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Sales Tax Affiliate Nexus Stemming From Sales Tax Affiliate Nexus Stemming From Online Business Presence

Meeting the Challenges of Tough State Laws and Court Rulings

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, DECEMBER 9, 2010

Today’s faculty features: Arthur Rosen, Partner, McDermott Will & Emery, New Y

• rk

Pat Derdenger, Tax Partner, Steptoe & Johnson, Phoenix J Christian Tennant Attorney McGuireWoods Richmond Va

• J. Christian Tennant , Attorney, McGuireWoods, Richmond, Va.

Adam Thimmesch, Faegre & Benson, Minneapolis

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Sales Tax Affiliate Nexus Stemming F O li B i P From Online Business Presence Webinar

• Dec. 9, 2010

Adam Thimmesch, Faegre & Benson athimmesch@ faegre.com Arthur Rosen, McDermott Will & Emery arosen@ mwe.com Pat Derdenger, Steptoe & Johnson pderdenger@ steptoe.com

• J. Christian Tennant, McGuire Woods

ctennant@ mcguirewoods.com

Today’s Program

Background On Attributional Nexus [Art hur Rosen] Slide 6 – Slide 12 The New Y

• rk "Amazon Tax"

[Art hur Rosen] Recent S tate Actions In This Area Slide 19 – Slide 42 Slide 13 – Slide 18 [Adam Thimmesch] Relevant Court Actions [J. Christ ian Tennant ] Slide 43 – Slide 54 Other State Developments [J. Christ ian Tennant ] Slide 55 – Slide 57 Slid 58 Slid 79 Practical Tax, Business Planning Approaches [Pat Derdenger] Slide 58 – Slide 79

BACKGROUND ON

Arthur Rosen, McDermott Will & Emery

BACKGROUND ON ATTRIBUTIONAL NEXUS

History Of Attempts At Taxing Remote Businesses

1942

Nelson v. Sears, Roebuck & Co. Nelson v. Montgomery Ward & Co. Northwestern States P l d C

1959 1967 1980s

National Bellas Hess, Inc. v. Department

• f Revenue of the State of Illinois

States break the law Portland Cement Company v. Minnesota

1959 1992 Late 1990s

Quill Corporation v. North Dakota Advisory Commission E-Commerce

1992 Late 1990s

Geoffrey v. SC

1993 ate 990s 1999 - 2000 2000 - Present

Advisory Commission

• n Electronic

Commerce E Commerce ???

Late 1990s 1999 - 2000 2000 - Present

Advisory Commission on Electronic Commerce

2004 2004 2005 2007 2009

MTC Factor Nexus Proposal OH Commercial Activity Tax MBNA v. West Virginia Capital One v. MA DDR

2009 2009

Capital One v. MA DDR CA enacts econ. nexus CT enacts econ. nexus

7

A ib i l N B k d Attributional Nexus ‐ Background

• Scripto, Inc. v. Carson (1960)

 An agent may create nexus for an out-of-state

corporation, even if the agent is an independent co po at o , eve t e age t s a depe de t contractor and not a fulltime employee.

• Tyler Pipe v. Washington Department of Revenue (1987)

 The test for determining whether an in-state person

creates nexus for an out-of-state person is whether the actions of the in-state person are “ significantly associated with the taxpayer’s ability to establish and maintain a market in the state.”

8

Attributional Nexus – Background (Cont.)

• Sales and use taxes –Attribution

 1990s “ bricks and mortar” affiliate cases

SF A F li OH (1995)

• SF

A Folio v. OH (1995)

• Bloomingdale’s By mail v. P

A (1989) Online booksellers cases

 Online booksellers cases

• Borders Online v. CA (2005)
• BarnesandNoble.com v. CA (2007)

BarnesandNoble.com v. CA (2007)

• St. Tammany Parish v. BarnesandNoble.com (2007)

9

Attributional Nexus – Background (Cont.)

• Sales and use taxes –Attribution (Cont.)

 School teacher cases

S h l ti B k KS (1996)

• Scholastic Books v. KS (1996)
• Scholastic Books v. CT (2009)

Warranty repair services

 Warranty repair services

• Dell v. CT (2003)
• Dell v. NM (2008)

Dell v. NM (2008)

10

Attributional Nexus – Hypothetical Situation

• Flyers being distributed indiscriminately on street corner
• C

i ith i t b t hi

• Coupon given with receipt by store cashier
• Advertisement printed on receipt given by store cashier
• Telemarketing company in-state making/taking no intrastate
• Telemarketing company in-state making/taking no intrastate

calls

• Telemarketing company in-state making/taking instrastate

calls

11

Affili N S Affiliate Nexus Statutes

• A number of states have enacted affiliate nexus statutes that

label remote sellers as vendors required to collect sales/ use tax, on the basis of there being a related in-state party that uses common trademarks or that has common management or a common business plan.

• Ala. Code Ann. §40-23-190; Ark. Code §26-53-124; Ga. Code
• Ann. §48-48-2; Idaho Code §63-3611; Indiana Code 6-2.5-8-10;

I C d §423 1(43) K St t A §79 3702 K R St t Iowa Code §423.1(43); Kan. Stat. Ann. §79-3702; Ky. Rev. St at.

• Ann. §139.340; Minn. Stat. §297A.66; N.Y

. Tax Law

§1101(b)(8); Ohio Rev. Code Ann. § 5741.01(l); Utah Code Ann. §59-12-107; Wis. Stat. §7751(13g)(d).

12

THE NEW YORK “AMAZON

Arthur Rosen, McDermott Will & Emery

THE NEW YORK AMAZON TAX”

N Y k A S New York Amazon Statute

• The statute presumes that a seller is a ”vendor” required to collect sales/use

tax if the seller: (1) enters into an agreement with a New York resident or residents for consideration, (2) the New York resident or residents link to Amazon’s Web page, and (3) the cumulative gross receipts from sales through Amazon s Web page, and (3) the cumulative gross receipts from sales through the links to customers in New York exceeds $10,000.

• The presumption can be rebutted if the seller can establish that ”the only

activity” of in-state representatives consists of advertising through a Web y p g g

• page. TSB-M-08(3)S (May 8, 2008). The presumption can also be rebutted if

the seller includes in its business-referral agreements a provision prohibiting associates from engaging in solicitation activities and requiring each associate to submit a signed certification stating that he/she/it engaged in no in state to submit a signed certification stating that he/she/it engaged in no in-state solicitation during the prior year. TSB-M-08(3.1)S (June 30, 2008)

• The statutory presumption is triggered by commission-based referral

agreements, but not by flat-fee agreements. TSB-M-08(3)S (May 8, 2008) agreements, but not by flat fee agreements. TSB M 08(3)S (May 8, 2008)

14

A S L i l i A i i Amazon Statutes: Legislative Activity

• Amazon legislation was enacted in Rhode Island (R.I. Gen.

Laws § 44-18-15(a)(2)) and North Carolina (N.C. Gen. Stat. § 105-164.8(b)(3)).

• Other states that considered or are considering such legislation

in 2010 include: CA CO CT FL IA IL MD MN MS NM OK in 2010 include: CA, CO, CT , FL, IA, IL, MD, MN, MS, NM, OK, TN, TX, VA, VT , and WI.

15

16

17

Amazon.com (N.Y. Supreme Court, A Di )

• App. Div. 2010)
• The Appellate Division upheld the lower court’s decision that the

statute is constitutional on its face, because there are at least some grounds on which the statute could be constitutional (specifically, if A ’ i t f i t t li it ti ti iti ) Amazon’s associates perform in-state solicitation activities).

• The Appellate Division concluded that the presumption contained in

the statute is not unconstitutional, because it is reasonable to expect that associates will want to increase their earnings by soliciting people to purchase items through their Web sites.

• The court remanded the Commerce Clause and Due Process Clause

as-applied challenges to the lower court with a command to ”develop a record which establishes, actually, rather than theoretically, whether [the associates] are soliciting business or merely advertising

• n their behalf.”

18

RECENT STATE ACTIONS IN

Adam Thimmesch, Faegre & Benson

THIS AREA

Affiliate Nexus: New Laws In 2010

• Colorado

– Passed two types of affiliate-nexus statutes R l t d t ffili t

• Related-party affiliate nexus
• Sales tax information reporting
• Oklahoma

– Passed two types of affiliate-nexus statutes

• Related party affiliate nexus
• Related-party affiliate nexus
• Sales tax information reporting

20

Colorado House Bill 10-1193

• Traditional affiliate nexus provision

– Expanded the definition of “doing business” in the state to include, as of March 1, 2010:

• Retailers that do not collect Colorado sales tax and are part of a controlled

p group of corporations, a member of which is a retailer with physical presence in the state – Statute creates a presumption that can be rebutted.

• Rebuttal requires proof that, during the calendar year in question, the retailer

with physical presence in the state did not engage in any constitutionally with physical presence in the state did not engage in any constitutionally sufficient solicitation in Colorado on behalf of the non-collecting retailer.

21

Colorado House Bill 10-1193 (Cont.)

• Sales tax information reporting

– Colorado legislature considered a New York-style Amazon law, but adopted a modified approach. – Under the statute adopted, out-of-state retailers are not required to collect tax, but are required to comply with onerous information-reporting requirements. A de minimis rule exempts retailers that make less than $100 000 in total gross – A de minimis rule exempts retailers that make less than $100,000 in total gross sales in Colorado in the prior calendar year and reasonably expect that total gross sales in Colorado in the current calendar year will be less than $100,000. – Total gross sales includes all sales of goods made by all entities controlled by or under common control with the non-collecting retailer.

22

Colorado Notice Requirements

• Retailers subject to the new rules have three reporting requirements:

(1) Customer transactional notice (2) Annual purchase summary ( ) p y (3) Customer information report

23

Colorado Transactional Notice: Content

• The customer transactional notice requires retailers to:

– State that the retailer does not collect Colorado sales or use tax St t th t th h i t t f C l d l t l – State that the purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet or by other remote means – State that Colorado requires Colorado purchasers to file a sales or use tax return t th d f th f ll t bl C l d h th t t t d d at the end of the year for all taxable Colorado purchases that were not taxed, and pay tax on those purchases

• The Customer Transactional Notice must be clearly legible,

reasonably prominent, and located in close proximity to the total price.

24

Colorado Transactional Notice: Placement

• Retailer indicates that no tax is due

– Transactional notice must be given with any display that indicates that no tax is due on a particular purchase (i e sales tax = $0 00) due on a particular purchase (i.e., sales tax = $0.00).

• Retailer does not indicate that no tax is due

Reg lations req ire the notice to be pro ided on each in oice or if no in oice is – Regulations require the notice to be provided on each invoice; or, if no invoice is given, on other documentation provided to the purchaser as part of the sale, either immediately before, as part of, or immediately after the sale. Department guidance relaxes this rule and states that notice can be given at any – Department guidance relaxes this rule and states that notice can be given at any point in the transaction, including on a sheet of paper with the delivered goods.

25

Colorado Transactional Notice: Placement (Cont.)

• The notice-placement requirement is met if the retailer provides a

“prominent linking notice” that reads as follows:

– “See important sales tax information regarding the tax you may owe directly to your state.” y

• The link must take the purchaser to a page that includes the required

notice. notice.

• If the retailer is required to provide a similar notice in other states, the

If the retailer is required to provide a similar notice in other states, the notice requirement is met if the notice provides a generalized notice that include “substantially the same information required” by Colorado.

26

Annual Purchase Summary: Content

• The annual purchase summary must:

– Summarize the date(s) of the customer’s purchase(s), and describe the type(s) ( ) p ( ), yp ( )

• f item(s) purchased and the dollar amount of the purchase(s)

– State that Colorado requires that the consumer file a sales or use tax return at the end of every year and pay tax on all taxable purchasers for which no tax has the end of every year and pay tax on all taxable purchasers for which no tax has been collected by the retailer – Indicate that the retailer is required by law to provide the Colorado Department of Revenue with the total dollar amount of purchases made by the Colorado purchaser; however, no information about the purchase other than the dollar amount of the purchase will be provided to the department

27

Annual Purchase Summary: Procedure

• The annual purchase summary is required to be sent to Colorado purchasers whose

total Colorado purchases for the calendar year are $500 or more. total Colorado purchases for the calendar year are $500 or more.

• The annual purchase summary must be sent by first-class mail to the last known

dd f th t b J 31 address of the customer by Jan. 31.

• The envelope in which the annual purchase summary is mailed must be prominently

The envelope in which the annual purchase summary is mailed must be prominently marked with the words “Important tax document enclosed.”

28

Customer Information Report

• Customer information report is provided to the Colorado Department
• f Revenue and must include:

– The name(s) of all Colorado purchasers – The billing addresses of all Colorado purchasers The billing addresses of all Colorado purchasers – The shipping addresses of all Colorado purchasers – The total dollar amount of purchases made by each Colorado purchaser for the prior calendar year prior calendar year

• If the retailer made more than $100,000 of total gross sales in

Colorado during the prior calendar year, then the retailer must g p y , electronically file the requested information.

• The report must be filed on or before March 1.

29

Colorado Penalties

• A penalty of $5 applies to each sale to a Colorado purchaser that

does not include the required customer transactional notice.

• A penalty of $10 applies for each required annual purchase summary

that is not sent by the retailer.

• A penalty of $10 applies to each customer that is not included on the

customer information report.

• Regulations include some penalty-mitigation provisions.

30

Oklahoma

• Oklahoma House Bill No. 2359 contains both traditional affiliate nexus

provisions and a Colorado-style notice provision.

• Three categories of retailers are included in the new affiliate-nexus

i i provision

– Retailers selling similar lines of products as related Oklahoma retailers – Retailers using related Oklahoma distributors – Retailers in controlled groups with Oklahoma retailers

31

Oklahoma House Bill No. 2359

• Similar product lines

– Retailers are deemed to be engaged in the business of selling tangible personal property for use in Oklahoma if both of the following conditions are met: property for use in Oklahoma if both of the following conditions are met:

• The retailer holds a substantial ownership interest in, or is owned in whole or

in substantial part by, a retailer maintaining a place of business within Oklahoma; and

• The retailer sells the same or a substantially similar line of products as the

related Oklahoma retailer and does so under the same or a substantially similar business name; or, the Oklahoma facilities or Oklahoma employees of the related Oklahoma retailer are used to advertise, promote or facilitate sales by the retailer to consumers.

32

Oklahoma House Bill No. 2359 (Cont.)

• Use of related-party distributors

– Retailers are deemed to be engaged in the business of selling tangible personal property for use in Oklahoma if the retailer holds a substantial ownership interest in, or is owned in whole or in substantial part by, a business that maintains a distribution house, sales house, warehouse or similar place of business in Oklahoma that delivers property sold by the retailers to consumers.

• Inclusion in controlled group of corporations
• Any retailer that is a part of a controlled group of corporations that has a component

member that is a retailer engaged in business in Oklahoma under the prior two new provisions is presumed to be a retailer engaged in business in Oklahoma.

• The presumption may be rebutted by presenting evidence that, during the calendar year

at issue, the component member that is a retailer engaged in business in Oklahoma did not engage in any of the activities described in the prior two provisions (use of facilities, use of employees use of delivery services) on behalf of the retailer use of employees, use of delivery services) on behalf of the retailer.

33

Oklahoma House Bill No. 2359 (Cont.)

• Oklahoma law: Sales tax information reporting

– Statute passed into law on May 28, 2010. – Requires only the customer transactional notice.

R ti i t l t t il th t (1) t tl i t d t ll t

• Reporting requirements apply to retailers that (1) are not currently registered to collect

and remit Oklahoma sales and use tax, (2) make sales of tangible personal property from a place of business outside of Oklahoma to be shipped to Oklahoma for use, and (3) are not required to collect Oklahoma sales or use taxes. a d (3) a e o equ ed o co ec O a o a sa es o use a es

– De minimis rule exempts retailers that make less than $100,000 in total gross sales in Oklahoma in the prior year and reasonably expect Oklahoma sales in th t ill b l th $100 000 the current year will be less than $100,000. – No penalty provisions.

34

Oklahoma Transactional Notice: Content

• The required notice must be contain the following statements:

– The non-collecting retailer is not required, and does not collect Oklahoma sales or use tax. – The purchase is subject to Oklahoma use tax unless it is specifically exempt from taxation taxation. – The purchase is not exempt merely because it is made over the Internet, by catalog or by

• ther remote means.

– The state of Oklahoma requires Oklahoma purchasers to report all purchases that were The state of Oklahoma requires Oklahoma purchasers to report all purchases that were not taxed and pay tax on those purchases. The tax may be reported and paid on the Oklahoma individual income tax return [Form 511] or by filing a consumer use tax return [Form 21-1]. – The referenced forms and corresponding instructions are available on the Oklahoma Tax Commission Web site, www.tax.ok.gov.

35

Oklahoma Transactional Notice: Placement

• Web site

– Notice shall occur on (1) a page “necessary to facilitate the applicable ( ) p g y pp transaction” and on the electronic order confirmation; or (2) on the check-out page.

• Under option (1), if an electronic order confirmation is not provided, the notice must

be provided on the purchase order, bill, receipt, sales slip, order form or packing statement.

– It is sufficient if the retailer provides a prominent linking notice that reads as It is sufficient if the retailer provides a prominent linking notice that reads as follows: “See important Oklahoma sales tax information regarding the tax you may owe directly to the state of Oklahoma,” if such linking notice directs the purchaser to the notice required under the regulations.

36

Oklahoma Transactional Notice: Placement (Cont.)

• Catalog

– Notice in a catalog shall be a part of the order form and on the purchase order, bill, receipt, sales slip, order form or packing statement. – It is sufficient if the retailer provides a prominent reference to a supplemental page that reads as follows: “See important Oklahoma sales tax information regarding the tax you may owe directly to the state of Oklahoma on page __,” if such page includes the notice required under the regulations.

37

Oklahoma Transactional Notice: Miscellaneous

• If a retailer is required to provide a similar notice for another state,

then the retailer may provide a consolidated notice so long as such notice includes the required information specifically references notice includes the required information, specifically references Oklahoma and meets the placement requirements.

• A non-collecting retailer may not state, display or imply that no tax is

due on any Oklahoma purchase unless the statement, display or implication is accompanied by the required notice.

– Exclusion from this requirement if the retailer knows that the purchase is exempt from tax exempt from tax

38

MTC Model Use Tax Notice And Reporting Statute

• MTC Income & Franchise Tax Uniformity Subcommittee is drafting a

model use tax notice and reporting statute.

• Structure is based on the Colorado law

– Three reporting requirements Three reporting requirements – Exclusions for de minimis sellers – Penalties for noncompliance – Penalty waiver provisions

39

MTC Model Use Tax Notice And Reporting Statute (Cont.)

• Key differences from Colorado and Oklahoma laws

– Transactional notice required on all invoices and order forms including, where applicable, electronic and catalogue invoices and order forms; and upon each sale or lease receipt provided to the purchaser sale or lease receipt provided to the purchaser – No provision for linking to notice Annual report to purchaser not required to be mailed via first class mail – Annual report to purchaser not required to be mailed via first-class mail – Explicitly allows state to estimate failures when determining penalties P id 20 d t t t t d A t – Provides 20 days to protest assessments under Act – Contains a specific confidentiality provision

40

Challenges To Retailers

• The new reporting requirements present many difficulties for out-of-

state retailers

– Cost (systems redesign, notice generation, first-class mailings, etc.) – System limitations (IT concerns, timing, etc.) – Customer relations – Multi-state compliance

41

Legislation In Other States

• In 2009 and 2010, at least 13 other states considered Amazon-style

legislation.

C lif i C ti t H ii Illi i I M l d Mi t Mi i i i – California, Connecticut, Hawaii, Illinois, Iowa, Maryland, Minnesota, Mississippi, New Mexico, Tennessee, Vermont, Virginia and Wisconsin

• Expect increased attention in 2011, but difficult to project
• Colorado governor-elect publicly supported repeal of the law during

2010 campaign.

42

RELEVANT COURT ACTIONS

• J. Christian Tennant, McGuire Woods

RELEVANT COURT ACTIONS

Relevant Court Actions

T t f

• Two cases to focus on

– Amazon.com LLC v. Kenneth R. Lay, Secretary of the North Carolina Department of Revenue, 2010 U.S. Dist. LEXIS 113163 (W D W O b 25 2010) 113163 (W.D. Was., October 25, 2010) – Direct Marketing Association v. Roxy Huber, Executive Director, Colorado Department of Revenue, Civil Action

• No. 1:10-CV-01546-REB-CBS
• Filed in the U.S. District Court for the District of

l Colorado

• Arguments have yet to be scheduled.

McGuireWoods LLP | 44

Relevant Court Actions (Cont.)

• Tax Injunction Act

– Codified at 28 U.S.C.A. § 1341 (LexisNexis 2010) – The district courts shall not enjoin, suspend or restrain the j p assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had in the courts of such state.

McGuireWoods LLP | 45

Relevant Court Actions (Cont.)

• Amazon.com v. Lay

– December 2009: North Carolina Revenue Department requests all sales information of customers with North Carolina shipping sales information of customers with North Carolina shipping addresses from Amazon.com LLC as part of an audit of Amazon.com LLC, not of its customers.

• Amazon provided NC with detailed sales information

excluding the customers’ personal identifiable information. – March 2010: The Revenue Department sent a second request for all sales information including the customers’ names, addresses, and product codes or descriptions and product codes or descriptions.

McGuireWoods LLP | 46

Relevant Court Actions (Cont.)

• Amazon.com vela (Cont.)

– Amazon filed a complaint in U.S. District Court for the Western District of Washington, arguing that the First Amendment and the District of Washington, arguing that the First Amendment and the Video Privacy Protection Act (18 U.S.C., Sect. 2710) barred the March 2010 information request. – The North Carolina Revenue Department argued

• (1) That the claims weren’t ripe because Amazon had suffered

no harm, and

• (2) That the Tax Injunction Act barred the proceedings and that

h ld i j i di i the court could not exercise jurisdiction.

McGuireWoods LLP | 47

Relevant Court Actions (Cont.)

• Amazon com vela (Cont )
• Amazon.com vela (Cont.)

– The U.S. District Court first denied the Revenue Department’s motion.

• The claims were ripe because (1) there was sufficient threat of

The claims were ripe because (1) there was sufficient threat of enforcement, (2) the Revenue Department already had detailed customer information, and (3) the Revenue Department continued to request information that threatens the rights of A ’ t Amazon’s customers.

• The court determined that the Tax Injunction Act did not

prohibit the court from hearing the case because the relief Amazon sought did not require the court to enjoin suspend or Amazon sought did not require the court to enjoin, suspend or restrain the collection of state taxes.

McGuireWoods LLP | 48

Relevant Court Actions (Cont.)

• Amazon com vela (Cont )
• Amazon.com vela (Cont.)

– The U.S. District Court held that the North Carolina Revenue Department’s request for all customer sales information violated the First Amendment the First Amendment. – As the Revenue Department’s request for information caused First Amendment issues, it had to show that a compelling governmental interest warranted the burden and that less restrictive means to interest warranted the burden, and that less restrictive means to achieve its ends were unavailable. – The U.S. District Court held that the disclosure of customers’ personal identifiable information would violate the Video Privacy personal identifiable information would violate the Video Privacy Protection Act, and that the department again failed to show a compelling need for the information.

McGuireWoods LLP | 49

Relevant Court Actions (Cont.)

• Amazon.com vela (Cont.)

– Ultimately, the U.S. District Court stated, “[T]o the extent the M h I f ti R t d d th t A di l it March Information Request demands that Amazon disclose its customers' names, addresses or any other personal information, it violates the First Amendment and the Video Privacy Protection Act only as long as the DOR continues to have access to or Act, only as long as the DOR continues to have access to or possession of detailed purchase records obtained from Amazon ...”

• - Amazon.com LLC v. Lay, 2010 U.S. Dist. LEXIS 113163 at 41

McGuireWoods LLP | 50

Relevant Court Actions (Cont.)

• Direct Marketing Association v. Huber

– The Direct Marketing Association (DMA) filed a complaint for g ( ) p declaratory and injunctive relief against the Colorado Department of Revenue to “enjoin enforcement by the Defendant of the unconstitutional requirements of a new Colorado law specifically targeted at out-of-state retailers ...” – The DMA argues that the law violates both the United States Constitution and the Colorado Constitution by:

• (a) Imposing discriminatory treatment on out-of-state retailers lacking

any physical presence in the state,

• (b) Trampling the right to privacy of Colorado residents as well as

certain non-residents,

• (c) Chilling the exercise of free speech by certain purchasers and

( ) g p y p vendors of products that have expressive content,

• (d) exposing confidential information regarding consumers and their

purchases to the risk of data security breaches, and

• (e) Depriving retailers, without due process or fair compensation, of

McGuireWoods LLP | 51

( ) p g , p p , both the value of their proprietary customer lists and the substantial investment made to protect such lists from disclosure.

Relevant Court Actions (Cont.)

• Direct Marketing Association v Huber (Cont )
• Direct Marketing Association v. Huber (Cont.)

– Interstate commerce

• Sufficient, minimum connection between an out-of-state

t il d t t i th f f h i l i retailer and a state, in the form of a physical presence, is needed before the state may impose regulatory obligations on such retailers of the type imposed by the Act and regulations. Th C Cl b t t l th t d l b d

• The Commerce Clause bars state laws that unduly burden

interstate commerce.

• The state of Colorado lacks sufficient connection to the out-of-

t t t il t t d b th ti d ti state retailers targeted by the notice, and reporting requirements to allow the state to impose such obligations upon them consistent with the Commerce Clause.

McGuireWoods LLP | 52

Relevant Court Actions (Cont.)

• Direct Marketing Association v Huber (Cont )
• Direct Marketing Association v. Huber (Cont.)

– Other arguments

• Violation of the right of privacy of Colorado consumers
• Due process of law

– United States and Colorado constitutions prohibit the state

• f Colorado from taking private property for public use

without just compensation. – DMA states that customer lists are private property, and Colorado provides no mechanism for compensating the retailer for the taking of its property.

McGuireWoods LLP | 53

Relevant Court Actions (Cont.)

• Direct Marketing Association v. Huber (Cont.)

– Colorado filed a motion to dismiss the complaint

• DMA lacks standing to bring the suit.
• DMA failed to state a claim for the violation of the customers’

right to privacy.

McGuireWoods LLP | 54

OTHER STATE

• J. Christian Tennant, McGuire Woods

DEVELOPMENTS

Other State Actions

• North Carolina voluntary disclosure

– Eligibility for this program ended on June 30, 2010. – Beginning on April 23, 2010, the “Internet Transactions Resolution Program” was offered to retailers that did not register for sales and use tax as a result of operating an affiliate program in N th C li North Carolina. – To participate in this program, retailers were required to submit an election to participate by June 30, 2010.

McGuireWoods LLP | 56

Other State Actions (Cont.)

• North Carolina voluntary disclosure (Cont )
• North Carolina voluntary disclosure (Cont.)

– Terms of the program

• Retailer registered to collect and remit North Carolina sales

d t and use tax

• The North Carolina Revenue Department agreed not to assess

tax, penalties or interest for periods prior to Sept. 1, 2010 for t il th t ti i t d i th retailers that participated in the program.

• The Revenue Department agreed not to exercise its authority to
• btain consumer information from the retailer to collect a tax

li bilit f th i d i t S t 1 2010 liability for the period prior to Sept. 1, 2010.

McGuireWoods LLP | 57

PRACTICAL TAX, BUSINESS

Pat Derdenger, Steptoe & Johnson

, PLANNING APPROACHES

Practical Concerns: An I n-State, Unrelated Party Working on Your Behalf – Dell Party Working on Your Behalf Dell Computer Maintenance Cases

• Formal maintenance agreements with unaffiliated third-

parties to service products may establish nexus.



Dell, an online/catalog computer vendor, contracts with a , / g p , nationwide service company to repair computers in purchasers’ homes; the service contract is sold by Dell to the purchaser at the time of purchase.

• Multistate Tax Commission Bulletin 95-1, revised in 2006,

for computer mail order companies:



In-state warranty repair services by independent



In state warranty repair services by independent contractor establish nexus.



Would apply to Internet sales

59

Practical Concerns: An I n-State, Unrelated Party Working on Your Behalf – Dell Party Working on Your Behalf Dell Computer Maintenance Cases (Cont.)

N L i i D ll I t ti l I 922



• Nexus. Louisiana v. Dell International, Inc., 922
• So. 2d 1257 (L.A. Ct. App. 2006) & Dell Catalog

Sales L.P. v. New Mexico Taxation and Revenue Sales L.P. v. New Mexico Taxation and Revenue Dep’t, No. 26,843 (CCH) [NM-TAXRPTR] ¶ 401- 200 (N.M. Ct. App. June 3, 2008 cert denied 144 N M 593 189 P 3d 1214 (J l 18 2008) N.M. 593, 189 P.3d 1214 (July 18, 2008).

• Activities of third party were significantly

associated with Dell’s ability to establish and associated with Dell s ability to establish and maintain a market in the state.

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Practical Concerns: An I n-State, Unrelated Party Working on Your Behalf – Dell Party Working on Your Behalf Dell Computer Maintenance Cases (Cont.)

No nexus Dell Catalog Sales L P v Conn



No nexus. Dell Catalog Sales, L.P. v. Conn. Commissioner of Revenue, 834 A.2d 812 (2003).

• Minimal in state repair service by independent

contractor not sufficient nexus

• Dell retained 90% of the price of the service
• Dell retained 90% of the price of the service

contract, and the service provider retained only 10%, so the court inferred that the service provider’s operations on Dell’s behalf were provider s operations on Dell s behalf were minimal.

• Isolated and sporadic physical contacts are

insufficient to establish substantial nexus

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insufficient to establish substantial nexus.

Practical Concerns: An I n-State, Unrelated Party Working on Your Behalf – Dell Party Working on Your Behalf Dell Computer Maintenance Cases (Cont.)



Possible solutions

• Have the customer ship the equipment back to

the manufacturer for repairs (eliminate third party, on-site repairs in the state). p y, p )

• BUT, customers may prefer on-site repairs.
• Have the customer contract directly with the

thi d t id d t di tl ith third-party provider and not directly with, or through, Dell

62

Practical Concerns: Location Of W b S Of Web Servers



MTC discussion drafts of proposed rules bl h d



Nexus established IF:

• Ownership, lease, use or maintenance of

computer terminals available for access in the computer terminals available for access in the taxing jurisdiction

• Licensing of proprietary software in the taxing

jurisdiction that facilitates use of the on-line service

63

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)



MTC discussion drafts of proposed rules (Cont )



MTC discussion drafts of proposed rules (Cont.) Nexus established IF:

• Utilization of a “cybermall” with a computer server

in the taxing jurisdiction that performs various administrative and financial functions on behalf of the remote seller

• A “cybermall” is an online retailer that offers a wide

range of goods for sale, such as Amazon.com.

• Maintaining a telecommunication linkage by

g g y private contract in the taxing jurisdiction that permits the online service to establish and maintain a market in the taxing jurisdiction

64

g j

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)



MTC discussion drafts of proposed rules (Cont.)



Nexus established IF:

P f i d i l t i i i th

• Performing or rendering electronic services in the

taxing jurisdiction, such as remote computer diagnostics and technical support

65

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)



Industry opposition prevented the MTC from finalizing these drafts, but aggressive states may follow them may follow them.

66

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)



Rulings on servers

N M i T ti d R D t t

• New Mexico Taxation and Revenue Department

Ruling No. 401-97-6 (11/20/1997): If a taxpayer “owns or leases the server ... and the server is in New Mexico, that in itself would create nexus for [the taxpayer] with New Mexico.”

67

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)

V D f T i P b D R li N

• Va. Department of Taxation, Pub. Doc. Ruling No.

05-128 (08/02/05): “Out-of-state seller whose

• nly presence in Virginia is a computer server

y p g p [owned by another business] used to create or maintain an Internet website does not have nexus for sales and use tax purpose ” for sales and use tax purpose.

• But, if the dealer owns or rents the server, and it is

situated in Virginia, the dealer may have nexus. See Va. Department of Taxation Pub Doc Ruling No 04 38 Department of Taxation, Pub. Doc. Ruling No. 04-38 (07/28/2004).

68

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)

• Ill. Department of Revenue General Information

Letter No. ST 01-0088-GIL (05/09/01): “Retailer’s use of a server located in Illinois, in and of itself, use of a server located in Illinois, in and of itself, is generally not sufficient to establish nexus for sales of tangible personal property made through the internet ” the internet.

• The retailer did not own or lease the server.
• Rather, it paid a fee to a Web-hosting company for

, p g p y use of the server (also used by others).

69

Practical Concerns: Location Of W b S (C t ) Of Web Servers (Cont.)



Solutions

T ti t h th l

• Taxation may turn on whether you own or lease

the server, or contract with a third-party for a server service.

• To be safe, use servers that are situated in states

h h l d h h l in which you already have physical presence – i.e., the home state.

70

Practical Concerns: Business Entity i li i Naming Policies

MTC proposed model affiliate sales tax nexus statute (April MTC proposed model affiliate sales tax nexus statute (April 28, 2005) - An out-of-state vendor has substantial

nexus for use tax collection if:

Th t f t t d d i t t b i “ l t d

1.

The out-of-state vendor and in-state business are “related parties.”

2.

The out-of-state vendor and in-state business use id ti l i il t d t d k identical or similar name, trade name, trademark or goodwill to develop, promote or maintain sales; or, the in-state business provides services to or that benefit the

• ut-of-state vendor’s in-state sales
• ut-of-state vendor s in-state sales.

3.

The out-of-state vendor must have at least $100,000 of sales in the previous year.

71

Practical Concerns: Business Entity N i P li i (C t ) Naming Policies (Cont.)



Some states have adopted statutes similar to the MTC proposed statute, including:

Alabama Ala Code § 40 23 190(a)(2)

• Alabama: Ala. Code § 40-23-190(a)(2)
• Idaho: Idaho Code § 63-3615A(1)(b)
• New Jersey: N J Rev Stat § 54:32B-2(i)(2)(b)
• New Jersey: N.J. Rev. Stat. § 54:32B 2(i)(2)(b)



Comptroller v. Furnitureland South, Inc., No. C- 97-37872-OC, Md. Cir. Ct., Aug. 18, 1999. , , g , Nexus found in part through use of similar logos between in-state and out-of-state parties

72

Practical Concerns: Business Entity N i P li i (C t ) Naming Policies (Cont.)



Solution

• Don’t use the same or a similar name for your in-

state and out-of-state affiliates or Internet and state and out of state affiliates or Internet and bricks-and-mortar affiliates.

73

Practical Concerns: Location Of Di t ib ti A d F lfill t A ti iti Distribution And Fulfillment Activities



States may find nexus established through an



States may find nexus established through an affiliate engaging in distribution and fulfillment activities on your behalf.

• Lyon Metal Products, Inc. v. State Bd. of

Equalization, 58 Cal. App. 4th 906 (Cal. Ct. App. 1997): Nexus established in California when goods 1997): Nexus established in California when goods were stored in a warehouse in California and delivered from there to customers.

• Williams and Co., Inc. v. Dailey, 303 S.E.2d 737 (W.
• Va. 1983): Nexus was established in part due to the

presence of the taxpayer’s warehouse in-state.

74

p ese ce o t e ta paye s a e ouse state

Practical Concerns: Location Of Distribution A d F lfill t A ti iti (C t ) And Fulfillment Activities (Cont.)



Solution

• Base distribution and fulfillment activities in states

where you already have physical presence and where you already have physical presence and nexus

75

Practical Concerns: “Amazon” Laws Practical Concerns: Amazon Laws

• New York style (“click through nexus”)
• New York-style ( click-through nexus )



Creates a rebuttable presumption that a remote seller is soliciting sales (has nexus) if: seller is soliciting sales (has nexus) if:

• Remote seller has an agreement with an in-state

third party that directly or indirectly refers customers to the remote vendor (including through Web site links).

• The in-state party receives compensation
• The in state party receives compensation.
• The remote seller must reach a threshold volume of

sales for the previous four quarters ($10,000 in NY).

76

Practical Concerns: “Amazon” Laws (Cont.) Practical Concerns: Amazon Laws (Cont.)

• New York-style (“click-through nexus”), Cont.



Solution

• Collect and remit sales/use taxes if you have such

arrangements with third parties in states with New York-style Amazon laws New York style Amazon laws

• OR, terminate relationships with third parties in

states that have adopted New York-style Amazon laws

• OR, opt to not terminate relationships and to not

collect tax and hope Amazon wins appeal

77

collect tax, and hope Amazon wins appeal

Practical Concerns: “Amazon” Laws (Cont.) Practical Concerns: Amazon Laws (Cont.)

• Colorado style
• Colorado-style



Affiliate nexus: Presumes nexus if remote vendor is part of a “controlled group,” as defined in IRC §1563(a) and a component member has physical presence in Colorado.



New reporting burdens on vendors without nexus

• Notice to customers that use tax is due to the state; $5 penalty

Notice to customers that use tax is due to the state; $5 penalty for each failure

• Provide each Colorado customer (by Jan. 31) and the

Department of Revenue (by March 1) with an annual account Department of Revenue (by March 1) with an annual account statement for each customer; $10 penalty for each failure



Oklahoma recently passed a similar law requiring reporting, and other states are considering Colorado-type legislation

78

and other states are considering Colorado type legislation.

Practical Concerns: “Amazon” Laws (Cont.) Practical Concerns: Amazon Laws (Cont.)

• Colorado-style (Cont )

Colorado style (Cont.)



Solution

• Be aware of the states in which members of a controlled group

have physical presence and have adopted Colorado-style have physical presence and have adopted Colorado-style affiliate nexus laws

• Comply with notice requirements in states that have passed

such laws



Recent decision that may affect Colorado-style Amazon laws

• In October 2010, Amazon.com won a case in federal District

In October 2010, Amazon.com won a case in federal District Court in Washington State holding that the First Amendment prohibited North Carolina from requiring Amazon.com to turn

• ver lists of customer purchases.

79

• Amazon.com v. Lay, 2010 WL 4262266 (W.D. Wash. 2010).