Meeting the Nexus Requirement for the Taxation of Interstate E-Commerce – Sales and Use Tax Rules as Applied to Electronic Commerce in the United States.

78 Pages Posted: 28 Mar 2018

See all articles by Steve M. Windham

Steve M. Windham

St. Thomas University - School of Law, Walter & Dorothy Diamond LLM Program

Date Written: February 20, 2006


The Commerce Clause and the Due Process Clause of the United States Constitution govern the taxation of interstate commerce. With evolving technology and the Internet in particular, the landscape of sales and use tax is evolving. E-Commerce is more than simply a new twist on an old idea. With the advent of the Internet and E-Commerce, technology is pushing the envelope of our current tax system. Since the United States has been a country, there has been interstate commerce. However, the Internet is unique in the nature of how it works, who uses it, compliance issues, as well as the overall framework of E-Commerce. The Internet connects somewhere between 817 million to one billion people worldwide, with some 31 million domain names registered.

E-Commerce utilizes cutting-edge technology which has caused lawmakers to reconsider the traditional rules of taxation. Consider that the internet has remote servers located throughout not only across the nation, but the world, and the rules governing taxation of E-Commerce suddenly lose clarity. There is no longer a clearly defined border. The Internet can be accessed nearly anywhere in the world, payments can be made using electronic cash as well as by every other form of electronic payment. The current US tax system is ill-equipped to accommodate the various administrative and compliance issues associated with the proliferation of E-Commerce, as there are currently over 7,500 sales and use tax jurisdictions in the United States.

Among the various concerns of E-Commerce is the issue of whether a company must collect sales tax for an out of state purchase that was transacted online. Conversely, when does a state have the right to collect use tax on an item that was purchased online from an out-of-state vendor? The particular focus of this paper is on the various requirements that must be met to collect the sales and use taxes on e-commerce transactions, as well as the ever-evolving legal landscape which governs interstate commerce.

The United States Supreme Court has held that a physical presence is required to establish the nexus requirement for the collection of state sales tax. Without this nexus requirement a state is not required to collect sales tax on that particular purchase. However, the state to where the item is being sent to for storage, usage or consumption may impose a use tax which is typically equal to what the sales tax would have been had the item been purchased in the destination state. Nexus is of paramount concern to online retailers and purchasers. The US Supreme Court has determined that in order to be Constitutional that the act of imposing the burden of collecting a state’s use tax must conform to the Due Process and Commerce Clause of the US Constitution. The case of Quill Corporation v. North Dakota is the crux of the current sales and use tax collection issue as it pertains to interstate commerce. Yet, while the US Supreme Court decision on Quill Corporation v. North Dakota is the basis for our current interstate sales and use tax laws, many feel that there must be a better way of dealing with this issue.

In order for a state to require a vendor to collect sales tax the state must abide by the Due Process and the Commerce Clauses of the US Constitution. Under the Due Process Clause there must be some minimum connection between the taxing state and the person, property, or transaction it seeks to tax. In order to satisfy the Commerce Clause of the US Constitution the US Supreme Court has devised a four-part test. Under this test, a tax affecting interstate commerce will survive a challenge based on the Commerce Clause if: 1) substantial nexus exists with the taxing state, 2) the tax is fairly apportioned, 3) the tax does not discriminate against interstate commerce and 4) the tax is fairly related to the services provided by the state. The first and fourth prongs are intended to ensure that a tax does not unduly burden commerce. The second and third prongs of the test relate to the goal of preventing discrimination against out-of-state businesses.9 The new Streamlined Sales Tax Program is taking form and has the potential to dramatically change the rules for collection of use taxes by out-of-state vendors. Something to consider is that even though the Streamlined Sales Tax Program has the official support of several states and several major retailers we do not yet know how it will stand up in the courts. It stands in defiance of the United States Constitution and two major United States Supreme Court Rulings.

The Internet has effectively eliminated not only state, but national borders on the information superhighway. As a result, many transactions are at risk of being subjected to tax in more than one jurisdiction — sometimes even in more than one country!

Because of the complexities of the Internet and the fact that technology has outpaced the current tax code, taxation of e-commerce is rarely as simple as it may seem. Additionally, there are a host of other taxes that may or may not be imposed on companies doing business on the Internet.

These in turn affect the overall price structure of e-commerce transactions, which in turn further affect the taxation of e-commerce. The World Wide Web is a tangled a web of legal jurisdictions and tax compliance and enforcement issues.

Keywords: sales tax, use tax, interstate e-commerce, nexus, streamlined sales tax

JEL Classification: K34, Y40, M40

Suggested Citation

Windham, Steve, Meeting the Nexus Requirement for the Taxation of Interstate E-Commerce – Sales and Use Tax Rules as Applied to Electronic Commerce in the United States. (February 20, 2006). Available at SSRN: or

Steve Windham (Contact Author)

St. Thomas University - School of Law, Walter & Dorothy Diamond LLM Program ( email )

16401 N.W. 37th Ave.
Miami, FL 33054
United States

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