physical presence Archives

physical presence

Finishing SALT: April State Focus & March Wrap-Up

by McDermott Will & Emery | Apr 5, 2018 | Nationwide Importance, Nexus, South Dakota, Tax Base

A Grain of SALT: April State Focus – South Dakota

On April 17, the United States Supreme Court will hear oral argument in South Dakota’s case challenging the Court’s physical presence requirement for sales tax nexus. South Dakota v. Wayfair, Docket 17-494.

50 years ago, in National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), the Supreme Court held that the Due Process and Commerce Clauses of the United States Constitution barred states from requiring remote retailers with no physical presence in a State to collect and remit sales tax. In 1992, the Court affirmed its prior ruling under the Commerce Clause. Quill v. North Dakota, 504 U.S. 298 (1992).

Quill has been at the center of state tax nexus controversy since the time of its issuance, as states have worked to restrict, and taxpayers have worked to expand the scope of the ruling. States and taxpayers have been continually tied up in disputes regarding the meaning of “physical presence” sufficient to trigger nexus. Concerned about the rapid growth of digital commerce, states have advanced increasingly aggressive theories of “physical presence” in an attempt to stem the loss of sales tax revenues from internet sales. Taxpayers, on the other hand, repeatedly have sought to apply the physical presence nexus standard to other types of taxes, principally income tax. Until South Dakota v. Wayfair, the Supreme Court declined to accept review of any case seeking further guidance with respect to the physical presence nexus standard. (more…)

House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 24, 2017 | Audits, Constitutional Issues, Income Tax, Local Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

The No Regulation Without Representation Act of 2017 (NRWRA) is scheduled for a hearing before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Tuesday, July 25 at 10:00 am EDT in 2141 Rayburn House Office Building. The bill was introduced by Congressman Jim Sensenbrenner (R-WI) last month with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in more detail below, the bill would codify the Bellas Hess “physical presence” requirement upheld by the US Supreme Court in Quill and make that requirement applicable to sales, use and other similar transactional taxes, notice and reporting requirements, net income taxes and other business activity taxes. Extending the concept to an area far beyond state taxation, the bill would also require the same physical presence for a state or locality to regulate the out-of-state production, manufacturing or post-sale disposal of any good or service sold to locations within its jurisdictional borders.

In the last Congress, the Business Activity Tax Simplification Act of 2015 (BATSA) would have codified a physical presence requirement in the context of business activity taxes (e.g., net income and gross receipts taxes). However, the scope of NRWRA’s limitations on interstate regulation and tax differs from the standard set forth in BATSA. Specifically, under BATSA, assigning an employee to a state constitutes physical presence, whereas under NRWRA a company does not have physical presence until it employs more than two employees in the state (or a single employee if he or she is in the state and provides design, installation or repair services or “substantially assists” in establishing or maintaining a market). Under NRWRA, activities related to the potential or actual purchase of goods or services in the state or locality are not a physical presence if the final decision to purchase is made outside of the jurisdiction. (more…)

BREAKING NEWS: Expanded “Physical Presence” Codification Bill Introduced in House

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 13, 2017 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

On, June 12, 2017, the No Regulation Without Representation Act of 2017 was introduced by Congressman Jim Sensenbrenner (R-WI) with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in detail below, the scope and applicability of the “physical presence” requirement in the 2017 bill is significantly broader than the first iteration of the bill that was introduced last year. Not only does the bill expand the physical presence rule to all taxes, it expands the rule to all regulations.

2016 Bill

In July 2016, Congressman Sensenbrenner introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives. The bill provided that states and localities could not: (1) obligate a person to collect a sales, use or similar tax; (2) obligate a person to report sales; (3) assess a tax on a person; or (4) treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed. “Similar tax” meant a tax that is imposed on the sale or use of a product or service.

Under the 2016 bill, persons would have a physical presence only if the person: (1) owns or leases real or tangible personal property (other than software) 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 three or more employees for any purpose. The bill provided that “physical presence” did not include the following: (1) click-through referral agreements with in-state persons who receive commissions for referring customers to the seller; (2) presence for less than 15 days in a taxable year; (3) product delivery provided by a common carrier; or (4) internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

The bill did not define the term “seller,” but did provide that “seller” did not include a: (1) marketplace provider (specifically defined); (2) referrer (specifically defined); (3) carrier, in which the seller does not have an ownership interest, providing transportation or delivery of tangible personal property; or (4) credit card issuer, transaction billing processor or other financial intermediary. Under the 2016 bill, persons not considered “sellers” (e.g., marketplace providers) were protected as well because the bill provided that a state may not impose a collection or reporting obligation or assess tax on “any person other than a purchaser or seller having a physical presence in the State.”

2017 Bill

The scope of the 2017 bill is significantly broader than the bill introduced in 2016 and would require a person to have “physical presence” in a state before the state can “tax or regulate [the] person’s activity in interstate commerce.” (emphasis added) The new bill applies the “physical presence” requirement to sales and [...]

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BREAKING NEWS: No Physical Presence Required for Ohio CAT Imposition

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Nov 17, 2016 | Constitutional Issues, Income Tax, Nationwide Importance, Nexus, Ohio, Sales Tax

Today, the Ohio Supreme Court issued its much-anticipated slip opinions in the three companion cases challenging Ohio’s Commercial Activity Tax (CAT) economic nexus standard. See Crutchfield Corp. v. Testa, Slip Op. No. 2016-Ohio-7760; Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762; and Mason Cos., Inc. v. Testa, Slip Op. No. 2016-Ohio-7768.

In ruling 5-2 in favor of the state, the Ohio Supreme Court first held that physical presence is not a necessary condition for imposing the CAT because the CAT’s $500,000 sales-receipts threshold is adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial under the dormant Commerce Clause. In reaching this conclusion, the court specifically stated that “[o]ur reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT.” (emphasis in original) Note that the court held this was the case regardless of whether the business-privilege tax is measured by income or receipts. In rebuking the taxpayer’s argument that Tyler Pipe affirmatively required some physical presence in the taxing state, the court held that physical presence is a sufficient (but not necessary) condition for imposing a business-privilege tax. See our prior blog on the oral argument for a more detailed description of the Tyler Pipe argument.

Second, the Ohio high court viewed the burdens imposed by the CAT on interstate commerce as not clearly excessive in relation to Ohio’s legitimate interest in imposing the CAT evenhandedly on sales receipts of in-state and out-of-state sellers. Citing these two bases, the Ohio Supreme Court affirmed the Board of Tax Appeals’ (BTA) decisions affirming the CAT assessments against the three appellants. The dissenting opinion viewed Quill as the proper standard for the Ohio CAT, and would have remanded the cases to the BTA for a determination of whether the taxpayer had physical presence.

Practice Note:

These companion cases were viewed by many as a potential vehicle to seek review of the continued viability of the Quill physical presence requirement (as Justice Kennedy called for in his widely-cited DMA concurrence last year). However, the narrow scope of the Ohio Supreme Court’s decision makes it difficult for this case to become the vehicle for the US Supreme Court to review Quill’s continuing viability for sales and use tax nexus.

BREAKING NEWS: House Passes Mobile Workforce State Income Tax Simplification Act

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Sep 21, 2016 | Income Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Moments ago, the United States House of Representatives (House) passed the Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) by voice vote. The Act will now be delivered to the United States Senate (Senate) for introduction and referral to committee for consideration. While the Senate Committee on Finance has not advanced a companion bill (S. 386) introduced by Senators John Thune (R-SD) and Sherrod Brown (D-OH) in February 2015, the bill currently touts 45 co-sponsors.

Background

The Mobile Workforce Act that passed today was introduced in May 2015 by Representatives Mike Bishop (R-MI) and Hank Johnson (D-GA). As highlighted in our prior coverage, the bill advanced out of the House Judiciary Committee in June 2015 by a vote 23-4. This legislation has been introduced in the House by each Congress since it was first introduced in 2006 by the 109th. While the legislation has seen some degree of success in the House, it has yet to advance beyond the Senate Committee on Finance. Notably, in May 2012, a prior version of the Act was passed in the House, but the Senate Committee on Finance did not take it up for consideration.

The Mobile Workforce Act

While the Mobile Workforce Act has been tweaked over the years, its underlying objective has largely remained the same—to providing a workable, national framework for the administration of, and compliance with, the states’ incongruent withholding and nonresident income tax payment laws. The version of the Act passed by the House today establishes a thirty-day safe harbor for traveling employees from nonresident state personal income taxes, and greatly reduces and simplifies the withholding and reporting burdens and related costs to their employers. Specifically, an employee working in a nonresident state for thirty or fewer days would not pay personal income tax to the nonresident state. Instead, the employee would remain fully taxable in its resident state on these earnings.

Under the Act, employers would not be required to withhold taxes in the nonresident state for employees whose travel falls at or below the thirty-day threshold in the state. In making this determination, the Act allows employers to rely on an employee’s annual determination of the time they will spend working in a state, absent fraud or collusion by the employee. The definition of “employee” has the same meaning given to it by the state in which the employment duties are performed, subject to only a few exceptions (including professional athletes, professional entertainers, and public figures who are persons of prominence who perform services for wages or other remuneration on a per-event basis).

As passed today, the “Act shall take effect on January 1 of the [second] year that begins after the date of the enactment of this Act” and retroactive application is expressly prohibited. Practically speaking, this means that the absolute earliest the Act could take effect is January 1, 2018 (assuming the Senate [...]

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BREAKING NEWS: Discussion Draft of Online Sales Simplification Act of 2016 Released

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Aug 25, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Today, the Chairman of the House Judiciary Committee, Rep. Goodlatte from Virginia, released the long-anticipated discussion draft of the Online Sales Simplification Act of 2016. Highlights of the bill include:

The bill implements the Chairman’s much-discussed ‘hybrid-origin’ approach.

The bill removes the Quill physical presence requirements for sales tax collection obligations under certain circumstances.

States may impose sales tax on remote sales IF the state is the origin state and it participates in a statutory clearinghouse AND the tax uses the origin state base and the destination state rate for participating states (the origin state rate is used if the destination state does not participate in the clearinghouse).

A remote seller will only have to remit the tax to its origin state for all remote sales.

A destination state may only have one statewide rate for remote sales.

Only the origin state may audit a seller for remote sales.

States that do not participate in the clearinghouse have significant restrictions on the ability to extract the tax from the remote seller.

Below is a more in-depth discussion of the intricacies of the bill.

(more…)

Breaking News: Physical Presence Requirement Bill Introduced in Congress

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 15, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Yesterday, Congressman Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives (House). The bill would codify the physical presence requirement established by the US Supreme Court in Quill. The bill would specifically define physical presence, creating a de minimis threshold, and would significantly affect existing state efforts to expand the definition of physical presence and overturn Quill.

Not only would the bill preempt the ‘nexus expansion’ laws, such as click-through nexus provisions, affiliate nexus provisions, reporting requirements and marketplace collection bills, but it would likely halt the South Dakota and Alabama (and other state litigation) specifically designed to overturn Quill. It would also move all future litigation on this issue to federal courts.

The bill would be effective as of January 1, 2017. The bill was referred to the House Committee on the Judiciary, which Rep. Sensenbrenner is a sitting member of (and former Chairman).

Summary

The bill defines “seller”, and provides that states and localities may not: (1) obligate a person to collect a sales, use or similar tax; (2) obligate a person to report sales; (3) assess a tax on a person; or (4) treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

Persons have a 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 three or more employees for any purpose.

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No Surprises in Ohio CAT Nexus Oral Argument

by Diann Smith and Stephen P. Kranz | May 4, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Ohio, Sales Tax, Transaction Taxes

Oral argument before the Ohio Supreme Court took place on May 3 in the three cases challenging Ohio’s Commercial Activity Tax (CAT) nexus standard. Crutchfield, Inc. v. Testa, Case No. 2015-0386; Mason Cos. Inc. v. Testa, Case No. 2015-0794; Newegg, Inc. v. Testa, Case No. 2015-0483. Ohio imposes its CAT on a business that has more than $500,000 in annual gross receipts in the state, even if the business has no physical presence in the state. These three taxpayers have challenged this standard as violating the Commerce Clause substantial nexus test.

The oral argument in the cases proceeded as expected. The majority of the time for both parties was taken up by questions from the bench. Several judges quizzed the taxpayers’ counsel about the assertion that no business was conducted in Ohio. The judges focused on activities such as products being received by customers in Ohio and software being placed on customers’ computers in Ohio to facilitate ordering or to track customer activity in Ohio. The taxpayers’ counsel vigorously disagreed with this construction of the facts – noting that whatever happened in Ohio, all of the taxpayers’ actions occurred elsewhere. He stated that the activities called out by the judges were no different than receiving and reviewing a catalog in the state.

The taxpayers’ counsel repeatedly cited to Tyler Pipe as the controlling law in this case – noting that before a state could impose a tax on a business, that business had to do something in the taxing state (or have something done on its behalf) that helped it establish and maintain a market in the state. According to the taxpayers’ counsel, it was not enough that a market exists in the taxing state; the taxpayer had to be doing something in the taxing state. He asserted that the taxpayer conducted no business activities in the state and thus Tyler Pipe prevented the state from imposing the CAT on them. This became the taxpayers’ mantra throughout the argument. (more…)

House Judiciary Committee Approves Three State Tax Bills

by McDermott Will & Emery, Arthur R. Rosen, Eric D. Carstens and Stephen P. Kranz | Jun 18, 2015 | Constitutional Issues, Income Tax, Local Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Yesterday, on June 17, 2015, three state tax bills were favorably reported to the United States House of Representatives (House) by the House Judiciary Committee (House Judiciary) after considering each during a half-day markup. The bills that were advanced included: (1) the Mobile Workforce State Income Tax Simplification Act (Mobile Workforce, H.R. 2315); (2) the Digital Goods and Services Tax Fairness Act (DGSTFA, H.R. 1643); and (3) the Business Activity Tax Simplification Act (BATSA, H.R. 2584).

Mobile Workforce State Income Tax Simplification Act

The Mobile Workforce bill was the first considered and seeks to establish a clear, uniform framework for when states may tax non-resident employees that travel for work. As advanced, the bill generally allows states to impose income tax compliance burdens on non-resident individuals only when the non-resident works in a state other than their state of residence for more than 30 days in a year. The bill also prevents those states from imposing a withholding requirement on employers for wages paid to such employees. Three proposed amendments seeking to limit the adverse revenue impact to New York were discussed and rejected. The Mobile Workforce bill was then favorably reported to the House by a vote of 23-4.

Digital Goods and Services Tax Fairness Act

DGSTFA would implement a uniform sourcing framework for states and localities seeking to tax digital goods and services. In doing so, the bill prevents any state or locality from imposing multiple or discriminatory taxes. Of the three pieces of legislation considered yesterday, only the DGSTFA was amended. The amendment, offered by the bill’s lead sponsor Representative Lamar Smith, was technical in nature and did not change the basic protections the bill would provide. At the markup, Chairman Goodlatte noted that the National Governors Association (NGA), which had previously voiced objections, was no longer opposed to the legislation after the revisions—though the NGA testimony indicated that the organization could not support the legislation without addressing the remote seller sales tax nexus issue.

The first technical changes in the adopted amendment were to the definitions of delivered or transferred electronically and provided electronically. The amendment added the term digital good and digital service after each respective term of art to clarify that digital goods are delivered or transferred electronically, whereas digital services are provided electronically. The second technical change was to the definition of digital good. In modifying the term, the amendment clarifies that streaming and other similar digital transmissions that do not “result in the delivery to the customer of a complete copy of such software or other good, with the right to use permanently or for a specified period” are not digital goods and would instead fall under the definition of a digital service.

Business Activity Tax Simplification Act

BATSA would codify the prerequisite of physical presence for a state to impose a direct tax on a non-resident business. BATSA would modernize the existing federal protection against state income taxation offered under P.L. 86-272 to include solicitation for sales of intangible property and services [...]

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Remote Transactions Parity Act Introduced in the U.S. House

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 15, 2015 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Today, Representative Jason Chaffetz introduced H.R. 2775, the Remote Transactions Parity Act of 2015 (RTPA), in the United States House of Representatives (House).

The RTPA addresses the Internet sales tax issue using the structure of the Marketplace Fairness Act (MFA), which passed the Senate in 2013 and was re-introduced earlier this year. Although the RTPA retains many of the features of the MFA, it adds protections for remote sellers and certified software providers.

MFA Authorization Framework Retained

Like the MFA, the RTPA creates two paths for states to impose sales and use taxes on remote sellers. Through the first path, states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA) are authorized to impose sales and use tax collection requirements on remote sellers. Under the second path, a state that is not a member state under the SSTUA would also be authorized to collect and remit sales and use taxes on remote transactions if it implements certain simplification requirements and protections for remote sellers and certified software providers. Many of these are carried over from the MFA, notably: (1) destination sourcing for interstate transactions; (2) a single entity for administration of sales and use tax; (3) a single audit of remote sellers per state; (4) a single return per state; (5) uniform tax base for all state and local sales taxes within the state; and (6) relief for errors, including remote sellers being relieved of errors made by a certified software provider or the state itself, and certified software providers being relieved of errors made by a remote seller or the state itself. Like the MFA, the RTPA would be effective one year from enactment, but not during the period from October through December in the year following enactment.

Changes

The RTPA contains several notable differences from the MFA, discussed below.

Small Seller Exception

Under the MFA, there is a fixed exception for small sellers and states are not authorized to impose a sales and use tax on small sellers, defined as remote sellers making sales of $1 million or less.

Under the RTPA, the small seller exception starts off larger, and subsequently phased out. In the first year, the exception applies for sellers making sales of $10 million or less. In the second and third year, the threshold is $5 million and $1 million, respectively. The exception goes away in the fourth year. Furthermore, under the RTPA sellers utilizing an electronic marketplace are not considered small sellers and are not entitled to the exception, no matter the year.

Protections to Sellers and Certified Software Providers

The RTPA provides additional protections for remote sellers and certified software providers. The RTPA contains a mechanism to make sure that a state is not authorized to impose a sales and use tax collection requirement on remote sellers until it has certified multiple software providers, and those providers are certified in all other states seeking to impose authorization requirements. This is to ensure that a remote seller can [...]

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