What kind of nexus is substantial enough to allow a state to tax a business’s sales in interstate commerce? In its 2018 decision in , the U.S. Supreme Court held that a business’s physical presence in the taxing state is not required. Describing the remote-seller litigants as “large, national companies that undoubtedly maintain an extensive ,” the Court held that substantial nexus was clear in view of “both the economic and ” that the remote-seller litigants had with South Dakota. The U.S. Supreme Court recited the general rule that substantial nexus exists when a taxpayer has availed itself of the substantial privilege of carrying on business in the taxing state, and it appeared to describe “virtual contacts” and “virtual presence” as follows: “Between targeted advertising and instant access to most consumers via any internet-enabled device, ‘a business may be present in a State in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.’” Wayfair left many questions unanswered, including whether (and, if so, how) “virtual contacts” and “virtual presence” may be required for a substantial nexus to tax in compliance with the commerce clause.
The Oregon Supreme Court’s Ooma Decision
On December 23, 2021, the Oregon Supreme Court provided more clarity regarding virtual contacts and virtual presence in Ooma, Inc. v. Oregon Department of Revenue. The U.S. Supreme Court declined review on June 21, 2022.
During the period at issue, Ooma lacked a physical presence in Oregon, and its advertising was national and not targeted to Oregon customers. Arguably, Ooma’s “virtual contacts” or “virtual presence” included its practice of remotely providing Voice over Internet Protocol (VoIP), voicemail, call waiting, call forwarding, and caller identification services to customers in Oregon and other states. To access these services, customers purchased Ooma hardware from Ooma’s online store or others’ online stores or brick-and-mortar stores. Oregon imposed an emergency communications (E911) tax on VoIP lines to be paid by the provider. The Oregon Department of Revenue audited Ooma, discovered that it had not paid E911 tax on its Oregon customers’ VoIP lines, and issued related tax assessments to Ooma.
Arguing that the assessments violated the commerce clause and the due process clause of the Fourteenth Amendment to the U.S. Constitution, Ooma appealed to the Oregon Tax Court’s Magistrate Division. The Magistrate Division upheld the assessments, and the Regular Division of the Tax Court did the same on Ooma’s further appeal. The Oregon Supreme Court affirmed after Ooma appealed to it.
As to the commerce clause, Ooma relied on Wayfair to argue that it lacked a virtual presence in Oregon and therefore, lacked a substantial nexus to support the department’s assessments. Ooma emphasized that its advertising was national in scope, it did not target Oregon customers for e-commerce, and it was “a very small business when compared to” those in Wayfair. In response, the department argued that Ooma’s economic contacts alone sufficed and that Ooma had pervasive virtual contacts with Oregon in any event. According to the department, Ooma’s revenues and transactions exceeded those in the South Dakota law at issue in Wayfair, and Ooma had a virtual contact with the state each time an Oregon customer made or answered a call using Ooma’s VoIP service and each time Ooma billed or sold equipment to an Oregon customer over the internet.
The Oregon Supreme Court sided with the department. In addressing the commerce clause issue, the state Supreme Court read Wayfair to indicate that a remote seller’s “sales in excess of South Dakota’s thresholds ‘could not have occurred unless the seller availed itself of the substantial privilege of carrying on business’ in the state,” so revenues or transactions beyond those thresholds “necessarily” establish substantial nexus with the taxing state. The court did not consider virtual presence to be a “requirement” under Wayfair “when a nexus is otherwise established through sales, marketing, and service delivery efforts.” Ooma’s due process arguments did not prevail, either.
The US Supreme Court’s Denial of Certiorari
Ooma petitioned the U.S. Supreme Court for a writ of certiorari on the following question: “[D]oes the Commerce Clause prevent the imposition of Oregon’s E911 tax in this case where the lower court wholly dismissed the ‘virtual contacts’ inquiry as irrelevant to the determination of substantial nexus?”
Ooma argued that the Court should take up the case because the Oregon Supreme Court was “patently incorrect” in denying that virtual contacts were required for substantial nexus under Wayfair; a state’s taxation of businesses lacking a virtual presence advantages other businesses and creates “an unfair ‘playing field;’” Wayfair “did not adopt [a] bright-line test based on economic thresholds as a replacement for the rejected bright line physical presence rule in Quill;” and “confusion regarding the application of the virtual contacts requirement in Wayfair has been resolved in favor of wholly excluding it from the substantial nexus analysis” in legislative extensions of state taxes to remote sellers after Wayfair. Ooma asked the Court to “act now to clarify the significance of virtual contacts in the Commerce Clause analysis in order to avoid what will surely be years of litigation in State courts on the issue.”
The department waived a response to Ooma’s petition, and the U.S. Supreme Court denied Ooma’s petition.
The U.S. Supreme Court’s denial of a petition for a writ of certiorari is not a decision on the merits of the underlying case. Although they may be considered persuasive elsewhere, the Oregon Supreme Court’s decision and essential reasoning in Ooma only bind Oregon state tribunals. Still, Ooma is notable because the Oregon Supreme Court’s decision is the first from a state court of last resort addressing a question of substantial nexus under Wayfair, and jurisdiction over cases involving such issues will almost always be in state tribunals subject to the U.S. Supreme Court’s ultimate review. A remote seller’s virtual presence (or lack thereof) does not appear to matter much for substantial nexus in Oregon, and the tribunals of other states may be expected to consider Ooma (one way or another) insofar as similar issues come before them.
Ooma is also notable because it represents an example of a state court extending constitutional principles interpreted by the Supreme Court in Wayfair to non-sales and use taxes. Other state courts, and perhaps state legislatures, could seek to do the same by applying Wayfair’s minimum sales or transaction thresholds to require out-of-state businesses to pay other types of taxes.
It remains to be seen when the U.S. Supreme Court may next address substantial nexus between a taxing state and a remote seller. The Court grants a petition for a writ of certiorari “only for compelling reasons” and “rarely … when the asserted error consists of erroneous factual findings or the misapplication of a properly stated rule of law.” The Court may be inclined to grant the writ if a state court of last resort’s decision on an important question of federal law conflicts with relevant decisions of the U.S. Supreme Court; has not been (but should be) settled by the U.S. Supreme Court; or conflicts with a decision of another state court of last resort or a U.S. court of appeals. Adding a level of uncertainty in these matters, two sitting justices question or reject the idea that state regulation or taxation of interstate commerce may violate the commerce clause (although it may violate other constitutional provisions); however, five sitting justices reaffirmed this dormant or negative aspect of the clause only a few years ago. It appears that the two most recently seated justices have yet to address this issue.
Pending the U.S. Supreme Court’s further clarification of substantial nexus for state taxation of remote sellers, state tribunals will be left to grapple with these issues. These decisions will not be entirely informed by the majority opinion’s wording in Wayfair, as “judicial opinions are not statutes, and [courts] don’t dissect them word-by-word as if they were.” Counsel for remote sellers and state taxing authorities should be prepared to invoke or distinguish established commerce clause principles and decisions from state tribunals on comparable facts, as the circumstances may dictate.