In my earlier blog series, I covered how nexus has evolved—especially following South Dakota v. Wayfair (2018). Much of the discussion in the SALT (State and Local Tax) world has focused on the expansion of economic nexus, particularly for e-commerce and remote sellers.
But that only addresses one prong of the four-part test established in Complete Auto Transit v. Brady (1977).
The other three prongs remain fully intact—and are often overlooked in multi-state tax compliance. They are:
✔ Be fairly apportioned
✔ Not discriminate against interstate commerce
✔ Relate to services provided by the state
What Does “Fairly Apportioned” Mean in SALT?
Under Complete Auto, a state tax must:
- Be fairly apportioned
- Not discriminate against interstate commerce
- Be fairly related to services provided by the state
For a tax to be fairly apportioned, the U.S. Supreme Court applies a two-part test:
- Internal consistency
- External consistency
These principles remain critical for SALT planning, e-commerce businesses, SaaS companies, and multi-state service providers.
Internal vs. External Consistency (Why It Matters for Multi-State Tax)
A tax is internally consistent if, hypothetically, every state adopted the same tax structure, no transaction would be taxed more than once.
A tax is externally consistent if the tax base reasonably reflects the portion of the activity connected to the taxing state.
In practical terms:
- Internal consistency helps prevent systemic double taxation across states
- External consistency ensures a state does not overreach its taxing authority
For businesses operating across jurisdictions, this is a core concept in managing multi-state tax exposure.
Key Case: Oklahoma Tax Commission v. Jefferson Lines (1995)
This case is foundational in understanding fair apportionment within SALT.
Oklahoma imposed sales tax on:
- Bus tickets for travel occurring entirely within the state
- Interstate travel tickets that originated in Oklahoma
The taxpayer argued this resulted in taxation beyond Oklahoma’s fair share.
The Supreme Court disagreed.
The Court held:
- The tax was internally consistent because if every state taxed ticket sales at the point of origin, no ticket would be taxed twice
- The tax was externally consistent because the sale of the ticket had a sufficient connection to Oklahoma
This case reinforces an important principle for remote sellers and e-commerce businesses: Where the transaction occurs can drive taxability—not just where the service or benefit is received.
Related Case: Goldberg v. Sweet (1989)
In Goldberg v. Sweet, Illinois taxed interstate telephone calls that:
- Originated or terminated in Illinois
- Were billed to an Illinois address
The state also provided a credit for taxes paid to other states on the same transaction.
The Court upheld the tax, emphasizing:
- The tax met both internal and external consistency tests
- The credit mechanism helped prevent actual double taxation
For modern businesses—especially digital services, telecom, and SaaS providers—this illustrates how tax structure and credit mechanisms influence compliance and risk.
Why This Still Matters After Wayfair
While Wayfair expanded nexus standards for e-commerce and remote sellers, it did not discard or expand the overall limits on state taxing power; the Court expressly noted that the four-prong Complete Auto test “remains good law” even after Wayfair.
Even where economic nexus thresholds are met, states must still comply with:
- Fair apportionment principles
- Commerce Clause limitations
- Proper sourcing methodologies
For businesses with multi-state operations, online sales, or cross-border service delivery, this remains a critical layer of analysis in SALT compliance.
Final Thought
Wayfair changed where businesses have tax obligations—but it did not change how far states can reach.
The Complete Auto framework still governs state taxation, and fair apportionment remains a key safeguard against over-taxation in a multi-state environment.
For businesses navigating SALT, economic nexus, and e-commerce tax compliance, understanding these principles is essential to managing risk and avoiding unintended exposure.
About the Author
The John Ellis Company, An Accountancy Corporation specializes in SALT, multi-state tax compliance, sales & use tax advisory, and tax controversy. We work alongside CPAs, e-commerce businesses, and growing companies to address complex nexus and apportionment issues—helping ensure compliance while minimizing unnecessary tax exposure.