James F. Murtha


Over twenty years ago, the Supreme Court of the United States decided that an entity must have a “physical presence” within a state before that state’s taxing authority can require the entity to pay state taxes. Since this physical presence requirement was created, a deep divide among state courts has shaped a confusing landscape surrounding two issues with the requirement. First, the states disagree on what constitutes physical presence within a state. Some state courts have held that mere economic presence in a state is sufficient for a state to assert its tax jurisdiction. Second, the states disagree on whether the physical presence requirement applies to all state taxes or merely a narrow classification of state taxes, specifically sales and use taxes. When it created the physical presence requirement, the Supreme Court hinted that, while it was articulating a standard, the issue of a state’s tax jurisdiction was best left for Congress to decide. Unfortunately, Congress has refused to legislate on this issue. Several state court decisions interpreting the physical presence requirement have been appealed to the Supreme Court—none of them have been granted certiorari.

The Supreme Court’s physical presence requirement is the current standard, and it was never expressly limited by the Court to certain classes of state taxes. The author argues that the Supreme Court should articulate a bright-line rule requiring actual physical presence within a state before the state has the power to impose any tax on an entity. Given Congress’s refusal to act, and the landscape of uncertainty currently faced by many multi-state businesses, it is time the Supreme Court clears up the tangled underbrush with a bright-line standard.