CD Clubs FAQ
V.4.21, Last Modified: Jul 19, '99

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Clubs Collecting Sales Tax

A state can not compel a company from another state to collect and remit sales (use) taxes on sales to that state unless the company has a "physical presence" in that state. (see National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota ex rel. Heitkamp, 112 S. Ct. 1904 (1992))

While having a retail outlet or owning real property are clearly "physical presences", the U.S. Supreme Court has ruled that the "physical presence" test can be satisfied by as little as one employee, or even independent contractor, entering a state to sell or perform a service. On the other hand, mail order solicitation, shipping a product via a common carrier (e.g. US Mail), or the presence of an affiliated entity in the state have been ruled to not be "physical presences".

If your state has a sales tax (in-state purchases), it most likely also has a use tax (out-of-state purchases). While the state may not be able to compel an out-of-state company to collect and remit use taxes on sales to that state, the state can compel its citizens to pay a use tax on out-of-state purchases. In other words, you are responsible for paying the tax either to the company or to the state. Fortunately for us, most states have much more pressing problems than trying to enforce collect of use taxes from its residents. Unfortunately, states have a vested interest in collecting use taxes from out-of-state companies, especially those that sell substantial amounts of goods.

The clubs claim that they only collect and remit sales taxes to states where it is required by the state in question.