[IMGCAP(1)]The concept of nexus, the minimum amount of contact between a taxpayer and a state which allows the state to tax a business, is not new.

It arises from two clauses in the Constitution. The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it wishes to tax. What is new is the increasingly aggressive stance taken by the states in asserting nexus.

Now, at least one state looks to fatten up on cookies, the bits of computer code that websites leave on computers and smartphones to track user data and to improve website experience.

“In Crutchfield, Inc. v. Testa, Ohio’s tax commissioner has asserted a theory of Internet nexus that would create taxable presence every time a retailer’s website is accessed by a customer in the state,” said Matt Hedstrom, a partner with Alston & Bird’s State and Local Tax (SALT) Group. “This theory that a company owns tangible personal property in the form of browser cookies place on consumers’ computers and mobile apps placed on customers’ cell phones would dramatically change the nexus landscape. Because those cookie-containing computers and cell phones are located in Ohio, the commissioner argues, the out-of-state businesses have themselves established physical presence nexus within the state’s borders.”

“The issue was whether an economic presence test is Constitutional, and then randomly within the state’s brief came the argument that remote sellers own the cookies placed on the computers of consumers that visit their website,” he added. “They’re saying that it constitutes physical presence and is sufficient for nexus.”

“Since the case is still pending, it remains to be seen if the court takes this on or says nothing about it,” Hedstrom noted.

Under this theory, “any company that transacts business with customers over the Internet would have nexus anywhere its customers are located,” he said. “That’s assuming that most companies are using cookies to market, and in fact they are. It would dramatically change the nexus profile for Internet companies.”

Hedstrom believes that the state’s theory of cookie nexus is misguided. “When the U.S. Supreme Court decided Quill [a 1992 decision that established a physical presence test in the sales and use tax arena], it established a bright-line physical presence standard,” he said. “My view is that simply defining software as tangible personal property is not sufficient to create physical presence. The presence of cookies on a customer’s computer just doesn’t rise to the level of physical presence under the Constitution.”

Moreover, several other states are also considering the Internet nexus theory, according to Hedstrom. He believes that it is unclear whether the commissioner’s brief in Crutchfield is merely arguing in the alternative or actually will adopt it as a new theory. “However, the fact that it would even be considered is cause for concern,” he said.

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