The Illinois Department of Revenue (Department) announced that it will grant abatement of late filing penalties for taxpayers that file their Illinois business income tax returns on or before November 15 and request penalty waivers for reasonable cause. The Department stated that it will waive late penalties due to the “complexity” of recent federal tax reform and possible taxpayer challenges in meeting the October 15 extended filing deadline for federal and state purposes.
Today, US Senators John Thune (R-SD) and Ron Wyden (D-OR) filed the Digital Goods and Services Tax Fairness Act of 2018 (S.3581) for reintroduction in the United States Senate. A companion version is expected to be reintroduced tomorrow in the House of Representatives by Representatives Lamar Smith (R-TX) and Steve Cohen (D-TN). This bill, if enacted, would establish a national framework for how states apply their sales and use tax systems to sales and uses of digital goods and digital services. The bill would resolve current uncertainty regarding which state has the right to tax certain sales and whether a state has the right to tax the sale of a digital good or digital service. The bill also would establish uniform, destination-based, sourcing rules for sales of such products and services.
Sales of digital goods and services are highly mobile transactions. A customer could have a billing address in one state and download a digital good from the seller’s server in another state while the customer is traveling in a third state. Whether such a transaction has sufficient attributes in any one of the three states to give rise to the right to tax the transaction by any one of them is open to question. Assuming one of the states has the right to tax the sale, there is a question as to which state that might be. The bill would clearly specify that one of the states has the right to tax the sale and clearly delineate which state has such taxing rights. Continue Reading Federal Digital Goods Bill: Rules of the Road for State Sales and Use Taxation of Digital Goods and Services
Top Hits You May Have Missed
Speaking Engagements in October:
October 1, 2018: Steve Kranz spoke at the Institute for Professionals in Taxation (IPT) 2018 Sales & Use Tax Symposium in Indian Wells, CA regarding Preparing for and Winning Litigation of Sales Tax Cases at the Administrative, Trial and Appellate Levels.
October 5, 2018: Peter Faber spoke at the ABA Tax Section in Atlanta, GA about the efforts by the states to circumvent the federal limitations on deducting state taxes.
October 9, 2018: Peter Faber spoke at the NYC Department of Finance Seminar in New York, NY about the implications of federal tax reform for the city.
October 10, 2018: Peter Faber spoke at the PLI Conference on Mergers and Acquisitions in New York, NY about the aspects of state taxation of mergers and acquisitions.
October 17, 2018: Peter Faber is speaking at the Hartman State and Local Tax Conference in Nashville, TN about the state taxation of mergers and acquisitions.
October 19, 2018: Steve Kranz is speaking at the Paul J. Hartman State and Local Tax Forum in Nashville, TN regarding Top Ten Sales & Use Tax Developments (that are not Wayfair).
October 23, 2018: Steve Kranz is delivering the keynote presentation at the Pennsylvania Institute of CPAs (PICPA) Multistate Tax Conference in Philadelphia, PA regarding SALT Scoreboard: A Year in Review.
October 24, 2018: Peter Faber is speaking at the Council on State Taxation (COST) 49th Annual Meeting in Phoenix, AZ on the state implications of international tax provisions of federal tax legislation.
October 24, 2018: Steve Kranz is speaking at the Council on State Taxation (COST) 49th Annual Meeting in Phoenix, AZ regarding Facilitating Change – The New World of Marketplace Platform Collection.
October 26, 2018: Peter Faber is speaking at the Temple University Symposium on Taxpayer Rights in Philadelphia, PA about the state taxpayer bill of rights laws.
October 27, 2018: Troy Van Dongen will be speaking about the various ways that states have approached the issue around the legalization of cannabis at the National Association of State Bar Tax Sections Conference, in San Francisco, CA.
October 30, 2018: Peter Faber is presenting at the Philadelphia Tax Conference in Philadelphia, PA regarding current developments in state and local taxes.
In June 2018, just before the US Supreme Court ruling in Wayfair, Illinois enacted an economic nexus standard modeled after South Dakota’s law (see our prior coverage). The new Illinois standard takes effect on October 1, 2018. On September 11, the Illinois Department of Revenue (Department) issued an emergency rule (Regulation 150.803), together with other guidance found on its website, intended to assist remote retailers with compliance with the new law.
The Regulation was effective immediately. Retailers should note the following key features of the Regulation. Continue Reading Illinois Department of Revenue Issues Post-Wayfair Guidance Implementing October 1 Economic Nexus Law
A Grain of SALT: September State Focus – New Hampshire
With the road paved in the US Supreme Court’s now famous South Dakota v. Wayfair Inc. decision, many states have begun releasing remote-seller sales tax collection guidance. Interestingly, the state of New Hampshire has joined the fray as well even though it does not impose a state sales tax. New Hampshire’s efforts are specifically directed at preventing out-of-state taxing authorities from imposing remote-seller sales tax collection obligations on New Hampshire businesses located solely in the state. These efforts come via a bill sponsored by Rep. Jess Edwards (R) and Rep. Kevin Scully (R) and planned to be introduced in early 2019. The bill would make sales and use tax collection obligations on New Hampshire remote-sellers by out-of-state jurisdictions unlawful. According to Rep. Edwards, this bill is being filed because “we do not recognize any other taxing jurisdiction other than New Hampshire to impose a tax obligation on our businesses.”
Top Hits You May Have Missed
Looking Forward to September
September 19, 2018: Steve Kranz and Eric Carstens are speaking at the Tax Executives Institute Seattle Chapter Meeting regarding the South Dakota v. Wayfair Supreme Court decision in Seattle, WA.
September 19, 2018: Steve Kranz and Katherine Quinn are speaking at the Tax Executives Institute Seattle Chapter Meeting regarding State Tax After (federal tax) Reform and will also cover key captive insurance company developments in Seattle, WA.
September 19, 2018: Charles Moll is speaking at the Tax Executives Institute Seattle Chapter Meeting regarding California SALT developments in Seattle, WA.
September 20, 2018: Catherine Battin is presenting “So Wayfair Happened—What’s Next?” at the Taxpayers’ Federation of Illinois’ Annual Conference in Rolling Meadows, IL.
September 20, 2018: Mary Kay Martire is presenting “Audits and Beyond—Tips, Traps, and War Stories” at the Taxpayers’ Federation of Illinois’ Annual Conference in Rolling Meadows, IL.
September 25, 2018: Peter Faber, Alysse McLoughlin and Mark Yopp are presenting “New Jersey Corporate Business Tax Overhaul: What You Need to Know” and “A Discussion on the States’ Reaction to Wayfair” at the Tax Executives Institute, Inc. (TEI) New York Chapter – State and Local Tax Meeting in New York, NY.
Illinois Governor Bruce Rauner has until August 28 to sign or veto Senate Bill 1737, a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance.
If enacted, this new law would provide a substantially improved environment for Illinois-based companies looking for captive solutions.
The US House Committee on the Judiciary has scheduled a hearing for Tuesday, July 24 at 10:00 am EDT in 2141 Rayburn House Office Building. According to a press release circulated last night, the topic of the hearing will be “[e]xamining the Wayfair decision and its ramifications for consumers and small businesses.” According to comments made by House Judiciary Chairman Bob Goodlatte (R-VA) to Bloomberg Law, specific pending or former legislation will not be considered and instead the hearing will be informational and used to drive the committee’s next steps, if any.
The 8 witnesses that will be testifying at the hearing next week are listed below.
- Grover Norquist, Americans for Tax Reform President
- Chad White, Class-Tech-Cars, Inc. Owner
- Lary Sinewitz, BrandsMart Executive Vice President, on behalf of the National Retail Federation
- Bartlett Cleland, American Legislative Exchange Council General Counsel and Chief Strategy and Innovation Officer
- The Honorable Curt Bramble, National Conference of State Legislatures Past President
- Andrew Moylan, National Taxpayers Union Foundation Executive Vice President
- Joseph Crosby, MultiState Associates Incorporated Principal
- Andrew Pincus, Mayer Brown Partner
A live video feed of the hearing will be available here next Tuesday. The authors plan to attend the hearing in-person and will post a follow-up blog summarizing our thoughts shortly after the hearing concludes next Tuesday. Stay tuned!
Top June Hits You May Have Missed
Looking Forward to July
July 16, 2018: Alysse McLoughlin is presenting “Federal Tax Changes & Implications to States” at the Southeastern Association of Tax Administrators Conference in Nashville, TN.
July 18, 2018: Alysse McLoughlin is presenting on state and local tax considerations for the Tax Executives Webinar “Practical Tax Reform Implementation – What Corporate Tax Professionals Need to Know Now”.
July 23, 2018: Alysse McLoughlin is speaking on a state panel about the “State Reactions to Tax Reform” for the Tax Reform portion of the New York University Summer Institute in Taxation in New York, NY.
July 28, 2018: Stephen Kranz is speaking at the National Conference of State Legislatures (NCSL) SALT 2018 Legislative Summit in Los Angeles, CA, regarding state tax reform following on federal reform and next steps on the remote sales tax. He will present an overview of the South Dakota v. Wayfair Supreme Court oral arguments and decision.
The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.
Moments ago, the US Supreme Court issued its highly-anticipated decision in South Dakota v. Wayfair, Inc., et al., No. 17-494. The 5-4 opinion was authored by Justice Kennedy and concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992 in Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority.
Summary of Opinions
The majority opinion was authored by Justice Kennedy and was joined by Justices Thomas, Ginsburg, Alito and Gorsuch. In reaching the conclusion that the physical presence rule is an incorrect interpretation of the dormant Commerce Clause, the opinion states that the Quill physical presence rule: (1) is flawed on its own terms because it is not a necessary interpretation of the Complete Auto nexus requirement, creates market distortions and imposes an arbitrary and formalistic standard as opposed to the case-by-case analysis favored by Commerce Clause precedents; (2) is artificial in its entirety and not just at its edges; and (3) is an extraordinary imposition by the Judiciary. The majority went on to conclude that stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power, noting that “[i]t is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.” The majority noted that the South Dakota law “affords small merchants a reasonable degree of protection” and “other aspects of the Court’s [dormant] Commerce Clause doctrine can protect against any undue burden on interstate commerce.” The majority opinion specifically notes that “the potential for such issues to arise in some later case cannot justify an artificial, anachronistic rule that deprives States of vast revenues from major businesses.” Finally, the majority decision provides that in the absence of Quill and Bellas Hess, the first prong of Complete Auto simply asks whether the tax applies to an activity with substantial nexus with the taxing State and that here, “the nexus is clearly sufficient.” Specifically, the South Dakota law only applies to sellers that deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions, which “could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.” With respect to other principles in the Court’s dormant Commerce Clause doctrine that may invalid the South Dakota law, the majority held that “the Court need not resolve them here.” However, the majority opinion does note that South Dakota appears to have features built into its law that are “designed to prevent discrimination against or undue burdens upon interstate commerce” including: (1) a safe harbor for small sellers; (2) provisions that prevent a retroactive collection obligation; and (3) the fact that South Dakota is a member of the Streamlined Sales and Use Tax Agreement.
Justice Thomas and Justice Gorsuch both wrote a standalone concurring opinions. Justice Thomas acknowledged that he should have voted with Justice White in Quill to overturn Bellas Hess and Justice Gorsuch seemed to caution his concurrence should not be read as an agreement with all aspects of the dormant Commerce Clause (perhaps looking forward to future issues that may be before the Court).
Chief Justice Roberts wrote the dissenting opinion, which was joined by Justices Breyer, Sotomayor and Kagan. The dissent argues that any alteration to the physical presence rule should be undertaken by Congress and that departing from the doctrine of stare decisis is an exceptional action demanding special justification, which is even further heightened in the dormant Commerce Clause context. The dissenting opinion went on to note that the majority “breezily disregards the costs that its decision will impose on retailers” and that the “burden will fall disproportionately on small businesses” which they note is something Congress could fix as part of a legislative solution. The Chief Justice Robert’s dissent concludes that “I fear the Court today is compounding its past error by trying to fix it in a totally different era.”
Practice Note and Next Steps
Today’s opinion raises no shortage of questions that will be discussed and further evaluated over the coming weeks and months. One thing that is clear from the decision is that the Court is still concerned about potential undue burdens that state tax systems may impose on businesses, particularly small businesses. The Court appears to have concluded that South Dakota’s imposition does not run afoul of those concerns, however, the door is open as to whether other states’ tax systems would satisfy the new requirements. The Court repeatedly emphasized that South Dakota’s participation in the Streamlined Sales and Use Tax Agreement was an important factor in upholding the imposition of tax. The Court also cited South Dakota’s lack of retroactivity and a threshold as important factors as well.
States will obviously rejoice at the decision. Expect states to seek legislative and regulatory expansion of their “doing business” laws to align with the South Dakota v. Wayfair opinion, with significant activity in the next round of state legislative sessions.
The Court reiterated that Congress may act to address any of the concerns with the new standard. In fact, Justice Kennedy’s majority opinion acknowledges that “Congress may legislate to address these problems if it deems it necessary and fit to do so.” Although little progress has been made in Congress on this issue for some time, the landscape is now changed and that may result in pushing Congress to act.