Many provisions of the House and Senate tax reform proposals would affect state and local tax regimes. SALT practitioners should monitor the progress of this legislation and consider contacting their state tax administrators and legislative bodies to voice their opinions.
On October 2, 2017, the State of South Dakota (State) filed its petition for a writ of certiorari with the United States Supreme Court (Court). A copy of the cert petition is available here and the case, South Dakota v. Wayfair, Inc. et al., is expected to be docketed on October 3, 2017. The State is asking the Court to overturn its physical presence standard used to determine whether an entity has substantial nexus under the dormant Commerce Clause. This comes only a few weeks after the South Dakota Supreme Court ruled against the State in favor of the online retailer defendants, citing the Court’s physical presence standard upheld in Quill on stare decisis grounds.
This development comes as no surprise to the state and local tax community, and begins what is likely to be one of the most closely watched cert petitions in years. Going forward, the online retailers have three options: (1) acquiesce that the Court should grant cert; (2) waive their right to file a response to the cert petition; or (3) file a brief in opposition. If the online retailers choose the third option, they will have 30 days from today (if the case is in fact docketed today) to file their brief in opposition. This deadline is subject to extensions, upon request (the first of which is always granted as a matter of right). We expect a number of groups to file amicus curiae briefs regarding this cert petition given the significance of the issue raised. If the online retailers do file a brief in opposition, the State will be given an opportunity to file a reply brief, rebutting the points made by the online retailers and reiterating the arguments made in the State’s cert petition. Unlike the cert petition and the brief in opposition, which must be filed with the Court under strict deadlines, the exact timing of the reply brief varies. As a general rule of thumb, a reply brief is usually filed approximately 10 days after filing of the brief in opposition.
While this dispute is a long way from being heard by the Court on the merits (if at all), the cert petition is a critical first step that will have implications to Congress, the courts, state legislatures, taxpayers, and revenue departments across the country. Stay tuned for more coverage of this cert petition and the developments that follow.
Yesterday, the South Dakota Supreme Court released its much-anticipated opinion in the Wayfair litigation, affirming a March 2017 trial court decision granting the remote retailer’s motion for summary judgment on the basis that the economic nexus law enacted in 2016 (SB 106) is unconstitutional and directly violates the US Supreme Court’s dormant Commerce Clause precedent in Quill Corp. v. North Dakota.
The South Dakota litigation remains at the front of the pack of a host of state court cases challenging similar state economic nexus laws across the United States. The expedited review (and decision) by the South Dakota Supreme Court here is significant, and puts the litigation well within the range of cases that would be decided by the end of the October 2017 Term (i.e., by July 2018), assuming cert is granted—which is by no means a guarantee. The state has 90 days to file a cert petition with the US Supreme Court, which can be extended upon request. Stay tuned, as this litigation is far from over and the sitting US Supreme Court will be tasked with deciding whether they will honor Justice Kennedy’s request to bring a case before the Court in DMA v. Brohl.
The full South Dakota Supreme Court opinion is available here.
On July 28, Circuit Judge Daniel Kubasiak dismissed the Complaint filed by the Illinois Retail Merchants Association and a group of retailers challenging the constitutionality of the Cook County, Illinois Sweetened Beverage Tax (Tax). A copy of the court’s Order is linked here (Order). The Order also dissolved the June 30 temporary restraining order which had halted the county’s imposition of the Tax, on which we have previously reported. In response to the Order, the county required Tax collection to begin on August 2. The county also announced that by September 20, retailers must remit a “floor tax” on the inventory of sweetened beverages in their possession as of August 1.
The Order rejected both of the constitutional arguments raised by the Complaint. The court held that Plaintiffs raised a good faith Illinois Uniformity Clause challenge, and thereby shifted the burden of proof to the county, because the Tax applied to pre-made, but not made-to-order sweetened beverages. The court went on to hold, however, that the county met its burden to justify this arbitrary tax classification by alleging that pre-made sweetened beverages were more widely available and therefore more likely to be purchased and consumed than made-to-order beverages (thus generating more tax revenues) and by arguing that imposing the Tax on made-to-order beverages would be administratively burdensome. The court then held that Plaintiffs had failed to meet their burden of establishing that the county’s justifications were insufficient in law or unsupported by the facts. According to the court, the “County has set forth a real and substantial difference between the people taxed, who purchase ready-to-drink, pre-made sweetened beverages, and those not taxed, who purchase on-demand, custom sweetened beverages.” (Order at 9.)
On August 9, 2017, the US Court of Appeals for the Third Circuit (Third Circuit), overruling the US District Court for the District of Delaware (District Court), allowed a claim by a holder seeking to prevent an unclaimed property audit by Delaware on due process grounds to proceed. See Plains All American Pipeline L.P. v. Cook et al., No. 16-3631 (3d Cir. Aug. 9, 2017). The procedural due process claim challenges Delaware’s use of auditors that have a stake in the assessment. Consistent with the District Court decision, the Third Circuit held that challenges to Delaware’s estimation methodology were ruled not ripe. The case has been remanded to the District Court for further proceedings.
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. Continue Reading House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow
Can a seller have nexus with a state – so as to be obligated to collect and remit that state’s sales and use taxes – only in connection with certain sales that seller makes into that state? In this article, the authors explore the concept that only certain transactions may be subject to that obligation, depending on the extent of the seller’s connection with that state.
Originally published in State Tax Notes, July 3, 2017.
A legal challenge to Cook County Illinois Sweetened Beverage Tax (Tax) heads back to circuit court today for a hearing on the plaintiffs’ motion for preliminary injunction. On June 30, Circuit Judge Daniel Kubasiak issued a temporary restraining order (TRO), halting Cook County, Illinois’ imposition of the Tax, which was to take effect on July 1. Judge Kubasiak found that the “Plaintiffs have persuaded the Court that a fair question exists as to the constitutionality” of the Tax.
Earlier this week, the plaintiff group, which includes the Illinois Retail Merchants Association and a group of retail food markets, successfully opposed the county’s emergency appeal of the TRO. In a ruling issued on Monday, July 10, the Illinois appellate court declined to set aside the TRO. While the fight is far from over, the Illinois rulings are a positive development for retailers, who have not succeeded to date in their efforts to defeat the Philadelphia sweetened beverage tax. See Opinion, Williams v. City of Phila., Nos. 2077 C.D. 2016, 2078 C.D. 2016 (Pa. Commw. Ct. June 14, 2017).
The Connecticut Department of Revenue Services (DRS) recently issued demand letters to many remote sellers requiring that they either: (a) provide electronic sales records for all individual sales shipped to a Connecticut address over the past three calendar years; or (b) register to collect and remit Connecticut sales and use tax. This action is consistent with statements made by DRS Commissioner, Kevin Sullivan, via a press release in March and more recently at a Federation of Tax Administrator’s (FTA) presentation on the topic two weeks ago. Sullivan’s comments at the FTA meeting indicated that state tax administrators “will move from hoping Congress will help” to taking action into their own hands.
For remote sellers with no physical presence in Connecticut that don’t wish to voluntarily collect and remit sales and use tax (consistent with the US Supreme Court’s precedent in Quill and Bellas Hess), they are given only one option–provide DRS with a semi-colon delimited text file containing 16 fields of data–including customer names, customer addresses, ship to addresses, item descriptions and quantities sold. But supplying such personal data about customers intrudes upon the privacy and First Amendment rights of the customer, and unconstitutionally deprives remote sellers of their property right in the data set without due process of law. Of equal concern, some sellers question whether DRS is appropriately limited in its ability to disclose or share the customer data it seeks.
First, disclosure of the records DRS is requesting from remote sellers would be a significant intrusion on their customers’ privacy. The records requested include disclosure of customer names, addresses, shipping state, sales price and specific product(s) purchased. This can be highly sensitive information. Merely linking a particular online retailer to a specific customer may reveal information about the customer’s health issues, political leanings, sexual orientation, personal tastes and financial circumstances. By collecting shipping addresses, DRS will learn when an individual has a gift purchase delivered to a different address, revealing what could be a personal (and highly private) relationship. Moreover, some sellers question whether Connecticut law adequately protects the confidentiality of the information DRS is attempting to collect, leaving the possibility that the information could be shared with other government agencies and potentially used for purposes other than collection of sales and use tax.
Second, for remote sellers that offer books, music, videos and other forms of expressive content, the DRS request violates the customers’ First Amendment protections. In 2010, a US District Court held that an online retailer’s North Carolina customers’ First Amendment rights were implicated by a similar content disclosure requirement on audit. See Amazon.com LLC v. Lay, 758 F. Supp. 2d 1154, 1169 (W.D. Wash. 2010). The First Amendment protects a buyer from having the expressive content of that buyer’s purchase of books, music and audiovisual material disclosed to the government. Thus, First Amendment rights are implicated when the government seeks disclosure of reading, listening and viewing habits. As a result, the North Carolina Department of Revenue was enjoined from requesting customer identifying information from the online retailer. The same prohibition upheld by the federal district court should apply to DRS here. Beyond the First Amendment, the Connecticut Constitution itself offers similar protections that speak against the state’s ability to obtain such information. See Conn. Const. art. I, §§ 4-5.
Third, Section 1 of the Fourteenth Amendment to the US Constitution and Article I, Section 8 of the Connecticut Constitution prohibit DRS from depriving any person of property without due process of law. The required disclosure by remote sellers of their proprietary list of Connecticut purchasers compromises the value of the customer list and deprives the disclosing retailer of its protected property right in the list without due process of law. For remote sellers, these lists are valuable, highly exclusive trade secrets, in which such retailers make a substantial investment and in which they have a protected property right. By forcing remote sellers to turn over their confidential customer lists and subsequently not having an obligation to protect the list from the public realm, DRS is depriving the remote sellers of valuable property without due process of law. Would the state be able to protect a customer list from a Freedom of Information Act (FOIA) request submitted by a remote seller’s competitor?
Last, but certainly not least, Connecticut law requires that each state agency “[m]aintain only that information about a person which is relevant and necessary to accomplish the lawful purposes of the agency.” Conn. Gen. Stat. Ann. § 4-193(e). The amount of information being required by DRS goes well beyond what is required to enforce Connecticut tax law. Some number of a remote seller’s customers undoubtedly paid use tax on their purchases. Ignoring that reality the DRS targets all sales to Connecticut consumers when they should instead be looking for information only on consumers who have not already paid the appropriate use tax. This broad fishing expedition is therefore not targeted to the agency’s necessary and appropriate role but is instead designed to burden the seller and cause remote sellers to register to collect and remit sales and use tax.
Practice Note: Remote sellers who receive communication from the DRS should evaluate their legal rights and obligations and take appropriate steps to protect their customers’ data. We encourage remote sellers to contact the authors should they be concerned about the course of action taken by the Connecticut DRS.
The Massachusetts Department of Revenue (Department) has just issued Directive 17-2 revoking Directive 17-1 which adopted an economic nexus standard for sales tax purposes. Directive 17-2 states that the revocation is in anticipation of the Department proposing a regulation that would presumably adopt the standards of Directive 17-1. It appears that the Department took seriously, perhaps among other concerns, internet sellers’ arguments that Directive 17-1 was an improperly promulgated rule. Internet sellers that recently received letters from the Department regarding Directive 17-1 (see our previous blog post) may need to reconsider their approach.