Report from the frontlines – updates on the nexus … FROM THE FRONTLINES – UPDATES ON ... 504...

REPORT FROM THE FRONTLINES – UPDATES ON THE NEXUS BATTLES

Warren Townsend Senior Director of Specialty Tax Wal-Mart Stores, Inc. Bentonvil le, Arkansas [email protected]

Martin Eisenstein Senior Partner Brann & Isaacson Lewiston, Maine [email protected] See the Blog at: www.eyesonecomlaw.b logspot .com

IPT

ANN

UAL

CON

FER

ENCE

Stephen Kranz Partner McDermott Wil l & Emery LLP Washington, D.C. [email protected] See the Blog at: www.insidesalt .com

July 2, 2014

IPT 2014 ANNUAL CONFERENCE

OUTLINE

• The Quill/National Bellas Hess nexus principle

• State Efforts to Limit Quill • Litigation pre-2008 • Click Through Nexus Statutes • Reporting Statutes • Affiliate Nexus

• Marketplace Fairness Act • Proposed Alternatives

• Is Quill Dead?

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QUILL: 1992

• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

• Confirmed physical presence test from 1967 case, National Bellas Hess, under Commerce Clause.

• “Sharp distinction … between mail order company with [a physical presence in the taxing] state and those … who do no more than communicate with customers in the state by mail or common carrier as part of a general interstate business.”

• Stated that if change was warranted, it must be enacted by Congress.

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CHALLENGES TO QUILL IN THE LAST 20 YEARS

• State Litigation Efforts • Credit Card Processing: CA

• DMA v. Bennett, 1991 WL 317021 (E.D. Cal.), aff’d 9th Cir. 916 F.2d 1451 (1990), cert. denied, 500 U.S. 905 (1991).

• In-state servicing • MTC 95-1: Isaacson & Eisenstein: MTC Nexus Bulletin 95-

1 Goes Beyond Existing Law, State Tax Notes (1996). • Various state statutes. • No reported decisions.

• Affiliates: By Ownership • Bertoni & Eisenstein, Defending Against Affiliate Nexus in

Sales and Use Tax Collection Liability Cases, Journal of Multistate Taxation (March/April 1996).

• Case law • SFA Folio Collections, Inc. v. Tracy, 652 N.E.2d 693 (Ohio 1995). • Bloomingdales by Mail, Ltd. v. Com., Dept. of Revenue, 567 A.2d 773

(Pa. Commonw. Ct. 1989). 4


RECENT NEXUS STATE LEGISLATION

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CLICK THROUGH NEXUS LEGISLATION: THE FIRST WAVE

• 2008: Adoption of Click Through Nexus (“Web Affiliate“) Statutes • First statute in New York (June 2008)

• Rebuttable presumption of nexus if: • Retailer has agreements with NY residents (“web affiliates”) for referrals from the

affiliate’s website; • Retailer pays the affiliate a commission or other consideration for referrals; • Preceding four quarter sales from such referrals are greater than $10,000.

• Similar statutes in 2009 adopted in NC and RI (sales threshold in RI is $5,000).

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CLICK THROUGH NEXUS LEGISLATION: THE SECOND WAVE

• 2010-2011: • AR (NY type statute) • CT, IL (not NY type statute; per se finding of nexus

and also the affiliate to create nexus must be “a person located in this state.”)

• 2012 • PA (by regulation)(delayed effective date of

9/1/12)(per se finding of nexus) • CA similar to NY law, although requires affiliate to

be “a person in this state” and encompasses other forms of advertising and also requires annual sales to CA of $1 million.

• GA (Similar to NY statute, but $50,000 threshold)

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• Post-Amazon Supreme Court of New York decision: KS, ME, MO, and MN (similar to NY except ME states affiliate is a “person within the state.”)

• Post-Amazon NY Court of Appeals decision: • Travelocity.com et al. v. Wyoming Department of Revenue,

2014 WY 43 (Apr. 3, 2014) (use of Internet affiliates creates nexus).

• Legislation introduced in several states along lines of NY statute: • Hawaii – HB1651 • Michigan – SB658/659 • Pennsylvania – HB1043 • South Carolina – SB870 • Tennessee – HB1537/SB2298

CLICK THROUGH NEXUS LEGISLATION: THE THIRD WAVE

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• All but CT, IL, and PA permit the retailer to overcome the presumption of nexus.

• New York safe harbor (TSB-M-08(3.1)S): • Contract Condition: Agreement between retailer and

New York resident whereby the resident covenants not to engage in any solicitation activities in New York that refer potential customers to the retailer, including: distributing flyers, coupons, newsletters and other printed promotional materials in New York; emailing from New York; verbal solicitations in New York; and initiating telephone solicitations from New York.

• Proof of Compliance Condition: Annual submission of non-solicitation certificate by affiliates.

CLICK THROUGH NEXUS LEGISLATION: OVERCOMING THE PRESUMPTION

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• Risks • Several states have not formally adopted the safe

harbor, but have statutory language that provides: “This presumption may be rebutted by proof that the resident with whom the retailer has an agreement did not engage in any solicitation in the State on behalf of the seller that would satisfy the nexus requirement of the United States Constitution . . .”

• Ambiguity in the protection: What if the affiliate doesn’t submit the certificate even though the affiliate contracted to do so?

CLICK THROUGH NEXUS LEGISLATION: OVERCOMING THE PRESUMPTION

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• Amazon.com and Overstock.com, Inc. v. New York Department of Taxation & Finance, 20 N.Y.S.3d 586 (N.Y. 2013). • Court held NY statute not unconstitutional on

its face. • Internet retailers having the opportunity to

demonstrate that affiliates did not engage in any solicitation in NY saved constitutionality.

• “No one disputes that a substantial nexus would be lacking if New York residents were merely engaged in passive advertisements on their websites.” Id. at 596.

AMAZON AND OVERSTOCK.COM - NEW YORK

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• Lower court finding that Illinois statute violates the Commerce Clause principle of Quill and the Internet Tax Freedom Act

• Distinction from NY statute: presumption is irrebuttable.

• Supreme Court of IL addresses only ITFA, not Commerce Clause. • Illinois statute violates the anti-discrimination

against internet commerce provision of ITFA. • Performance Marketing Ass’n v. Hamer, 2013 IL

114496.

PERFORMANCE MARKETING ASSOCIATION: ILLINOIS

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CURRENT STATE LEGISLATIVE THREATS: REPORTING REQUIREMENTS

• 2009-2013: Reporting States: • CO

• 3 types of notice/reporting for retailers not registered in state. • On website/in catalog • Annual statement to CO customers sent by first class mail • Annual report to CO Department of Revenue regarding CO

customers

• OK • SD • VT (hybrid) • KY

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LITIGATION: REJECTING THE STATES’ EFFORTS TO DO AN END-AROUND OF QUILL

• DMA Litigation in Colorado: • U.S. District Court issued an injunction prohibiting

enforcement of the statute as violating Quill and discriminating against interstate commerce.

• Tenth Circuit dismissed the case because of Tax Injunction Act. Direct Marketing Ass’n v. Brohl, 735 F.3d 904 (2013) • Cert. applied for.

• CO District Court issued a preliminary injunction on 2/18/14; statute discriminates against interstate commerce. Direct Marketing Association v. Huber, (CO. District Court 2/18/14)

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CURRENT STATE LEGISLATIVE THEORIES: AFFILIATE NEXUS

• Member of commonly controlled group of companies • E.g. CO, FL, OH, VA • CO and OH permit retailer to show that affiliate

does not solicit for retailer.

• Out of state retailer uses in-state affiliate to distribute goods or service products • E.g. TX

• Affiliate and retailer are in same line of business • E.g. CT, IL, and NE

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LESSONS LEARNED

• Quill remains good law, although New York type web affiliate statutes raise challenges.

• Nothing new in the latest wave of state legislation and court decisions. • No case has held that pure common

ownership or use of third parties to refer customers creates nexus. • Under current law, only the nexus of a third party

that acts on behalf of the retailer in the state will create nexus.

• States can’t do indirectly what they can’t do directly; i.e. reporting statutes.

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PROPOSED FEDERAL LEGISLATION: MARKETPLACE FAIRNESS ACT

• Marketplace Fairness Act [S.743/H.R.684], 113th Cong. (2013).

• Originally proposed in Senate and House in November 2011 by both Republicans and Democrats. • 2013 version introduced April 16, 2013. • Passed by the Senate May 6, 2013. • Referred to the House Committee on the Judiciary on

May 20, 2013.

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• Provides two alternatives for states that affirmatively choose to exercise the authority to impose tax on remote sales: • (1) SSUTA member states in the Agreement (so long as

the Agreement contains the Act's minimum simplification requirements and the state publishes its intent to collect tax with 90 days notice), or

• (2) Non-SSUTA member states in the Agreement that enact legislation to exercise authority to require collection and that maintain the minimum simplification requirements described below.

PROPOSED FEDERAL LEGISLATION: MARKETPLACE FAIRNESS ACT (CONT’D)

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• For non-member states, the bil l provides that enacting legislation can (a) specify the tax or taxes to which the authority to collect and minimum simplification requirements apply; and (b) the products and services subject to tax that are excluded from the authority to require collection of taxes under the Act.

• Small Seller Exception (Applies both SSUTA and non-SSUTA members states)

• The remote seller must have total remote sales in the United States exceeding $1,000,000. For purposes of determining total remote sales, contractual, license, or ownership (affiliated entities) are aggregated if IRC affiliate standards are satisfied or if the entity was created to avoid taxation.

• Sourcing

• Member states must comply with the Agreement’s destination-based sourcing provisions, while non-member states must source according to delivery destination.


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• Reported Benefits of the Act: • Provide liability relief for vendors and software

providers if liability results from errors of certified software provider or vendor, respectively.

• Taxability and rate information to be provided by each state.

• Free collection software required to be provided to vendors by each state.

• Certification of software providers. • Single return, central administration, and single audit

per state. • Uniform state and local tax base per state. • Uniform sourcing rules (basically to destination).

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Remote Sellers Concerns Include: There is no single state and local tax rate for each

state; each locality can provide its own rate Each state may provide its own software and each

business must pay its own costs to integrate the free software into its ordering, fulfillment and accounting systems. Not a single set of definitions of taxable and

exempt products and taxable sales price. Lack of common sales tax return, single audit

and administration among the states. Lack of judicial review for failure of state to

comply with requirements of MFA. Lack of adequate compensation for collection of

taxes.


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• November 2013: House Committee on the Judiciary Chair Robert Goodlatte published seven “Principles on Internet Sales Tax”:

• 1) Tax Relief • 2) Tech Neutrality • 3) No Regulation Without Representation • 4) Simplicity • 5) Tax Competition • 6) States’ Rights • 7) Privacy Rights


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• Hearing held on March 12, 2014 before the House Committee on the Judiciary: “Exploring Alternative Solutions on the Internet Sales Tax Issue” • Panelists:

• Stephen Kranz – Testified on the need for congressional action and warned of states acting on their own in its absence.

• Joe Crosby – Testified in favor of tax administration simplification to enable remote sellers to collect sales tax.

• Andrew Moylan – Proposed an origin-based sourcing regime. • Former U.S. Rep. Chris Cox – Testified in favor of a hybrid origin-

based sourcing regime. • James Sutton, Jr. – Advocated a sales tax reporting system. • William Moschella – Testified on the concept of allowing states

to prohibit sellers’ shipments into their states.

Video of the hearing can be found at: http://thomas.loc.gov/video/house-committee/hsju/44805950


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• Proposed by William Moschella. • This proposal would enact a federal law

pursuant to the Commerce Clause. • Law would prohibit “…shipment of goods

in violation of the sales tax laws of the state to which the goods are shipped.”

• Similar to what Webb-Kenyon Act did (intoxicating liquors).

ALLOW STATES TO PROHIBIT SHIPMENTS INTO THEIR STATES

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• Consumer Private Reporting • Requires remote sellers to provide sales information to

the states and to the purchasers. • Self-reporting of use tax.

• Reporting done on an aggregate basis through a federal database so private information would remain between seller and purchaser.

• Use approved software that helps vendor determine what is taxable in each state.

• Vendors report to a federal database that would combine sales information into a 1099 style format for each state and each purchaser.

• Purchaser would have information to file own use tax return.

• Purchaser would have right to reveal specifics of a purchase to show that it was not taxable.

REQUIRE REPORTING – NOT COLLECTION

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• Set federal standards for minimum information and standard format.

• Approved software vendors funded by the states. • Self-reporting companies would be reimbursed

for implementation costs. • States audit software companies’

compliance with individual state laws. • States could review coding process of self-

reporting sellers but not hold them liable for mistakes in taxability coding. • Could require approved third party software if

substantial non-compliance.

REQUIRE REPORTING – NOT COLLECTION (CONT’D)

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• Remote sellers apply for reimbursement of expenses for software upgrades to account for new reporting system – states fund the reimbursements.

• If remote seller found to have nexus – no liability for past periods if they reported under this system for those periods.

• Purchaser information accumulated based on several sources: federal tax ID number, credit card number or possibly by separate sales tax ID number by federal agency.

REQUIRE REPORTING – NOT COLLECTION (CONT’D)

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• Proposed by Andrew Moylan. • Collection of applicable sales tax based

on physical location of the seller. • Seller only accountable to the rules and

enforcement actions of the jurisdictions in which they are located.

ORIGIN-BASED SOURCING

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• Home Rule and Revenue Return Alternative Would: • Authorize Multistate Compact where participating

states would realize sales tax on purchases their residents make from remote sellers located in other Compact states.

• Sellers use the tax rates and rules of their “home jurisdictions.”

• Distribution of taxes received from out-of-state purchaser to the purchaser’s home state.

COLLECT AND REDISTRIBUTE (HYBRID ORIGIN SOURCING)

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• Compact member states would require their in-state sellers to collect and remit sales tax on sales to purchasers located in other Compact states.

• Federal legislation would only allow the Compact states to impose tax on sales made by sellers to purchasers in states where the seller has no physical presence. • Statutory physical presence standard would

prevent a state from attempting to impose sales tax collection responsibility based on advertising arrangements, commonly controlled groups, etc.

• Each state could choose whether or not to participate as a compact member.

COLLECT AND REDISTRIBUTE (HYBRID ORIGIN SOURCING) (CONT’D)

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• Remote Seller will collect and file returns in the “home jurisdiction” it designates.

• “Home jurisdiction” would be the Compact state in which the greatest number of employees work per payroll tax records. • Federal legislation could also describe

instances where the largest number of employees would not be the appropriate location and prescribe alternative methods.

• International Fuel Tax Agreement uses the “base jurisdiction” concept.


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• Once a seller in a Compact state designates its home jurisdiction, it will be required to collect sales tax on sales to residents of other Compact states where it has no physical presence. • Seller uses home jurisdiction rates and rules. • Seller only files in its home state. • Seller only subject to audit by its home state.

• Federal courts would be used to litigate cases from Compact states.

• Compact states would not impose additional tax liability beyond what is collected from the purchaser under the terms of the Compact. • Purchaser would not owe any additional use tax.


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• Legislation would require Compact states to adopt privacy and data security safeguards. • Legislation would require independent audits of

state data security practices. • Legislation would require states to

periodically send sales tax paid by out-of-state purchasers to where the purchasers reside. • Sellers in Compact states would be required to

include in their returns the aggregate amount of sales to purchasers from each state – but not the identities of the purchasers or the nature of their purchases.


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• Without Congressional action, states will proceed on their own, causing potentially confusing results and expensive litigation.

• In the 1980s, states banded together to form the National Bellas Hess Project, an attempt to overthrow the physical presence standard. • They ultimately failed in Quill.

• Now, states are imposing reporting and notice requirements, and enacting affiliate and web affiliate nexus statutes.

IS QUILL DEAD?

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CONTACT INFO

Warren Townsend Senior Director Specialty Tax Wal-Mart Stores, Inc. Bentonvil le, Arkansas [email protected] (479) 273-6433

Martin Eisenstein Partner Brann & Isaacson Lewiston, Maine [email protected] (207) 786-3566 See the Blog at: www.eyesonecomlaw.b logspot .com

Stephen Kranz Partner McDermott Wil l & Emery LLP Washington, D.C. [email protected] (202) 756-8180 See the Blog at: www.insidesalt .com

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QUESTIONS?

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Report from the frontlines – updates on the nexus … FROM THE FRONTLINES – UPDATES ON ... 504...

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