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BREAKING NEWS: US Supreme Court Denies Cert in Direct Marketing Association v. Brohl

This morning, the US Supreme Court announced that it denied certiorari in Direct Marketing Association v. Brohl, which was on appeal from the US Court of Appeals for the Tenth Circuit. The denied petitions were filed this fall by both the Direct Marketing Association (DMA) and Colorado, with the Colorado cross-petition explicitly asking the Court to broadly reconsider Quill. In light of this, many viewed this case a potential vehicle to judicially overturn the Quill physical presence standard. Practice Note:  Going forward, the Tenth Circuit decision upholding the constitutionality of Colorado’s notice and reporting law stands, and is binding in the Tenth Circuit (which includes Wyoming, Utah, New Mexico, Kansas and Oklahoma as well). While this development puts an end to this particular kill-Quill movement, there are a number of other challenges in the pipeline that continue to move forward. In particular, the Ohio Supreme Court recently decided that the...

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Digital Tax Update – Local Edition

After the highly publicized administrative lease transaction and amusement tax expansions in Chicago last year, more cities around the country are taking steps to impose transaction taxes on the sale or rental of digital content. Unlike tax expansion efforts at the state level (such as the law recently passed in Pennsylvania), which have almost all been tackled legislatively, the local governments are addressing the issue without clear legislative authority by issuing administrative guidance and taking aggressive positions on audit. As the local tax threat facing digital providers turns from an isolated incident to a nationwide trend, we wanted to highlight some of the more significant local tax developments currently on our radar. California This summer, a coalition of approximately 40 California cities hired a law firm to draft an administrative ruling that would expand their Utility Users Tax (UUT) on video programming services (i.e., basic and premium...

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Alabama Issues Remote Sellers Use Tax Assessments, Newegg Inc. Appeals

Ever since Alabama’s new economic nexus regulation went into effect, litigation over its constitutionality has been expected given that Alabama Commissioner Julie Magee and Governor Bentley said as much when announcing it (Rule 810-6-2-.90.03, effective January 1, 2016).  It appears that they finally got their wish. On June 8, 2016, Newegg Inc. (Newegg) filed a Notice of Appeal in the Alabama Tax Tribunal challenging the Alabama Department of Revenue (DOR) Notice of Final Assessment of Sellers Use Tax (Assessment) that was entered on May 12, 2016. The Assessment is for seller’s use tax, interest and penalties for the months of January and February 2016 (the Assessment Period), which represent the first two months the new regulation was in effect. The Alabama litigation comes on the heels of the litigation in South Dakota, which also involves Newegg and other retailers. Although the critical issue in both is whether economic nexus is constitutional, given that...

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Unclaimed Property Hunger Games: States Seek Supreme Court Review in ‘Official Check’ Dispute

Background As detailed in our blog last month, MoneyGram Payment Systems, Inc. (MoneyGram) is stuck in between a rock and a hard place as states continue to duel with Delaware over the proper classification of (and priority rules applicable to) MoneyGram’s escheat liability for uncashed “official checks.”  The dispute hinges on whether the official checks are properly classified as third-party bank checks (as Delaware directed MoneyGram to remit them as) or are more similar to “money orders” (as alleged by Pennsylvania, Wisconsin and numerous other states participating in a recent audit of the official checks by third-party auditor TSG). If classified as third-party bank checks, the official checks would be subject to the federal common law priority rules set forth in Texas v. New Jersey, 379 U.S. 674 (1965) and escheat to MoneyGram’s state of incorporation (Delaware) since the company’s books and records do not indicate the apparent owner’s last known...

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Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

Last Friday, the Alabama Court of Civil Appeals handed the Department of Revenue (Department) a significant loss in their continued attempt to tax non-enumerated services and tangible property provided in conjunction with those services under the sales tax.  See State Dep't of Revenue v. Omni Studio, LLC, No. 2140889 (Ala. Civ. App. Apr. 29, 2016).  Specifically, the appellate court affirmed the taxpayer’s motion for summary judgment granted by the trial court, which set aside the Department’s assessment on the basis that photographs provided by a photography studio are merely incidental to the nontaxable photography services provided by the studio.  While the prospective effect of the holding in the photography context is unclear due to recent amendments to the photography regulation (effective January 4, 2016), the case is significant in that it strengthens the “incidental to service” (or “true object”) precedent in Alabama and should be seen as a rebuke to...

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Viral Marketers Beware – In Alabama, Sales Tax Nexus Created for Out-of-State Bookseller Even Though In-State Teachers Not Acting on Behalf of Seller

After a quarter of a century, the school book nexus cases continue to proliferate, delight and mystify.  The latest installment in the saga is from Alabama.  Scholastic Book Clubs, Inc. 2931 v. State Of Alabama Department Of Revenue, Ala. Tax Tribunal, Dkt. No. S. 14-374 (March 25, 2016).  Like the other cases, the question addressed is whether a vendor with no property or employees in the state nevertheless has nexus for sales tax collection purposes because of the activities of unrelated, and uncompensated, teachers in the state.  Like all of the other cases, these teachers received unsolicited catalogs from the vendor and could either discard the materials or distribute them to their students.  Like all of the other cases, if a teacher elected to distribute the materials, the teacher collected completed order forms and payments from the students and mailed the order and payments to the vendor.   Like all of the other cases, the teacher distributed the...

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Alabama Legislature Rejects (Yet Another) Attempted Digital Tax Expansion

Last month, a much-anticipated bill drafted by the Alabama Department of Revenue (Department) was introduced in the Alabama Senate that would have expanded the definition of tangible personal property to include “digital goods.”  See Senate Bill 242 (introduced February 16, 2016).  Fortunately, the Senate Finance and Taxation Education Committee (Committee) rejected the bill on March 9, 2016, after hearing testimony from Assistant Department Counsel Christy Edwards and extensively questioning her on the bill’s content and motives.  Notably, the Department continues to take aggressive positions in an effort to tax digital goods and services, without the requisite statutory or legislative approval to back it up. Background On February 28 2015, the Department proposed an amendment to Regulation 810-6-5-.09, which would have amended the rental tax on tangible personal property to include “digital transmissions” (broadly defined to include digital content such as...

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Financial Statement Countdown for Remote Sellers Selling into Alabama

Remote sellers making sales into Alabama have until January 1, 2016, to begin collecting sales tax regardless of their physical presence in the state or consider whether there is any impact on financial statement issues as a result of non-collection. This summer, the Alabama Department of Revenue issued a surprising new regulation, § 810-6-2-.90.03. This rule specifically provides that a remote seller with more than $250,000 of sales into the state that also meets the provisions of the “doing business” statute must register for a license and collect and remit sales/use tax to the state. Notably, the list of activities that are considered “doing business” includes solicitation of sales using cable television advertising; substantial solicitation of sales plus benefitting from any banking; financing; debt collection; telecommunication; or marketing activities occurring in this state; any contact with the state sufficient to allow Alabama to impose a sales and...

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Arizona ALJ: Remote Provider of Subscription Research Service is the Lessor of Tangible Personal Property

In a curious decision out of Arizona, an Administrative Law Judge (ALJ) found an out-of-state provider of online research services was properly assessed transaction privilege tax (TPT, Arizona’s substitute for a sales tax) based on the logic that the provider was renting tangible personal property to in-state customers.  The Office of Administrative Hearings (OAH) decision, No. 14C-201400197S-REV, available here, should be unsettling for all remote providers of subscription-based services with customers in Arizona.  This decision offers an example of the continued push by states to administratively expand the tax base to include nontaxable digital services.  Many states, like Arizona, do so by considering remote access to digital goods and services to be tangible personal property, as defined by statutes that are decades old. Facts The taxpayer was an out-of-state IT research firm offering internally-produced proprietary research and data compilation content...

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A Very Scary Time of the Year: MTC Joint Audit Selection

With both Halloween and the Multistate Tax Commission (MTC) Income Tax Audit selection nearing, taxpayers should prepare themselves for the possibility of being spooked in the near future.  On Thursday, October 30, from 2-4 pm EST, the MTC Audit Committee—including representatives from the 22 states participating in the upcoming round of joint income tax audits—will be holding a teleconference that will begin with a public comment period.  Because of the inevitable disclosure of confidential taxpayer information, the bulk of this meeting—including selecting the various companies to audit—will take place during the second half of the agenda and be closed to the general public.  Just because a company has completed an audit in the past does not mean this season will be all treats.  The authors have noticed that companies previously audited by the MTC can remain on the list of targets and are often repeat selections. Unique Complexities The MTC audit process is...

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