State sales tax revenues in the fourth quarter of 2008 declined by 6.1% over the same period a year earlier, marking the worst decline in 50 years. In addition, annual national state and local sales tax losses on e-commerce (generally not subject to state and local sales tax) are expected to grow to $11.4 billion by 2012, for a six-year total loss of $52 billion.

This demonstrated need for revenue has caused a blurring of the lines. In Missouri, for example, architectural images created as watercolor paintings and delivered electronically as digital images are subject to sales tax as tangible personal property. Another example of this blurring occurred in New Mexico, where an appeals court found that, even though Dell Marketing LP has its principal place of business in Texas and no stores, sales agents or employees in New Mexico, its activities in New Mexico constituted taxable sales. According to the court, there was no violation of the Commerce Clause of the United States Constitution (violation of the Commerce Clause would prohibit taxation). That Commerce Clause requires substantial nexus with New Mexico by a given entity. The court found substantial nexus because Dell engaged an independent contractor (in which Dell had no ownership) to repair the Dell computers in customers’ homes.

The old verities are passing away, and taxpayers should reconsider whether their operations are subject to the sales tax (and other taxes for that matter) in this new environment, created, in part, by the states’ need for revenue to pay bills.