2. Adopt a clear and constitutional nexus standard.

A better approach would be to clarify and codify constitutional and Supreme Court precedents regarding the taxation and regulation of interstate commerce. Congress could do this by adopting an unambiguous nexus standard that conforms to existing Supreme Court jurisprudence and constitutional objectives. Both Governor James Gilmore, chairman of the Advisory Commission on Electronic Commerce (ACEC), and Dean Andal, ACEC member and vice chairman of the California State Board of Equalization, have made presentations to the commission that embody this approach.

Andal's "Uniform Jurisdictional Standard" asks the ACEC to lend its formal support to the Supreme Court's physical presence test, which makes it clear when state and local governments have the right to impose sales taxes.26

Specifically, it would modify an existing federal law, Public Law 86-272, which deals with state income taxation of companies engaged in interstate commerce. The Andal proposal would broaden Public Law 86-272 to cover all forms of state and local taxation of interstate commerce, not merely income taxes, and clearly define what constitutes a "substantial physical presence" in a state or locality and when that test is not satisfied.

For example, the fact that an electronic transaction passes through a network of wires, computers, servers, or wireless satellite dishes that may be located within a given state does not by itself mean that a company has a substantial physical presence within that jurisdiction. Furthermore, the fact that a firm's Web page is advertised or promoted within a state or locality does not necessarily mean that the company is physically present within that jurisdiction.

Many state and local officials and tax officials have tried to replace traditional nexus standards with new theories, such as "attributional," "representational," or "agent" nexus that attribute physical presence to a company in cases such as those discussed above. It is vital that the ACEC and Congress reject these new definitions. As Saba Ashraf, an associate with the New York law firm of Winthrop, Stimson, Putnam & Roberts, notes, "By changing and expanding the definition of physical presence, and in effect equating nonphysical presence in a state with physical presence, the state legislative bodies would be writing the constitutional requirement of physical presence out of existence."27

Physical presence must mean what most rational individuals take it to mean: the actual, tangible presence of a company's buildings, employees, and related property within the boundaries of a state or locality.