Arizona Court Finds Online Retailer Has Substantial Nexus

The Arizona Court of Appeals determined that an online auto parts retailer that utilizes Arizona distributors for shipping, warehousing, and handling services, had substantial nexus with the state and was subject to Arizona’s transaction privilege tax. The Department of Revenue originally assessed tax on Arizona orders in an audit. The Arizona tax court later ruled that the assessment was unlawful since the taxpayer did not have substantial nexus during the audit period. The Court of Appeals agreed with the Department of Revenue and vacated the tax court’s decision. The appeals court determined that in addition to its own employee travel to the state, the taxpayer’s use of Arizona distributors constituted a physical presence that created a substantial nexus in Arizona. The court also noted that the taxpayer’s sales to Arizona customers exceeded the threshold for an economic presence under the Arizona statute that implemented the Wayfair decision, however, the Court did not apply that statute retroactively to the audit period.

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Rock Auto LLC. v. Arizona Dep’t of Revenue; Arizona Court of Appeals Division One; No. 1 CA-TX 23-0002; No. TX2020-000778 (4/2/24)