Presenting a live 110 ‐ minute webinar with interactive Q&A Nexus Reviews: Uncovering State Sales g or Income Tax Obligations Designing an Effective Internal Process to Identify Potential Tax Exposures THURSDAY, JANUARY 6, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Mark Yopp, Sutherland Asbill & Brennan , New York Chuck Jones, Manager, State and Local Tax Group, Grant Thornton , Chicago Maryann Luongo Baker & McKenzie Washington D C Maryann Luongo, Baker & McKenzie , Washington, D.C. The audio portion of the conference must be accessed via the telephone. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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N Nexus Reviews: Uncovering State Sales R i U i St t S l or Income Tax Obligations Webinar Jan. 6, 2011 Mark Yopp, Sutherland Asbill & Brennan Chuck Jones, Grant Thornton mark.yopp@sutherland.com chuck.jones@us.gt.com Maryann Luongo, Baker & McKenzie maryann.luongo@bakermckenzie.com
Today’s Program Looking For Potential Sales Tax Nexus Slide 6 – Slide 17 [Mark Y opp] Looking For Potential Income Tax Nexus Slide 18 – Slide 35 [Chuck Jones] Leveraging Company Resources For Nexus Oversight h Slide 36 – Slide 39 l d l d [Maryann Luongo]
Mark Yopp, Sutherland Asbill & Brennan LOOKING FOR POTENTIAL LOOKING FOR POTENTIAL SALES TAX NEXUS
Overview: Nexus Theories And Standards I. Constitutional requirements A. Due Process Clause nexus 1. Requires that there be some definite link and minimum connection between a state and the person, property or transaction seeking to p , p p y g be taxed 2. Standards: Imposition of tax must not violate fundamental fairness or offend substantial justice, and the taxpayer must purposefully avail itself of the taxing jurisdiction. B. Commerce Clause nexus 1. One of the four prongs of the test established in Complet e Aut o p g p Transit v. Brady by the U.S. Supreme Court as to whether a tax violates the Commerce Clause a. The tax is applied to an activity with SUBSTANTIAL NEXUS with the taxing state ith th t i t t b. The tax is FAIRLY APPORTIONED c. The tax does not DISCRIMINATE against interstate commerce, and and d. The tax is FAIRLY RELATED to the services provided by the taxing state. 7
Overview – Nexus Theories And Standards (Cont.) II. Sales tax nexus standards A. Physical presence: Quill Corp. v. Nort h Dakot a (1992) 1. In this case, Due Process Clause nexus was met through economic presence, by a taxpayer purposefully availing itself of a jurisdiction. 2. 2 I thi In this case, Commerce Clause nexus was met through physical presence that C Cl t th h h i l th t is not de minimis . B. Attributional nexus 1 1. In-state representatives of a company even if not employees of the company In state representatives of a company, even if not employees of the company, can create nexus for the company through their activities. S cript o, Inc. v. Carson (1960) 2. The activities of the in-state representatives, whether employees of the company or third parties, must make or maintain a market for the company in thi d ti t k i t i k t f th i order to create nexus. Tyler Pipe v. Wash. Dept . of Revenue (1987) C. Affiliate nexus A A. State case law: Barnesandnoble com LLC v S State case law: Barnesandnoble.com LLC v. S t at e Bd of Equalizat ion (2007) t at e Bd. of Equalizat ion (2007) B. State statutes (e.g. Georgia, Wisconsin) 8
Overview – Nexus Theories And Standards (Cont.) III. Trends A. Physical presence 1. States have taken the position, in rulings and otherwise, that the slightest physical presence creates nexus, even though the Quill corporation had software discs and catalogs in the state, and that did not create nexus. B. Legislative expansion 1. Nexus/“doing business” 2. Affiliate nexus statutes 3. Click-through nexus statutes (attributional) 4 4. Expansion of reporting requirements Expansion of reporting requirements C. Case law expansion 1. Expansion of types of activities considered to make or maintain a market Dell Cat alog S market. Dell Cat alog S ales v Tax & Rev Dep’t of New Mexico ales v. Tax. & Rev. Dep’t . of New Mexico (2008) 9
C Common Nexus Traps N T I. Third-party activities and contracts A. Contractual language can imply that third parties are acting on behalf of a company (Using “partner” or “agent”). B. There is a wide variety of third-party activities that may create nexus (“making or maintaining a market”). 1. Accepting orders, accepting returns, customer service, approving orders C. Most states have followed Quill and consider “ traditional advertising” to not be nexus-creating. II. Affiliate activities and contracts A. While some states have adopted statutes that say mere presence of a retailer’s related party in a state creates a collection requirement, these statutes have not been regularly enforced. B. Broad inter-company agreements may impart activities to related parties that are not actually being performed. 10
C Common Nexus Traps (Cont.) N T (C ) Cli k th Click-through nexus statutes h t t t • ― Have been passed in New York, North Carolina and Rhode Island ― Proposed in many other states ― The statutes presume that an out-of-state retailer is doing business in the state if a resident of the state is being paid a commission for referring sales through an Internet link. ― Threshold of amount of sales generated through this Threshold of amount of sales generated through this arrangement - $10,000 for New York ― Many states say that their existing statutes cover this activity. 11
Common Nexus Traps (Cont.) Click-through nexus statutes (Cont.) • ― New York litigation ― Amazon.com LLC v. New Y ork S t at e Dep’t of Taxat ion and Finance, et al. and Overst ock.com, Inc. v. New Y ork S t at e Dep’t of Taxat ion and Finance, et al., 0210 NY Slip Opinion 07823 (1 st Dept. App. 11/4/10) ― Appellate court held that the statute was constitutional on its face and remanded the case for a factual determination of whether the statutes are constitutional as applied. ― Arguments made by the retailers ― Statutes do not require that the in-state residents make or maintain a market in the state; presumption applies to mere presence. ― Contracts contained language that prohibited solicitation by the in-state Web sites. 12
C Common Nexus Traps (Cont.) N T (C ) Other activities that may create nexus • ― Third parties sending e-mails from out-of-state servers ― Third parties distributing gift cards or coupons ― Third parties sending physical mailings from an out-of- state location ― Inserts in packaging Inserts in packaging ― Using servers in a state (Texas) ― New Texas regulation New Texas regulation ― Potential Internet Tax Freedom Act issues ― Visiting vendors g 13
Drafting Nexus Questionnaires D f i N Q i i Employee activity – Possible questions • ― Where are employees traveling? ― What activities are the employees engaged in while in another What activities are the employees engaged in while in another state? ― Examples of problematic activities: ― Negotiating or signing contracts ― Distributing any promotional items, cards or samples ― Bringing property the retailer owns into the state for Bringing property the retailer owns into the state for display, signage, etc. ― Is the employee conducting activity on behalf of a related party? 14
Drafting Nexus Questionnaires (Cont.) Third-party activities – Potential questions • ― How are the third parties promoting sales by the retailer? ― Is the third party sending e-mails, hosting content on a I th thi d t di il h ti t t server, distributing gift cards or coupons, distributing samples, etc.? ― What contractual authority does the third party have to act on behalf of the retailer? ― How is the third party compensated? How is the third party compensated? ― Are the third party’s services, space or Web “real estate” generally sold as advertising? 15
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