Paul L. Caron

Friday, March 9, 2018

Weekly SSRN Tax Article Review And Roundup: Mazur Reviews Thimmesch’s Nexus And The Dormant Commerce Clause

This week, Orly Mazur (SMU) reviews a new work by Adam B. Thimmesch (Nebraska), A Unifying Approach to Nexus Under the Dormant Commerce Clause, 116 Mich. L. Rev. Online ___ (2018).

Mazur (2017-2)Adam Thimmesch’s timely new essay considers whether and how the Supreme Court should regulate a state’s taxing power over online transactions if the Court abolishes the physical presence nexus rule. According to this rule, upheld in the 1992 case, Quill Corp. v. North Dakota, a state cannot collect sales and use taxes from out-of-state vendors unless the vendor has a physical presence in that state. The Supreme Court is set to reexamine the continued validity of the physical presence mandate this year in the case of South Dakota v. Wayfair.

Many legal scholars (including 60 tax professors) and policymakers have urged the Court to take this opportunity to overrule Quill and the physical presence rule and have provided numerous and persuasive reasons to support this position. Adam Thimmesch’s new work contributes to this literature by evaluating what the Court should do if the Court were to abandon the physical presence rule. He concludes that the Court’s best option in Wayfair is to repeal the physical presence rule and not replace it with a different nexus requirement. In other words, Thimmesch argues that a separate jurisdictional rule is not necessary to regulate the state’s ability to tax online transactions.

To support this conclusion, the essay first examines the various approaches that the Court takes to promote a common national market under the dormant Commerce Clause. In particular, it highlights: (i) the use of the physical presence nexus requirement in sales and use tax cases, (ii) the four part test set forth in Complete Auto Transit v. Brady that applies in other tax areas, and (iii) the balancing test attributed to Pike v. Bruce Church that the Court uses to evaluate non-tax cases. Through this analysis, Thimmesch convincingly demonstrates that the nexus requirement is “nothing more than blunt-force Pike balancing.” Because it serves the same function as the balancing test, there is no need to retain or impose a new nexus requirement.

The essay then demonstrates that it would be difficult to balance the state interests and the burdens imposed on interstate commerce in Wayfair and other sales and use tax cases. Specifically, it shows the difficulties in quantifying the states’ interests given that they vary both over time and among states and the challenges in quantifying the burdens of tax compliance on businesses as a whole. This discussion reinforces the challenges the Court would have to face in crafting any new national nexus rule that adequately balances these competing interests. The author, therefore, cautions against adopting a new bright-line nexus requirement to replace the physical presence nexus rule.

Thimmesch also considers an alternative approach to regulate states’ taxing authority post-Quill: namely, the adoption of a nexus standard, such as economic nexus, instead of a specific nexus rule.  Although the author recognizes the virtues of such an approach, he concludes that a better approach is to eliminate any special test for nexus under the dormant Commerce Clause. This option is preferable, because it would allow states to collect sales and use taxes on Internet transactions and unify the Court’s approach to the dormant Commerce Clause doctrine in tax and non-tax cases. This approach also has its costs, especially by shifting the burdens of online taxation to small vendors, but Thimmesch insightfully recognizes that Congress is in a better position to address those costs than the Court and suggests that states have many pragmatic reasons for seeking to minimize those costs on their own. Moreover, he notes that the states would not have unfettered discretion to tax any online transaction. Instead, the Court would still apply the dormant Commerce Clause and balance the national interest in a common economic market against the states’ retained taxing autonomy by looking for facial discrimination and using its internal consistency test, as it has done in other contexts. The work then concludes by discussing how the Court should go about eliminating any nexus requirement.

Overall, Thimmesch’s latest work provides a much-needed evaluation of the different approaches the Court can take in regulating the states’ power to collect their sales and use taxes. His work provokes a rethinking of the role of the dormant Commerce Clause in the tax context and raises important points for the Court to consider if it decides to kill-Quill in the pivotal case of South Dakota v. Wayfair.  

Here’s the rest of this week’s SSRN Tax Roundup:

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