Physical Presence Standard in Interstate Taxations

CCH’s State Tax Review has mention of the Supreme Court’s being asked to resolve the “physical presence” controversy encountered by many states in determining whether the Constitution’s commerce clause permits imposing corporate income and franchise taxes on companies which have no physical presence in the state.

At issue are two 2006 cases on separate petitions, Lanco v New Jersey Dept. Taxation (docket) and MBNA v. West Virginia Tax Commissioner. (docket)

In the National Bellas Hess v. Illinois Dept. Revenue (1967) and Quill v.Heitkamp(1992), the Supreme Court had held that states could not impose sales and use taxes on corporations unless there was a physical presence in that state. Bellas, in fact, states that a company may in fact “have the ‘minimum contacts’ with a taxing state as required by the due process clause and yet lack the ‘substantial nexus’ with the state required by the commerce clause.”

Since then, CCH said, many states and businesses have been litigating over whether this physical presence standard applies to other than sales or use taxes, with clear consensus lacking. New Jersey, Ohio, and others limit the physical presence standard to sales and use taxes, while courts in Michigan, Tennessee, and Texas have extended the standard to other taxes. Here, the New Jersey Supreme Court (Lanco) held that “the Quill decision was not intended to create a universal physical presence requirement for state taxation under the commerce clause and should be limited to sales and use taxes.” West Virginia (MBNA), agreeing with the sales and use tax limit, further held, however, that “A significant economic presence test was a better indicator of whether a substantial nexus existed for commerce clause purposes than a physical presence standard.”


Lanco opinion
MBNA opinion