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Arizona considers pre-Wayfair physical presence nexus

ARTICLE | April 15, 2024

Authored by RSM US LLP

Executive summary

On April 2, 2024, the Arizona Court of Appeals found that by using Arizona distributors, RockAuto, LLC (RockAuto) established physical presence nexus for transaction privilege taxes (sales taxes) in Arizona, reversing a lower court’s summary judgment decision. RockAuto, a Wisconsin-based online auto-parts retailer, maintained no inventory or physical locations in Arizona. Although RockAuto had employee presence through business trips in the state, such presence was not the primary justification for the Court’s nexus determination. Rather, RockAuto’s relationship with six contracted distributors was sufficient to satisfy the substantial nexus requirement of the U.S. Constitution’s Commerce Clause as mandated before 2018’s South Dakota v. Wayfair decision. This rare post-Wayfair physical presence analysis should remind multistate taxpayers that the vast history of physical presence jurisprudence generally still applies to state nexus determinations.

Pre-Wayfair nexus analysis addresses physical presence

The decision

RockAuto maintained an auto parts e-commerce website throughout the audit period of April 1, 2023 to April 30, 2019. In lieu of holding its own inventory, RockAuto required distributors to provide product inventories which RockAuto then listed on its website. Orders placed through the website were forwarded to the distributors for fulfillment in compliance with RockAuto’s shipping and return policies. Pursuant to RockAuto’s contracts, the Arizona distributors agreed to package online orders with RockAuto branded tape, include a RockAuto promotional magnet in the orders, ship the orders via mail or common carrier, and accept customer returns. The tape, magnets and boxes were provided by RockAuto, as well as return labels. Distributors were also prohibited from selling products directly through the distributor’s own website, a website the distributor controlled, or a third-party’s website.

When there were multiple brands of the same part available, and the customer intended to purchase multiple items, RockAuto’s website allowed customers to click “Choose for Me to Minimize Cost,” which would select the brand that would ship for the lowest total cost. However, customers were not aware of the use of the distributors or the location of the warehouses.

Under a pre-Wayfair analysis, RockAuto argued that it had not established the necessary physical presence to create substantial nexus in Arizona. After reviewing U.S. Supreme Court and Arizona nexus case law, the Court of Appeals found that RockAuto established physical presence in Arizona such that it was responsible for transaction privilege taxes for sales to Arizona customers. The Court determined that the distributor’s activities were significantly associated with RockAuto’s ability to establish and maintain an in-state market by relying on the distributors to maintain inventory, ship orders to Arizona customers, accept returns, and use RockAuto promotional materials. Additionally, the Court noted that RockAuto’s business model was designed to increase customer satisfaction by reducing shipping times and costs for customers, further helping to establish and maintain a market in the state. Accordingly, essential portions of RockAuto’s contracts were performed by the distributors in Arizona.

RockAuto argued that its in-state activities were insignificant since almost 90% of orders from Arizona distributors shipped to out-of-state customers, and over 80% of orders to Arizona customers came from out-of-state distributors. The Court rejected this argument, stating that the number of Arizona transactions and customers did not dictate whether a taxpayer had physical presence. Furthermore, the Court noted that four Arizona business trips to meet with distributors within the six-year audit period supported a finding of physical presence.


While market activities can establish substantial nexus in the post-Wayfair environment, this decision serves as a good reminder that physical presence through employees, inventory and offices can also create nexus. Although physical presence may no longer be required under the U.S. Constitution, maintaining physical presence through actual presence, or expanded presence through affiliate nexus, will establish sales and use tax nexus in most states. Additionally, Arizona has enforced an economic sales tax nexus threshold since 2019. Currently, remote sellers with over $100,000 of gross sales in the previous or current year establish economic nexus and must adhere to all transaction privilege tax compliance obligations including registration, collection and filing. For more information on the decision, please reach out to your Arizona state and local tax advisers. For more information on the current state of sales and use tax nexus, please read our article, Wayfair turns five: A coming of age story.

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This article was written by Mo Bell-Jacobs and originally appeared on 2024-04-15.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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