Most of the conversation around state and local tax (SALT) today centers on nexus—especially after South Dakota v. Wayfair (2018) and the expansion of economic nexus rules impacting e-commerce and remote sellers.
That focus makes sense… but it’s incomplete.
Nexus is only one prong of the four-part test established in Complete Auto Transit v. Brady (1977), which still governs whether a state tax is constitutional.
The other three prongs—often overlooked in practice—are:
- Fair apportionment
- No discrimination against interstate commerce
- A sufficient relationship to services provided by the state
What Does “Related to Services Provided by the State” Actually Mean?
At a high level, this requirement ensures that a state is not taxing activities or businesses that lack a meaningful connection to the benefits the state provides.
However—and this is where many people get tripped up—this is not a cost-benefit test.
States are not required to:
- Match the amount of tax to the value of services provided
- Justify their tax rates based on what a taxpayer “receives”
Instead, the key question is whether the tax is reasonably related to the activity being taxed.
A Classic Example: Commonwealth Edison v. Montana (1981)
In this case, Montana imposed a 30% severance tax on coal extraction, calculated based on contract price—regardless of where the coal was ultimately sold or used.
At the time, Montana’s position in the coal market was significant—it held approximately 25% of U.S. coal reserves and about 50% of the nation’s low-sulfur coal reserves—which amplified the economic impact of the tax on interstate commerce.
The taxpayer argued that:
- The tax rate was excessive
- It was not properly related to services provided by the state
The U.S. Supreme Court disagreed.
The Court upheld the tax because:
- It applied uniformly to in-state and out-of-state commerce
- It was tied to the activity occurring within the state (coal extraction)
- The Commerce Clause does not guarantee access to another state’s resources at a “reasonable price”
Importantly, the Court clarified:
- A tax does not need to reimburse the state for services provided
- It does not need to correlate directly with the value of those services
- It simply needs to be proportionate to the activity being taxed
Why This Matters for Multi-State Businesses
Focusing only on nexus can create a false sense of compliance.
Even when nexus is clearly established:
- The structure of the tax must still satisfy the full Complete Auto framework
- Missteps in apportionment or constitutional structure can create exposure
At The John Ellis Company, An Accountancy Corporation, we frequently see multi-state businesses—particularly in e-commerce, import/export, and growing regional operations—overlook these additional requirements.
That’s often where risk (and opportunity) exists.
Bottom Line
Nexus may get the headlines, but it’s only the entry point.
Understanding—and applying—all four prongs of Complete Auto is essential for:
- Defensible SALT positions
- Audit readiness
- Strategic multi-state tax planning
If you’re evaluating multi-state exposure or unsure whether your current SALT approach holds up under scrutiny, it may be worth a second look.