Ohio Tax Advanced: Nexus Wars!!! Emerging Issues in State Tax Nexus - - PDF document
26th Annual Tuesday & Wednesday, January 2425, 2017 Hya Regency Columbus, Columbus, Ohio Workshop DD Ohio Tax Advanced: Nexus Wars!!! Emerging Issues in State Tax Nexus The Most Rapidly Changing Area of Taxation Wednesday,
26th Annual
Tuesday & Wednesday, January 24‐25, 2017
Hya Regency Columbus, Columbus, Ohio
Advanced: Nexus Wars!!! Emerging Issues in State Tax Nexus … The Most Rapidly Changing Area of Taxation
Wednesday, January 25, 2017 11:00 a.m. to 12:30 p.m.
Biographical Information
Stephen P. Kranz, Partner, McDermott Will & Emery LLP 500 North Capital Street, N.W., Washington, DC 20001 skranz@mwe.com 202-756-8180 Fax: 202-756-8087 Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course
that help clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Steve helps clients prevent and resolve tax problems throughout their life cycle, starting with tax planning, compliance, financial statement implication analysis, audit defense and litigation, legislative monitoring and advocacy, and the formation and leadership of taxpayer coalitions. Steve developed many of these techniques as a litigator for the US Department of Justice, Tax Division, as chief counsel for the District of Columbia’s Office of Tax and Revenue, and further refined them during his tenure as general counsel of the Council on State Taxation (COST). Today, Steve practices at the forefront of state and local tax issues, including developments in the world of cloud computing and digital goods and services. He helps clients understand tax threats and opportunities, and develop holistic solutions, no matter the tax issue or jurisdiction. He also brings this same skill set to the highly challenging world of unclaimed property. Steve represents Fortune 100 companies in litigation while working to address the larger tax policy questions through state legislatures, the US Congress, the National Conference of State Legislatures, the National Governors Association, the Multistate Tax Commission and the Streamlined Sales Tax Governing Board. His background has taught him that standalone litigation is not always the most efficient manner of solving a tax problem or preventing its spread—thus, he often works to address problems by taking advantage of tax policy points of entry offered by state and local governments. Steve has authored articles for professional publications, speaks at national conferences and is interviewed frequently by journalists covering state and local tax developments. On March 12, 2014, he appeared before the US House Judiciary Committee as an expert on alternative approaches to the Internet Sales Tax issue, and has appeared in a similar capacity before
property matters for the Entertainment Software Association, the National Retail Federation, the Retail Industry Leaders Association and CompTIA. RECOGNITION
policy and practice
COMMUNITY
Biographical Information
Craig B. Fields, Partner Morrison & Foerster LLP 250 West 55th St., New York, NY 10019 CFields@mofo.com (212) 468-8193 Fax: (212) 903-7833 Craig B. Fields is co-chair of Morrison & Foerster LLP’s Tax Department and is also chair of the firm’s State + Local Tax Group. His practice focuses on litigation and planning relating to state and local tax matters. He has been involved in controversies regarding state and local tax issues before the administrative and judicial systems of jurisdictions throughout the United States as well as having resolved hundreds of non-public record cases around the country. Mr. Fields has also provided advice regarding the potential tax consequences of complex restructurings involving the corporation income (franchise) taxes, the sales and use taxes, and miscellaneous taxes of many jurisdictions. Chambers USA has ranked Mr. Fields as a leading state tax lawyer since 2012. In addition, Legal 500 US has recommended him since 2011 and he has been ranked consistently in Super Lawyers since 2006.
appeared in numerous publications, including Tax Management’s Multistate Tax Report, the Journal of State Taxation, State Tax Notes, Research Institute of America’s State and Local Taxes Weekly, the COST State Tax Report, the Journal of Multistate Taxation and Incentives, the Journal of New York Taxation, Interstate Tax Report, and the American Bar Association’s The State & Local Tax Lawyer.
such organizations as New York University’s Institute on State and Local Taxation, Georgetown University Law Center’s Advanced State and Local Tax Institute, Vanderbilt University Law School’s Paul J. Hartman State and Local Tax Forum, the Council On State Taxation, the National Multistate Tax Symposium, the Ohio Tax Conference, the Energy Tax Association, STARTUP, the Tax Executives Institute, the Tulane Tax Institute, the Practicing Law Institute, and the Tax Section of the American Bar Association.
The Journal of State Taxation, and the Bloomberg BNA State Tax Advisory Board.
New York University School of Law.
26th Annual Ohio Tax Conference
Wednesday, January 25, 2017
Advanced Workshop DD
Emerging Issues in State Tax Nexus … The Most Rapidly Changing Area of Taxation
2
Craig B. Fields Partner & SALT Chair New York, NY Stephen P. Kranz Partner Washington, DC
Agenda
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Brief History & Issue Overview State Nexus Expansion Legislation
Overview of Tactics 2016 Recap 2017 Update
2017 Nexus Litigation
Overview and status update on the most imminent
judicial threats seeking to overturn Quill
Federal Nexus Legislation 2017 Outlook
State and Federal
Brief History and Issue Overview
Nexus Wars!!!
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Brief History - Quill
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1967: National Bellas Hess
U.S. Supreme Court determines physical presence is required.
1973: Congress introduces legislation to overturn National
Bellas Hess
Interstate Sales and Use Tax Act (HR 1453; S. 282).
1980’s: MTC coordinates with states to take the position that
physical presence is not required
Theory: advances in technology had alleviated the administrative
burdens justifying National Bellas Hess.
1992: Quill v. North Dakota
Quill Corp. v. N. Dakota, 504 U.S. 298 (1992)
6
Distinguished the two constitutional nexus standards. A person may have Due Process “minimum contacts”
with a state, yet still lack the “substantial nexus” with the state that the Commerce Clause requires.
Physical presence in state required for business to have
“substantial nexus” with taxing state under the Commerce Clause.
Many courts have held that the this standard is limited to
the sales and use tax context.
Nexus – Analytical Framework
7
Nexus with the Transaction Due Process Sales and Use Taxes Actual Transaction Other Taxes Part of a Unitary Business Commerce Clause (Dormant) Substantial Nexus Nexus with the Person Due Process Minimum Nexus Minimum Contacts/Purposeful Availment (more than “stream of commerce”) Commerce Clause (Dormant) Substantial Nexus Sales and Use Taxes Physical Presence (direct or through attribution) Other Taxes ??? Commerce Clause (Affirmative) P.L. 86 - 272
Due Process & Nexus
Non-tax cases impact state tax nexus. U.S. Supreme Court rejected NJ’s attempt to exercise
jurisdiction over an out-of-state entity defendant in J. McIntyre Mach., Ltd. v. Nicastro, 131 S.Ct. 2780 (2011).
Defendant’s contacts with NJ: four of the defendant’s machines
had ended up in NJ through the stream of commerce.
Supreme Court: “Due process protects petitioner’s right to be
subject only to lawful authority. At no time did [defendant] engage in any activities in New Jersey that reveal an intent to invoke or benefit from the protection of its laws. New Jersey is without power to adjudge the rights and liabilities of J. McIntyre, and its exercise of jurisdiction would violate due process.”
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Due Process & Nexus (cont.)
Goodyear Dunlop
Tires v. Brown, 131 S.Ct. 2846 (2011):
Court may assert jurisdiction over a foreign defendant only when the
corporation’s affiliation with the State are so constant and pervasive “as to render [it] essentially at home in the forum State.”
Daimler AG v. Bauman, 134 S.Ct. 746 (2014):
Rejecting use of agency theory to attribute jurisdiction Standard should “permit out of state defendants ‘to structure their
primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.’”
Walden v. Fiore, 134 S.Ct. 1115 (2014):
“Due process requires that a defendant be haled into court in a forum
State based on his own affiliation with the State, not based on the ‘random, fortuitous, or attenuated’ contacts he makes by interacting with
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Due Process - State Nexus Cases
Scioto Ins. Co. v. Okla. Tax Comm’n (Okla. 2012).
OK Supreme Court rules that payments received for use of
intellectual property by Wendy’s restaurants in Oklahoma did not create nexus.
Distinguished prior Oklahoma decision in Geoffrey. Due Process principles were just as important as
Commerce Clause in court’s analysis.
Griffith v. ConAgra Brands, Inc. (WV 2012).
WV Supreme Court finds that licensing trademarks on food
industry products did not create nexus.
Licensing activities satisfied neither “purposeful direction”
under the Due Process Clause nor “significant economic presence” under the Commerce Clause.
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Nexus over the Person: General Partner
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Found to have nexus:
California: Sup, Inc., (2013)
SBE ruled a Nevada corporation had franchise tax nexus because it was
the general partner in a Nevada limited partnership doing business in California
T
ennessee: Vodafone Americas Holdings, Inc. v. Roberts, (2013)
Chancery Court held that British company owning 45% interest in
general partnership had T ennessee nexus due to partnership’s activities
New
York: Matter of Shell Gas Gathering Corp. #2, (2010)
NYS Tax Tribunal ruled corporate members of LLC that held general
partner interests in an in-state partnership were subject to New York income tax
New
York: Matter of Tosti, (2010)
Division of Tax Appeals held a non-equity partner in a New
York law firm had New York-sourced income even though he worked entirely outside New York
Nexus over the Person: Limited Partner
12 Found to have nexus:
New Jersey: Village Super Market of PA, Inc. v. Dir., Div. of Taxation, (2013)
An out-of-state limited partner in a New Jersey limited partnership had nexus because the partner and the partnership were in the same line of business, were parties to the same New Jersey- governed cash management agreement, had common agents, managers, officers, and directors, and shared a principal place of business in New Jersey
Pennsylvania: Marshall v. Commonwealth, (2012)
Non-resident individual limited partner in Connecticut limited partnership owning a building in Pittsburgh was taxable on COD income; court only addressed Due Process argument as the Commerce Clause argument was deemed waived
Kentucky: Revenue Cabinet v. Asworth Corp., (2010)
Court of Appeals held that a corporate limited partner had nexus in Kentucky; the Kentucky Supreme Court denied review but “unpublished” the opinion Found not to have nexus:
New Jersey: BIS LP, Inc. v. Dir., Div. of Taxation, (2011)
An out-of-state investment company that owned a 99% limited partnership interest in a limited partnership doing business in New Jersey lacked nexus with the State because it was not “integrally related” with the limited partnership
Louisiana: UTELCOM, Inc. and UCOM, Inc. v. Bridges, (2012)
Mere ownership of a limited partner interest does not subject a foreign corporation to Louisiana franchise tax, rejecting DOR regulation; decision based strictly on statutory interpretation
Trailing Nexus
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California:
Cal. State Board of Equalization, Letter Ruling 220.0275 (May 1, 2009)
“The trailing nexus period generally consists of the quarter in which the retailer
ceases the activities that had caused it to be a ‘retailer engaged in business’ in California, as well as the entire quarter that follows.” T
exas:
34 T
“An out-of-state seller who has been engaged in business in T
exas continues to be responsible for collection of T exas use tax on sales made into T exas for 12 months after the seller ceases to be engaged in business in T exas” Washington:
Wash. Admin. Code § 458-20-193(7)(c)
“Once nexus has been established, it will continue throughout the statutory
period of RCW 82.32.050 (up to five years), notwithstanding that the instate activity which created the nexus ceased.”
Nexus over the Transaction
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Found to have nexus:
Florida: Florida Department of Revenue v. American Business USA Corp.,
(2016)
The Florida Supreme Court held that sales tax on a Florida company’s
sales of flowers that were never stored in or brought into Florida and that were delivered to customers located outside the State did not violate the Due Process Clause (nor the Commerce Clause). A petition for a writ of certiorari was filed by the company in the U.S. Supreme Court on October 24, 2016.
Note Florida has a unique origin-based tax on florist, so substantial nexus
under the dormant Commerce Clause was not at issue since the company was physically present in Florida.
Found not to have nexus:
Ohio: Corrigan v. Testa, (2016)
The Ohio Supreme Court held that the Due Process Clause prohibited
Ohio from taxing a nonresident on his gain from the sale of an interest in a limited liability company doing business in Ohio.
Nexus over the Person
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In Bellas Hess the U.S. Supreme Court urged Congress to
Act:
“The many variations in rates of tax, in allowable exemptions,
and in administrative and record-keeping requirements could entangle National [Bellas Hess]’s interstate business in a virtual welter of complicated obligations to local jurisdictions.”
Only Congress can permit individual states to require remote
collection.
In Quill the U.S. Supreme Court urged Congress to Act:
“Congress is now free to decide whether, when, and to what
extent the States may burden interstate mail order concerns with a duty to collect use taxes.”
Nexus over the Person
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But a quarter-century later, Congress has yet to invoke
their affirmative Commerce Clause power in the remote sales tax area.
As state sales tax revenues continue to dwindle and fed-
up with waiting around on Congress, states have been increasingly active in attacking Quill (both directly and indirectly) at the state level.
Nexus over the Person
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Justice Kennedy: “Our Bad” in DMA v. Brohl Concurrence
(March 2015).
Laments the “injustice faced by Colorado and many other
States” because Supreme Court cases don’t account for “dramatic technological and social changes that [have] taken place in our increasingly interconnected economy.”
Wants states to be able to “collect many of the taxes due on
[e-commerce] purchases.”
Acknowledges loss of tax revenue “especially as Internet
retailers have increasingly displaced their brick-and-mortar kin.”
“The legal system should find an appropriate case for
this Court to reexamine Quill and Bellas Hess.””
Nexus over the Person
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Emboldened by the unwillingness of Congress to take
action and Justice Kennedy’s concurrence in DMA, many states have started to take the position that Quill no longer applies.
In January 2016, the NCSL issued a letter to state
legislatures urging them to act with haste to expand state statutory authority to collect sales tax.
Accompanying the letter, the NCSL distributed draft state
legislative language designed for the specific purpose of
In 2016, over 50 bills expanding the nexus and reporting
requirements have been introduced in over 20 different states.
State Nexus Expansion Tactics
Nexus Wars!!!
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Overview – State Nexus Expansion Tactics
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Attributional/Affiliate Nexus Legislation Click-through Nexus Legislation Notice and Information Reporting Requirements
Both to Consumer and State
“Quill is Dead” Legislation Marketplace Provider Legislation Economic Nexus
Affiliate/Attributional Nexus
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Taxpayers with related entities [in similar businesses]
creates nexus for all affiliates.
Usually a rebuttable presumption.
40 states have affiliate nexus provisions.
Some only apply if in-state affiliate maintains a warehouse or
distribution facility in the state.
Others apply if the in-state affiliate:
Sells the same or similar products; Uses trademarks or trade names that are the same or similar to
those of the retailer; or
Conducts any other activities significantly associated with the
retailer’s ability to establish and maintain a market in the state.
Affiliate/Attributional Nexus
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Other states have taken the position that constitutional nexus
precedent supports the use of affiliate nexus.
See, e.g., N.M.
Taxation & Revenue Dep’t v. BarnesandNoble.com, LLC, 303 P.3d 824 (N.M. 2013).
The New Mexico Supreme Court ruled that the taxpayer, an online
retailer with no physical presence in New Mexico, had substantial nexus with the state through the taxpayer’s sister corporation, which did have a physical presence in the state.
The sister corporation: (1) displayed the taxpayer’s website in its in-
state retail stores, (2) shared the same trademark with the taxpayer, and (3) engaged in cross-marketing activities for the taxpayer’s benefit, all of which maintained the taxpayer’s market in New Mexico.
Click-Through Nexus
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First adopted by New York in 2008 and at least 18
additional states since then.
In-state website operators create a sales tax collection
if operators in the state collectively refer a threshold amount of sales to the remote seller through links on their websites.
Click-Through Nexus
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Overstock.com, Inc. v. New
York State Department of Taxation and Finance, 20 N.Y.3d 586 (N.Y. 2013).
The New
York Court of Appeals upheld the New York click-through law as facially constitutional.
The law was upheld, in large part, because it was not an absolute rule but
rather a rebuttable evidentiary presumption.
The United States Supreme Court denied cert on December 2, 2013.
Compare Performance Marketing Ass’n v. Hamer, 998 N.E.2d 54 (Ill. Sup.
Illinois’ former click-through law was absolute (not a rebuttable
presumption).
Violated Internet Tax Freedom Act (ITFA) because it imposed
discriminatory tax on electronic commerce.
Did not address the Commerce Clause challenge.
Use Tax Notice and Information Reporting Requirements
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2010: Colorado was the first state to enact. The enacting legislation started as a click-through bill (similar
to New York), but was modified during the legislative process.
Requires retailers to: (1) notify Colorado purchasers that tax is due on their purchases; (2) send annual notices to Colorado customers who purchased
more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state; and
(3) report information on Colorado purchasers to the state’s tax
Prior to 2016, only 7 states enacted these provisions.
Colorado was the only state that had penalty provisions.
“Quill is Dead” Legislation
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In 2010, Oklahoma passed legislation that listed all of the
steps it had taken to simplify its sales and use tax system, and declared that its tax system no longer presented an “undue burden” on interstate commerce and that any and all remote sellers are required to collect sales and use tax
See 68 Okla. Stat. § 1407.5.
Marketplace Provider Proposals
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In 2015, several states proposed provisions that would
impose burdens on marketplaces related to remote sales made through the marketplaces.
New York and Washington state proposed legislation that
would have required marketplace providers to collect sales and use tax on sales made through the marketplaces (regardless of whether the seller was registered for sales tax in the state).
Utah and South Dakota proposed information reporting
requirements for marketplaces, requiring them to report the identity and contact information of remote sellers making sales into the state through the marketplace.
Economic Nexus
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Most direct way to challenge Quill. In 2015, the Alabama Department of Revenue
promulgated a regulation that requires remote sellers having receipts exceeding $250,000 from sales into the state to either comply with the voluntary regime or collect and remit sales and use tax.
See Ala. Admin. Code 810-6-2-.90.03 (effective 01/01/16).
Many states have taken similar approaches via legislation
and regulation.
Note that several states have economic nexus provisions
that were enacted pre-Quill that are currently unenforced.
See, e.g., Minn. Stat. § 297A.66, Subd. 3(d).
2016 Legislative Recap
Nexus Wars!!!
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2016 Legislative Recap Affiliate Nexus
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19 bills introduced in 8 states:
Idaho - HB 581, HB 633 Louisiana - HB 6, HB 30, HB 96, HB 110 Massachusetts – S 1618 Minnesota - HF 2769, SF 2374, HF 3124, SF 3093, HF 3787, HF
848
Nebraska - LB 1087 Oklahoma - HB 2531, HB 2925 Rhode Island - H 7375 Utah - SB 182, HB 235
Louisiana and Oklahoma enacted affiliate nexus bills.
2016 Legislative Recap Click-through Nexus
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12 bills introduced in 5 states:
Idaho - HB 581, HB 633 Louisiana - HB 6, HB 30, HB 96, HB 110 Nebraska - LB 1087 Rhode Island - H 7230, H 7375 Utah - SB 85, SB 182, HB 235
Louisiana HB 30 was enacted in March 2016.
2016 Legislative Recap Notice and Reporting Requirements
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18 bills introduced in 8 states:
Iowa - HF 2319 Kansas - HB 2603 Louisiana – HB 110, HB 113, HB 294, HB 295, HB 1037, HB
1121
Minnesota - SF 3093, HF 3124, HF 2769, SF 2374 Oklahoma - SB 1301, HB 2531 Rhode Island - H 7375 Utah - SB 65 Vermont - H 753, H 873
LA, OK and VT enacted notice and reporting bills.
2016 Legislative Recap Marketplace Provider Nexus
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14 bills introduced in 7 states:
Louisiana - HB 110, HB 113, HB 294 (reporting only) Minnesota - HF 2769, SF 2374, HF 3124, SF 3093, HF 848 Mississippi - SB 2052, HB 418 Nebraska - LB 1087 Oklahoma - HB 2531 Rhode Island - H 7375 Utah - SB 65 (reporting only)
Minnesota HF 848 was passed by the legislature, but
vetoed by Governor Dayton on June 6, 2016.
2016 Legislative Recap Economic Nexus
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12 bills introduced in 9 states:
Connecticut - SB 448 Louisiana - HB 110 Minnesota - HF 3594, SF 3441, HF 3787 Nebraska - LB 1087 New Mexico - SB 6 (introduced September 30, 2016!) Oklahoma - SB 1251, SB 1301 Rhode Island - H 7375 South Dakota - SB 106 Vermont - H 873
The SD and VT bills were enacted.
2016 Legislative Recap Enacted Bills
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Louisiana
HB 30 – signed into law March 14, eff. April 1, 2016.
Click-through nexus and expanded affiliate nexus.
HB 1121 – signed into law June 17, eff. July 1, 2017.
Will require remote retailers with cumulative Louisiana gross
receipts—including affiliates—exceeding $50,000 per calendar year) to:
(1) Notify the purchaser at the time of sale; (2) Send purchasers annual notices each January containing the total
amount paid by the purchaser in the preceding calendar year; and
(3) File annual statements with the Department for each Louisiana
purchaser showing the total amount paid by the purchaser during the preceding calendar year.
2016 Legislative Recap Enacted Bills (cont.)
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Oklahoma
HB 2531 – enacted May 17, eff. Nov. 1, 2016.
Amended/expanded affiliate nexus provisions. Annual use tax notification requirement (consumer). Marketplace provisions included in introduced version, but amended to
exclude prior to passage. South Dakota
SB 106 – enacted March 22, eff. May 1, 2016.
Economic nexus: remote seller deemed to have nexus if in the previous
delivery of taxable products or services into SD; or (b) 200+ separate transactions.
No retroactive application; streamlined appeal provisions aimed at
directly challenging Quill. DOR enjoined from enforcement during challenge.
2016 Legislative Recap Enacted Bills (cont.)
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Vermont
H 873 – signed into law May 25.
Annual notice and reporting requirements that require noncollecting
vendors to:
(1) notify
Vermont purchasers that sales or use tax is due on nonexempt purchases; and
(2) send annual notifications to all
Vermont purchasers showing the total amount of their purchases from the prior year.
Only applies to Vermont purchasers that purchased $500 or
more from the noncollecting vendor in previous calendar year.
Notice and reporting requirements effective earlier of July 1,
2017 or the first day of the first quarter after the sales and use tax reporting requirements challenged in DMA are implemented by Colorado.
2016 Legislative Recap Enacted Bills (cont.)
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Vermont
H 873 (cont.)
Replaces the unenforced economic nexus standard with a new standard
that will consider a remote seller to be a vendor if they:
(1) Engage in regular systematic, or seasonal solicitation of sales of tangible
personal property in Vermont (via traditional advertising means, the Internet, cellular or other communication systems); and
(2) Either made sales into
Vermont of at least $100,000 or totaling 200 individual sales transactions in any 12-month period preceding the applicable monthly period.
Economic nexus provisions effective the later of July 1, 2017 or the
first day of first quarter after a controlling court decision or federal legislation abrogates the Quill physical presence requirement.
2017 Legislative Outlook
Nexus Wars!!!
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2017 Legislative Outlook
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As of early January, several states have already introduced
(or prefiled) nexus expansion legislation for 2017.
Minnesota SF 45 Nebraska LB 44 New Mexico (discussion draft) Virginia SB 962 Wyoming HB 19
At least a half dozen more states are rumored to be
actively considering legislation for their 2017 regular session.
The list includes Connecticut, Maryland, Nevada, Rhode Island,
T ennessee, T exas, and Washington.
2017 Legislative Outlook
41
Minnesota SF 45 (introduced Jan. 9, 2017)
“retailer maintaining a place of business in this state” would be
expanded to include:
Employing an in-state resident who works from home; and Having a marketplace provider or other third party operating in
Minnesota under the authority of the retailer or its subsidiary.
“Marketplace provider” broadly defined to include any person who facilitates a
retail sale by a retailer by: (a) Listing or advertising for sale by the retailer in any forum, tangible personal property, services, or digital goods that are subject to tax; and (b) Either directly or indirectly through agreements or arrangements with third parties collecting payment from the customer and transmitting that payment to the retailer regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services.
“A retailer is represented by a marketplace provider in this state if the retailer
makes sales in this state facilitated by a marketplace provider that maintains a place of business in this state.”
2017 Legislative Outlook
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Minnesota SF 45 (cont.))
Small seller exclusion for “retailers maintaining a place of business in
this state” based solely on the marketplace provider expansion with “total taxable sales” to customers in this state of less than $10,000 in the 12-month period ending on the last day of the most recently completed calendar quarter.
The exclusion does not apply to retailers that are (or were previously)
registered to collect sales and use tax in Minnesota.
Also includes affiliate nexus expansion. As introduced, the effective date for the nexus provisions would be
the earlier of: (1) the U.S. Supreme Court overturning the Quill physical presence requirements; (2) July 1, 2020; or (3) Congressional action authorizing states to impose collection and remittance requirements for retailers without an in-state physical presence.
2017 Legislative Outlook
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Nebraska LB 44 (introduced Jan. 5, 2017 on emergency basis)
Economic nexus bill that would deem remote sellers to have physical presence
with Nebraska if they meet either of the following criteria in the previous or current calendar year:
(a) gross revenue from the sale of tangible personal property, products delivered
electronically, or services for delivery into Nebraska exceeds $100,000; or
(b) sales of tangible personal property, products delivered electronically, or services for
delivery into Nebraska in 200 or more separate transactions.
Notification and reporting requirements (and penalties) on remote sellers that
meet the economic nexus standard, but refuse to collect Nebraska sales tax. These requirements include:
(1) basic purchaser notifications; (2) annual purchaser notifications (by mail) of the total amount of purchases in the
previous calendar year and other purchase-related information; and
(3) annual reporting to the DOR showing total amount paid for Nebraska purchases by
purchasers during the preceding calendar year.
Because it was introduced on an emergency basis, it would immediately take
effect “when passed and approved according to law.”
Note that in order to pass a bill on an emergency basis in Nebraska, a supermajority
(two-thirds) is required.
2017 Legislative Outlook
44
New Mexico (discussion draft)
Prepared by Interim Revenue Stabilization & Tax Policy
Committee during meetings in late 2016.
Would impose the New Mexico gross receipts tax on remote
sellers by redefining “engaging in business” to be “without regard to having physical presence, including the presence
Small seller exception for sellers that have less than one
hundred thousand dollars ($100,000) of gross receipts in the state, based on receipts during the prior calendar year (including affiliates).
Proposed effective date of July 1, 2018.
2017 Legislative Outlook
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Virginia SB 962 (prefiled for intro Jan. 11, 2017)
Provides that storage of inventory in the Commonwealth is sufficient
nexus to require out-of-state businesses to collect sales and use tax on sales to customers in the Commonwealth.
Wyoming HB 19 (prefiled for intro Jan. 10, 2017)
South Dakota-style legislation, would be effectively immediately. Would create an economic nexus threshold that would deem the
remote seller to have physical presence if during the current or prior year:
(1) gross revenue from sales of property/services into the state exceeds $100,000;
(2) they engaged in 200 or more separate sale transactions into the state.
Permits the DOR to bring an action seeking declaratory judgment.
Mandatory injunction during pendency of action. No retroactive application.
Limited overcollection liability to remote sellers if deemed unlawful.
Nexus Expansion Litigation
Nexus Wars!!!
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Nexus Litigation Update
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Direct Mktg. Ass'n v. Brohl
Feb. 22, 2016 – 10th Circuit issued decision on remand from
U.S. Supreme Court.
Quill physical presence requirement is limited to tax collection. “Complete Auto does not apply here because this case involves a
reporting requirement and not a tax.”
See 814 F.3d 1129 (10th Cir. 2016).
Petition for en banc rehearing denied April 1.
DMA and Colorado Solicitor General subsequently filed
cross-cert petitions.
Last month, both cert petitions were denied.
Binding law in 10th Circuit states; persuasive elsewhere.
Nexus Litigation Update (cont.)
48
South Dakota v. Wayfair et al.
In April, South Dakota filed a declaratory judgment action
against several prominent remote retailers in state court.
Wayfair Inc., Overstock.com and Newegg, Inc.
DOR is enjoined from enforcing SB 106 against any other
taxpayers until this case is over.
On May 25, the defendants filed notice of removal to remove
the case to U.S. District Court for the District of South Dakota (Case No. 3:16-CV-03019-RAL).
Briefing concluded August 26; South Dakota is asking for the case to
be sent back to state court, while the remote retailers are seeking a motion for summary judgment finding SB 106 unconstitutional.
Motion Hearing held on Dec. 8, 2016.
Nexus Litigation Update (cont.)
49
ACMA & NetChoice v. Gerlach
On the same day as Wayfair, the American Catalog Mailers
Association (ACMA) and NetChoice filed a declaratory judgment action against DOR Secretary Andy Gerlach in South Dakota Sixth Judicial Circuit Court seeking a declaration that SB 106 is unconstitutional and unenforceable on its face.
Case No. 32CIV16-96.
On June 24, 2016, the Secretary filed his answer, responding
that the court lacks jurisdiction to grant the relief sought because ACMA and NetChoice lack standing, the matter is not ripe, sovereign immunity applies and plaintiffs’ complaint fails to state a cause of action upon which relief may be granted.
Nexus Litigation Update (cont.)
50
Newegg Inc., v. Ala. Dep’t of Revenue, Docket No.
S.16-613 (Ala. Tax Tribunal, filed June 9, 2016)
Newegg is challenging the constitutionality of the Alabama
“economic nexus” regulation (Rule 810-6-2-.90.03) that took effect Jan. 1, 2016, which provides that $250,000+ in Alabama sales = substantial economic presence.
Department of Revenue filed its Answer in August, arguing that
“economic presence” is more appropriate today and Newegg meets two of the “doing business” criteria.
Chief Judge Bill Thompson entered a preliminary order
authorizing the commencement of pre-hearing discovery.
Nexus Litigation Update (cont.)
51
Crutchfield Corp. v.
Testa, 2016-Ohio-7760; Newegg,
Testa, 2016-Ohio-7768
Nov. 17 – three companion cases decided by the Ohio
Supreme Court involving the imposition of the Commercial Activity Tax (“CAT”).
The CAT is a gross receipts tax imposed on any business
having receipts greater than $500,000 from sales made into the state.
Nexus Litigation Update (cont.)
52
Crutchfield Corp. v.
Testa, 2016-Ohio-7760; Newegg,
Testa, 2016-Ohio-7768
Ohio Supreme Court majority held that:
Although a physical presence in the state may furnish a sufficient basis
for finding a substantial nexus, physical presence is not a necessary condition under the Commerce Clause for imposing a business- privilege tax (such as the CAT), as long as the tax is imposed with an adequate quantitative standard that ensures that the taxpayer's nexus with the state is substantial; and
The $500,000 sales-receipts threshold, as one means of satisfying the
statutory requirement of substantial nexus with state for purposes of imposing the CAT, satisfied requirement that a state tax, to be valid under dormant Commerce Clause, be applied to an activity with a substantial nexus with the taxing state.
Nexus Litigation Update (cont.)
53
Crutchfield Corp. v.
Testa, 2016-Ohio-7760; Newegg,
Testa, 2016-Ohio-7768
Ohio Supreme Court dissent found no evidence that gross-
receipts taxes are meaningfully different from use taxes for substantial-nexus purposes, and Tyler Pipe’s reliance on physical presence is more indicative of a requirement than an option.
Likely that one or more of the companies will petition U.S.
Supreme Court for cert.
Will the Court take this case? If so, will the issue be framed in such a way that the Court can
reexamine the broader validity of Quill?
Nexus Litigation Update (cont.)
54
Tennessee?
On June 16, the DOR proposed a new economic nexus
regulation (Rule 1320-05-01-.129) that deems out-of-state dealers with more than $500,000 in sales to T ennessee consumers during any calendar year to have substantial nexus with the state.
Dealers meeting the new economic nexus threshold must register with
the DOR by March 1, 2017, and begin reporting and paying the appropriate tax to the DOR beginning July 1, 2017.
Public hearing held on August 8, in Nashville.
DOR filed Rule with Secretary of State on Oct. 3, 2016. 90-day grace
period required before the Rule takes effect.
Litigation (and potentially legislation) is widely expected to
follow.
Federal Legislation
Nexus Wars!!!
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Federal Nexus Legislation
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Marketplace Fairness Act Remote Transactions Parity Act Online Sales Simplification Act [discussion draft] No Regulation Without Representation Act
Marketplace Fairness Act [S. 698] [114th Congress]
57
The MFA passed the Senate during the 113th Congress (S.
743), but failed to pass the House. The bill was re- introduced March 10, 2015.
This bill provides a state two options for gaining the
Congressional authorization to require remote sellers to collect sales tax:
SSUTA member states have to provide 90 days notice; Non-SSUTA members must comply with minimum simplification
requirements and enact legislation that (1) specifies the taxes to which the authority applies; and (2) identifies products and services that will be excluded from the authority.
Marketplace Fairness Act [S. 698] [114th Congress]
58
The minimum simplification requirements include:
One entity must be in charge of the administration of all state and
local sales taxes, including return processing and audits for remote sales;
There many only be one audit of the remote seller for all state and
local jurisdictions;
There must be a uniform sales and use tax base among all state and
local jurisdictions;
Remote sales must be sourced to the location where the product or
service is received by the purchaser;
The state must provide information on the taxability of products and
services and must provide software, free of charge, capable of calculating sales tax due on remote sales and filing returns;
Remote sellers cannot be held liable for taxes if the potential liability
is a result of incorrect information from the state or the state’s software.
“Small seller” exemption - < $1 million in remote sales.
Remote Transactions Parity Act [H.R. 2775] [114th Congress]
59
Introduced June 15, 2015 (currently 68 co-sponsors). Similar to the MFA, the RTPA provides a state two options
for gaining the Congressional authorization to require remote sellers to collect sales tax:
SSUTA member states have to provide 90 days notice; Non-SSUTA members must comply with minimum simplification
requirements and enact legislation that (1) specifies the taxes to which the authority applies; and (2) identifies products and services that will be excluded from the authority.
The RTPA includes all of the minimum simplification requirements
included in the MFA plus others.
Remote Transactions Parity Act [H.R. 2775] [114th Congress]
60
The RTPA strictly defines “remote seller” as a person who
makes remote sales in the state without a “physical presence.”
A person does not have physical presence in a state when it is in the
state for less than 15 days in the year or when it is in the state to conduct limited or transient business activities.
The RPTA’s exemptions differ from the MFA:
The “small remote seller” exemption applies to remote sellers with
less than $10M in total gross receipts during the first year the state acts under the RTPA, less than $5M in the second year, and less than $1M thereafter;
There is a “catalog seller” exemption for remote sellers that list items
for sale in a tangible catalog and do not engage in internet sales.
Online Sales Simplification Act [discussion draft]
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House Judiciary Chairman Bob Goodlatte released a
discussion draft of the Online Sales Simplification Act on January 13, 2015. Revised discussion draft released in April
Most recent discussion draft released August 25, 2016. Not formally introduced.
The draft proposes a hybrid origin-based imposition.
Only “origin” states may impose a sales and use tax collection
requirement on remote sellers.
States must join a distribution agreement, whereby origin states
redistribute the revenue to destination states.
No Regulation Without Representation Act [H.R. 5893] [114th Congress]
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Introduced by Rep. Jim Sensenbrenner on July 14; referred
to House Committee on the Judiciary.
Would codify the Quill physical presence standard, effective
States and localities may not do any of the following unless the
person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed:
(1) obligate a person to collect a sales, use or similar tax; (2) obligate a person to report sales or other information; (3) assess a tax on a person; or (4) treat the person as doing business in the jurisdiction for purposes
No Regulation Without Representation Act [H.R. 5893] [114th Congress]
63
Physical presence only if during the calendar year the person:
(1) owns or leases real or tangible personal property in the state; (2) has one or more employees, agents or independent contractors in
the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or
(3) maintains an office in-state with 3+ employees for any purpose.
Physical presence expressly excludes (as de minimis):
Referral agreements (i.e., click-through agreements); Presence for less than 15 days; Delivery via common carrier; and Internet advertising services by in-state residents not exclusively
directed at in-state customers.
U.S. District Courts given original jurisdiction over civil actions
to enforce.
2017 Nexus Expansion Outlook
Nexus Wars!!!
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Nexus Expansion Outlook
65
Short-term the state-level nexus wars will continue.
States will continue to enact litigation or regulations facially
challenging the Quill physical presence standard by implementing an economic nexus standard. This raises significant compliance concerns for remote vendors.
Will one of the direct challenges to Quill make it to the U.S.
Supreme Court (such as one of the South Dakota cases, Alabama litigation, or anticipated Tennessee challenge)?
Will Congress feel the heat from the states and finally pass one
Politics in Washington, DC is highly volatile post-2016 election, and
there is much more of an appetite for tax reform.
Nexus Expansion Outlook
66
With the 10th Circuit recently affirming the validity of the
Colorado notice and reporting regime, look for more states to implement notice and reporting requirements in 2017.
For marketplace providers, a number of states (AZ, CA, CO and
IN) issued guidance late last year taking a position on the sales tax collection responsibilities of marketplaces under current law (often as a “consignee” or “auctioneer”).
In lieu of legislation, many states may follow suit and seek to clarify
this area of the law by issuing guidance.
This will impact both the marketplace providers and those selling on
the online marketplace.
Nexus Expansion Outlook
67
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Craig B. Fields Partner & SALT Chair New York, NY (212) 468-8193 cfields@mofo.com Stephen P. Kranz Partner Washington, DC (202) 756-8180 skranz@mwe.com