Yesterday, the application period opened for the limited-time MTC Marketplace Seller Voluntary Disclosure Initiative opened and it will close October 17, 2017. Since our last blog post on the topic detailing the initiatives terms, benefits and application procedure, six additional states (listed below) have signed on to participate in varying capacities. The lookback period being offered by each of the six states that joined this week is described below.

  1. District of Columbia: will consider granting shorter or no lookback period for applications received under this initiative on a case by case basis. DC’s standard lookback period is 3 years for sales/use and income/franchise tax.
  2. Massachusetts: requires compliance with its standard 3-year lookback period. This lookback period in a particular case may be less than 3 years, depending on when vendor nexus was created.
  3. Minnesota: will abide by customary lookback periods of 3 years for sales/use tax and 4 years (3 look-back years and 1 current year) for income/franchise tax. Minnesota will grant shorter lookback periods to the time when the marketplace seller created nexus.
  4. Missouri: prospective-only for sales/use and income/franchise tax.
  5. North Carolina: prospective-only for sales/use and income/franchise tax. North Carolina will consider applications even if the entity had prior contact concerning tax liability or potential tax liability.
  6. Tennessee: prospective-only for sales/use tax, business tax and franchise and excise tax.

Practice Note

The MTC marketplace seller initiative is now up to 24 participating states. It is targeting online marketplace sellers that use a marketplace provider (such as the Amazon FBA program or similar platform or program providing fulfillment services) to facilitate retail sales into the state. In order to qualify, marketplace sellers must not have any nexus-creating contacts in the state, other than: (1) inventory stored in a third-party warehouse or fulfillment center located in the state or (2) other nexus-creating activities performed by the marketplace provider on behalf of the online marketplace seller.

While Missouri, North Carolina and Tennessee have signed on to the attractive baseline terms (no lookback for sales/use and income/franchise tax), Minnesota and Massachusetts are requiring their standard lookback periods (i.e., 3+ years). Thus, these two states (similar to Wisconsin) are not likely to attract many marketplace sellers. The District of Columbia’s noncommittal case-by-case offer leaves a lot to be determined, and their ultimate offer at the end of the process could range from no lookback to the standard three years.

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.

Deputy Executive Director Greg Matson (a nice guy at heart) announced this week that the Multistate Tax Commission (MTC) has hired its first transfer pricing training consultant and is scheduled to begin training state auditors.  The training, titled “Identifying Related Party Issues in Corporate Tax Audits” will be hosted by the North Carolina Department of Revenue from March 31 to April 1, 2015 in Raleigh, North Carolina.  While the much anticipated Arm’s Length Adjustment Service (ALAS, discussed in more depth in our February 6, 2015 blog post, available here) is still pending approval of the MTC Executive Committee and ratification at the annual meeting this summer, it has not stopped MTC officials from moving forward with training state auditors on transfer pricing.  This training (and any subsequent training offered before the annual meeting) will be conducted as part of the MTC’s “regular training” schedule (and is not directly tied to the ALAS program since authority to train for that program has not vested).  Nonetheless, Executive Director Joe Huddleston made it clear in a recent letter to the states that “[t]his course will preview the training to be provided through the Arm’s-Length Adjustment Service.”

The kickoff training session at the end of this month will be conducted by former Internal Revenue Service Office of Chief Counsel senior economic advisor, Ednaldo Silva.  He is the founder of RoyaltyStat LLC, one of the transfer pricing consulting firms that is being considered by the MTC to provide their services for the ALAS.  During yesterday’s teleconference of the ALAS Advisory Group, Matson and Huddleston were optimistic that additional training sessions would be offered by the MTC before the ALAS is finalized.  It remains to be seen whether this training will be offered by Silva or another participant from the October 2014 Advisory Group meeting that has submitted a bid to be the contract firm for the ALAS.  Because these trainings are a fundamental threshold step to commencing ALAS audits (projected to begin December 2015), they provide a strong signal that the MTC is optimistic that they will have sufficient support from the states to continue the ALAS program.

Too Soon?

In a letter distributed to 46 states and Washington, D.C. in February 2015, the MTC officially solicited state commitments to the ALAS program.  States were given until the end of March 2015 to respond.  By the terms of the ALAS proposal, the MTC will need a commitment from at least seven states for the program to move forward.  MTC officials announced at yesterday’s Advisory Group teleconference that the current count is zero (with one state declining).  While there is still time to respond, several revenue department officials voiced concern about making a commitment without more detailed estimates of costs.  Others voiced uncertainty about the ability to enter into a contract for such a long period under state law (the program requests that each state commit to four years).  While there was no significant undertone of opposition to the ALAS program, there also was not a mass cry of support.  Notably, only 10 states were participating in the March 4, 2015 Advisory Group teleconference.  It remains to be seen whether the low turnout will conclude with few states participating (since the real benefit of a multistate audit is the ability to spread the costs across many states).  Even with only 10 states participating, Huddleston and his staff estimate that the ALAS program could generate over $110 million in revenues over the four-year pilot phase (with a majority of that amount coming in final two years).

Still to Come

The Advisory Group, led by Dan Bucks, announced that they will hold two more teleconference meetings (one before and one after the Executive Committee meeting on May 7, 2015).  Expected on the agenda at the next meeting (projected for mid-April) is a discussion of how to best evaluate the success of the ALAS program.  The goal is for the ALAS program to be finalized and ratified by the MTC at the annual meeting this July.

Practice Note: Taxpayers are encouraged to re-examine their interstate (and foreign) transfer pricing now to ensure they are properly supported by transfer pricing documentation.  While the ALAS program still has the potential to fail, the MTC is taking the initiative to educate state auditors on transfer pricing issues—which will increase the risk of a transfer pricing audit regardless of the ALAS outcome.

On October 6 and 7, 2014, the Multistate Tax Commission (MTC) will hold an Arm’s-Length Adjustment Service (ALAS) Advisory Group Conference at the Atlanta Airport Marriott.  On the first day, third-party contract auditors will give presentations on transfer pricing issues.  An ALAS Advisory Group meeting will be held on the second day.

This past year, the MTC has been designing a joint transfer pricing program.  So far, nine members have committed money to the development of this program: Alabama, the District of Columbia, Florida, Georgia, Hawaii, Iowa, Kentucky, New Jersey and North Carolina.

Dan Bucks, former executive director of the MTC and former director of the Montana Department of Revenue, is the project facilitator.  In the lead-up to the event, he discussed arm’s-length issues with numerous third-party contract auditors.  On October 6, the contract auditors will explain how they believe a multistate transfer pricing program should work and how the MTC would best use their services to conduct transfer pricing audits on behalf of member states.

The list of contract auditors includes Chainbridge Software, Economics Analysis Group, Economists Incorporated, NERA, Peters Advisors, RoyaltyStat and WTP Advisors.  While project facilitator, Dan Bucks, has indicated that this meeting is not an audition for a procurement process, the discussion seems to be headed in that direction and the MTC has not ruled out utilizing third-party audit assistance in the transfer pricing program.

Businesses concerned with the overall direction of the ALAS Advisory Group, including the possibility of subjecting taxpayers to Chainbridge-style audits on a nationwide scale, should contact the authors.  For more information on the conference, please visit the MTC ALAS webpage.