Top Hits You May Have Missed

Illinois Department of Revenue Issues Post-Wayfair Guidance Implementing October 1 Economic Nexus Law

Reform Pending for Illinois Captive Insurance Framework

More States Respond to Federal Tax Reform

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

Reform Pending for Illinois Captive Insurance Framework

House Judiciary Committee to Consider Wayfair Decision Impact

More States Respond to Federal Tax Reform

Looking Forward to September

September 12, 2018: Diann Smith will be presenting “Post-Wayfair” at the Tax in the City® event in Seattle, WA. You can still register! Just click here.

September 19, 2018: Jane May is presenting “Anatomy of a Whistleblower Case” at the inaugural Dallas Tax in the City® event in Dallas, TX. You can still register! Just click here.

September 19, 2018: Alysse McLoughlin is presenting “US Supreme Court’s Decision on Wayfair” at the inaugural Dallas Tax in the City® event in Dallas, TX. You can still register! Just click here.

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.

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.

  1. Grover Norquist, Americans for Tax Reform President
  2. Chad White, Class-Tech-Cars, Inc. Owner
  3. Lary Sinewitz, BrandsMart Executive Vice President, on behalf of the National Retail Federation
  4. Bartlett Cleland, American Legislative Exchange Council General Counsel and Chief Strategy and Innovation Officer
  5. The Honorable Curt Bramble, National Conference of State Legislatures Past President
  6. Andrew Moylan, National Taxpayers Union Foundation Executive Vice President
  7. Joseph Crosby, MultiState Associates Incorporated Principal
  8. 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

BREAKING NEWS: US Supreme Court Overrules Quill

Illinois Budget Bill Makes Few Tax Changes except the Adoption of an Economic Nexus Standard

Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services

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.

Continue Reading News of Wayfair Decision Breaks during Tax in the City® New York

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.

On June 4, Illinois Governor Bruce Rauner signed into law the state’s fiscal year (FY) 2019 budget implementation bill, Public Act 100-0587 (the Act). The Act makes a significant change to the Illinois sales/use tax nexus standard by adopting an “economic nexus” standard for a sales/use tax collection obligation. The economic nexus language was added to the budget bill one day before it was passed by the General Assembly. The standard is contrary to the physical presence nexus standard established by the United States Supreme Court in Quill Corp. v. North Dakota, 504 US 298 (1992), the validity of which is currently pending before the Court in South Dakota v. Wayfair, Docket 17-494. The Court is expected to rule on Wayfair by the end of this month (see here for our prior coverage of the Wayfair case).

The Act amends Section 2 of the Use Tax Act to impose a tax collection and remission obligation on an out-of-state retailer making sales of tangible personal property to Illinois customers if the retailer’s gross receipts from sales to Illinois customers are at least $100,000 or the retailer has at least 200 separate sales transactions with Illinois customers. Similarly, it would amend Section 2 of the Service Use Tax Act with respect to out-of-state sellers making sales of services to Illinois customers. These changes mirror the economic nexus standard adopted by South Dakota. See SD Codified Laws § 10-64-2.

In the wake of Wayfair, other states have adopted similar nexus provisions. See, e.g., Conn. SB 417, Ga. HB 61, Haw. HB 2514, Iowa SF 2417, provisions enacted in 2018. By enacting the statute without an escape clause, Illinois, like other states, has put a law on the books that directly conflicts with Quill, and which will be ripe for constitutional challenge if the US Supreme Court affirms the South Dakota Supreme Court’s ruling that the South Dakota statute is unconstitutional.

The Act also amended Section 223 of the Illinois Income Tax Act to extend the tax credit for for-profit hospitals (equal to the lesser of property taxes paid or the cost of charity care provided) to tax years ending on or before December 31, 2022.

The Act made no changes in response to the federal tax reform bill. In particular the General Assembly did not enact Senate Bill 3152 (proposing to add-back the new federal deduction for foreign-derived intangible income (FDII); see here for our prior coverage). The General Assembly also did not enact either of the pending bills (HB 4237 and 4563) proposing to work around the federal $10,000 limitation on the deductibility of state and local taxes by establishing funds/foundations to which taxpayers could make contributions in exchange for tax credits.

On May 24, 2018, the Circuit Court of Cook County granted the City of Chicago’s Motion for Summary Judgment in the case captioned Labell v. City of Chicago, No. 15 CH 13399 (Ruling), affirming the City’s imposition of its amusement tax on internet-based streaming services.

City’s Amusement Tax and Amusement Tax Ruling #5

The City imposes a 9 percent tax on “admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement. …” Mun. Code of Chi., tit. 4, ch. 4-156 (Code), § 4-156-020(A); see also id. § 4-156-010 (defining “amusement” in part as a performance or show for entertainment purposes, an entertainment or recreational activity offered for public participation and paid television programming). On June 9, 2015, the City Department of Finance (Department) issued Amusement Tax Ruling #5, taking the position that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also [on] charges paid for the privilege to witness, view or participate in amusements that are delivered electronically [emphasis in original].” Amusement Tax Ruling #5, ¶ 8.

The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here. Continue Reading Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services

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. Continue Reading Finishing SALT: April State Focus & March Wrap-Up