The Fading Bright Line of Physical Presence: Did KFC Corporation v. Iowa Department of Revenue Give States the Secret Recipe for Repudiating Quill?
60 Pages Posted: 10 Mar 2011 Last revised: 22 Mar 2013
Date Written: March 9, 2011
The U.S. Supreme Court has long held that the Dormant Commerce Clause of the U.S. Constitution prohibits states from imposing sales- or use-tax collection requirements on vendors that do not have a physical presence in their jurisdictions. That rule has been under pressure in recent years, however, with a number of states taking actions challenging the Court’s physical-presence rule. Those challenges have included expansive nexus-attribution provisions, burdensome information-reporting requirements, and calls to directly challenge the continued validity of the physical-presence test in court. The Iowa Supreme Court also recently added a new dimension to this resistance with its surprising physical-presence analysis in KFC Corporation v. Iowa Department of Revenue. In that analysis, the KFC court adopted a unique functional-equivalency standard under which it held that KFC’s contacts with Iowa satisfied the demands of the physical-presence test despite KFC having no direct physical connection to the state. This Article evaluates the KFC decision, discusses the apparent source and scope of the court’s rationale, and explains that KFC can only be interpreted as a direct repudiation of the Court’s physical-presence mandate. The Article concludes with a defense of the ongoing validity of that rule despite many calls to the contrary.
Keywords: nexus, commerce clause, state taxation, physical presence, Quill, National Bellas Hess, internet sales, remote vendor
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