  This finding was adopted as policy in Revenue Ruling 05-25, (Tenn. Dept. of Revenue, December 19, 2005), which remains in effect today.

Occasionally a state’s statute or regulation will actually shorten the taxing agency’s reach.  Letter of Findings No. 09-0939, Indiana Department of Revenue, June 23, 2010, held that a software seller with Indiana-based employees working out of their homes could not be characterized as “a retail merchant engaged in business in Indiana.”  Although the employees included sales staff, they served regional, non-Indiana customers and did not sell to customers within the state.  Under the wording of the applicable statute, the company would have to be engaged in sales-related activities involving tangible personal property or services sold for use in Indiana in order to be classified as doing business in the state.  Since the company did not meet this criterion, it could not be held responsible for collecting the state’s tax.

In Arizona Department of Revenue Director’s Decision No. 201000178-S (August 1, 2011), an out-of-state company selling dental supplies to Arizona dentists was found to have nexus because its in-state representatives provided training and support to help the dentists integrate the products into their practices.

An out-of-state business that sold products to schools and nonprofit agencies in Missouri was doing business in the state because it used two resident sales people who worked out of their homes.  See Letter Ruling No. LR4724, Missouri Department of Revenue, May 5, 2008.

A 2011 Pennsylvania bulletin states that remote sellers with one or more employees regularly travelling to the state for any purpose related to the sellers’ business activities will be regarded as having sales tax nexus.  Unfortunately, the term “regularly travelling” is not clarified.  See Sales Tax Bulletin No. 2011-01 (Pa. Department of Revenue, December 1, 2011).


Independent contractors:

Most states make little distinction between the activities of employees and independent contractors. (See e.g., Scripto, Inc. v. Carson (1960) 362 U.S. 207.)  Occasionally, however, the use of an independent contractor or similar third-party representative will not be regarded as creating nexus in circumstances where an in-state employee providing similar services would result in a different outcome.  Generally these disparities in treatment are restricted to in-state activities that are not related to sales.

For example, the Florida Department of Revenue held that hiring a third party management consultant that worked from her Florida residence did not result in nexus.  The consultant provided advice to the out-of-state company’s staff on new product development, workflow improvement, and training.  She had no contact with the company’s customers or suppliers.  (Technical Assistance Advisement No. 09A-058, Florida Department of Revenue, November 9, 2009.)

A firm that proposed to set up a facility in Illinois to receive and process books that were rejected by customers of an out-of-state publishing company would not create Illinois nexus for the publisher.  The only services the processer would provide to the publisher were receipt (from the customers) and delivery (to the publisher) of the rejected books.  The processer would not solicit sales or be otherwise authorized to act for the publisher, and the books would only be transported by common carrier or the U.S. Postal Service.  (Illinois Private Letter Ruling No. ST-99-0352-GIL, 1999 Ill. PLR LEXIS 464, November 18, 1999.)

Similarly, the Florida Department of Revenue held that an independent consultant that advised an out-of-state mail order company on personnel matters did not create nexus.  The out-of-state company systematically solicited and made sales within Florida, but the independent consultant did not develop a market for the retailer in Florida and she did not have any interaction with the retailer’s customers.  (Technical Assistance Advisement, No. 09A-058, Florida Department of Revenue, November 9, 2009.)

In most cases, however, the presence of an independent contractor/third-party representative performing services for an out-of-state taxpayer will create nexus for the taxpayer in the state where the services are performed.  Several examples follow.

Nexus was asserted in Illinois for an out-of-state company that utilized an Illinois answering service.  In Illinois Department of Revenue Informational Letter, LTR 95-0485, 1995 WL 815221 (November 1, 1995) (96 STN 47-32 (March 8, 1996), the answering service was held to constitute an in-state representative that created a sufficient presence to require the out-of-state firm to register and collect the state’s tax.

Another out-of-state company’s engagement of an Illinois telemarketing company was sufficient for the state to assert nexus, even though the telemarketers were soliciting customers throughout the entire United States and the company had no other physical presence in Illinois.  See Illinois Department of Revenue Informational Letter, LTR 95-0519, 1995 WL 815147 (December 29, 1995).

In Kansas, nexus was asserted for an out-of-state company that used in-state independent (commissioned) sales representatives to take orders from customers.  The orders were sent outside the state to the company for approval; the company had no physical presence in Kansas; and the merchandise was shipped directly to the customers by common carrier from outside the state.  Nonetheless, a court found that the company was doing business in Kansas based solely on the activities of the in-state representatives.  See In the Matter of Family of Eagles, Ltd., 275 Kan. 479, 66 P.3d 858 (Kan. 2003).

A New York advisory opinion (Motion Systems Corp., New York Commissioner of Taxation and Finance, TSB-A-01(8)S, February 27, 2001) addressed a situation where a New Jersey manufacturer sold its product nationally and abroad to other manufacturers that incorporated the product into machines that they, in turn, sold to ultimate consumers.  The manufacturer’s only New York presence was created by a resident independent manufacturer’s representative who made personal calls on a potential or existing customer in the state every four to six months to explain the taxpayer’s product or deal with troubleshooting issues.

Even though the great majority of the manufacturer’s sales qualified as sales for resale and the in-state activities of the representative were relatively minor, the Commissioner held that the presence of the in-state representative created nexus.  Accordingly, the taxpayer was required to register with the state and file sales and use tax returns.

Generally an out-of-state company that hires in-state third-party contractors to install, maintain, or repair the company’s products will be considered to have created nexus.  In a conclusion that would be similar in virtually any state with a sales tax, the Kansas Department of Revenue informed an in-state installer that its installation of signs sold and shipped into the state created nexus for the out-of-state seller of the signs.  The seller was doing business in the state because it retained the Kansas installer to fulfill its contractual obligations to its Kansas customers.  (Opinion Letter O-2012-003, Kansas Department of Revenue, September 13, 2012.)

The same position was expressed in a bulletin issued by Multistate Tax Commission in which the Commission indicated that the performance of in-state warranty repair services for an out-of-state company will create nexus for the out-of-state seller. (Nexus Program Bulletin, NB 95-1, Multistate Tax Commission, December 20, 1995, revised September 10, 1996.)  States that participate in the Streamlined Sales Tax Program may also adopt interpretations provided by MTC bulletins. (See Chapter 7.)

New York does not participate in the Streamlined Sales Tax Program, but it shares the aforementioned interpretation.  An out-of-state manufacturer selling computer systems throughout the nation was found to have created New York nexus by hiring independent in-state repair people to fulfill the terms of its warranty contracts.  The manufacturer did not have property, an office, or a sales representative in New York; shipped all of its products by U.S. mail or common carrier; solicited through ads in national computer magazines and mailings to prior customers; and took all orders via telephone or its website.  However, the company’s one-year on-site warranty program, under which it would engage third-party New York repairers to diagnose and repair covered hardware problems at customers’ in-state locations, was sufficient to establish nexus.  (Klein, New York Commissioner of Taxation and Finance, Advisory Opinion TSB-A-00 (42)S, October 13, 2000; also see Technical Assistance Advisement No. 98A-081, Florida Department of Revenue, November 4, 1998.)

(This article was adapted from a continuing education course that was coauthored by Jesse W. McClellan, Esq. and Dan Davis, CPA, that is offered by Western CPE® © McClellan Davis, LLC.)

Jesse McClellan, Esq.

Jesse McClellan, Esq.

Jesse is a licensed attorney and former sales and use tax auditor. He is a principal at McClellan Davis, LLC, a firm that specializes in representing businesses for sales and use tax matters. Email Jesse

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