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.

Top Hits You May Have Missed

New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates

Oregon Bars Use of Three Factor Apportionment Formula

McDermott Defeats New York False Claims Act Case Alleging Starbucks Failed to Collect and Remit Sales Tax

Looking Forward to June

June 1, 2018: Stephen Kranz presented “Diverse Routes to Resolving SALT Audit Issues” at the Georgetown Law Advanced State and Local Tax Institute in Washington, DC.  Stephen discussed numerous complex audit issues facing tax administrators and taxpayers alike, including avenues for equitable resolution of complex audit issues and evaluation of when litigation is the best means of resolution.

June 5, 2018: Alysse McLoughlin is presenting “Partnership Audit Regulations: The Great Unknown” at the Federation of Tax Administrators Annual Meeting in Nashville, TN.

June 21, 2018: Britt Haxton, Kristen Hazel, Enrica Ma, Jane May, Sandra McGill, Alysse McLoughlin, Maureen O’Brien and Diann Smith are presenting at Tax in the City® New York about the various impacts of tax reform on state and local taxes, digital commerce, cross-border transactions, and compensation structures and fringe benefits. There will also be a CLE/CPE session on the ethical considerations around tax reform. Email Maria Dubinets at mdubinets@mwe.com to register.

June 25, 2018: Alysse McLoughlin is presenting “State Implications of the Federal Partnership Rules” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.

June 26, 2018: Stephen Kranz is presenting “Taxability of Digital Goods and Services” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC. Stephen will present an overview of US digital taxation, the characterization of tangible personal property, related legislative and administrative developments, and an update on recent litigation in digital tax. He will also provide an overview of best practices, including minimizing sales and use tax on software related transactions as well as audit tips.

June 27, 2018: Jane May is presenting “State Payroll Audits” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.

June 28, 2018: Stephen Kranz is speaking at the National Conference of State Legislatures (NCSL) Executive Committee Task Force on State and Local Taxation, Lake Tahoe NV, regarding federal tax reform and next steps on the remote sales tax. He will also present an overview of the South Dakota v. Wayfair Supreme Court oral arguments and upcoming decision.

On April 9, 2018, the New York State Supreme Court granted Starbucks’ motion to dismiss claims that it had failed to collect more than $10 million of sales tax at its New York stores. Lawyers from McDermott’s State and Local Tax (SALT) group and its White Collar and Securities Defense team handled the matter.

A unique feature of New York law is that the attorney general and private qui tam plaintiffs are permitted to bring New York False Claims Act (NYFCA) actions under New York Financial Law for “claims, records, or statements made under the tax law.” Fin. L. 198(4)(a)(i)-(iii). Under federal law and the law of most states, there is no False Claims Act liability for tax issues. But in New York, the attorney general and private plaintiffs can pursue False Claims Act cases for failure to comply with tax law. There have been numerous large settlements and judgments issued against major companies under the NYFCA, including one settlement for $40 million. See A.G. Schneiderman Announces $40 Million Settlement With Investment Management Company for Tax Abuses, Marking Largest Whistleblower Recovery in Office’s History (April 18, 2017). If successful, qui tam plaintiffs can recover a 25 – 30 percent share of the amount recovered, together with costs and attorneys’ fees. Fin. L. § 190(6)(b).

In this case, two private relator plaintiffs alleged that Starbucks failed to collect sales tax on warmed and “to-go” food items over a 10-year period. The relators filed a complaint, under seal, on or about June 11, 2015, with the New York Attorney General (AG). The AG declined to intervene. On June 30, 2017, the relators elected to proceed on their own with the lawsuit and filed a complaint seeking a judgment for at least $10 million in allegedly unpaid sales tax, as well as treble damages, civil penalties and attorneys’ fees. There was no allegation that Starbucks had failed to properly pay New York taxes that it had previously collected and was holding improperly. The relators’ allegations were solely based on their claim that Starbucks had under-collected sales tax from its New York customers.

On behalf of Starbucks, McDermott filed a motion to dismiss, arguing that Starbucks properly collects and pays its taxes to the State of New York and that Starbucks has consistently worked cooperatively with auditors from the New York State Department of Taxation and Finance. McDermott further argued that the relators “survey” of purchases at Starbucks locations and anecdotal conversations with Starbucks employees failed to properly allege that Starbucks violated the tax law or engaged in any fraud.

On November 10, 2017, the court held oral argument. On April 9, 2018, the Honorable James d’Auguste agreed with McDermott’s arguments and dismissed the case. See State of New York ex rel. James A. Hunter & Keenan D. Kmiec v. Starbucks Corporation, No. 101069/15, Dkt No. 40 (Sup Ct. April 9, 2018). The court held that the relators failed to properly allege that Starbucks had knowingly avoided or recklessly disregarded the law. Id. at 15. The court also opined that “the Survey was not scientifically performed and plaintiffs’ Survey was unsupported by any expert review or report.” Id. at 17. Finally, the court concluded that “plaintiffs’ allegations that Starbucks’ illegal practices were ongoing for a decade before this action was started and that it suffered $10 million in damages are based purely on speculation.” Id. at 17.

McDermott’s SALT and White Collar and Securities Defense teams joined forces in representing Starbucks in connection with this matter. The team consisted of Todd Harrison, Steve Kranz, Mark Yopp, Joseph B. Evans, Kathleen Quinn and Samuel Ashworth.

Full Case Name:          State of New York ex rel. James A. Hunter & Keenan D. Kmiec v. Starbucks Corporation, No. 101069/15 (Sup Ct. April 9, 2018)

Court:                           New York State Supreme Court

Justice:                         James E. d’Auguste

Opposing Counsel:     Hunter and Kmiec

This morning, Indiana Governor Eric Holcomb signed a bill into law that will exempt cloud-based software transactions from State Gross Retail and Use Taxes, effective July 1, 2018. The signing took place at the headquarters of Indiana-based cloud service provider DemandJump, Inc.

Specifically, Senate Enrolled Act No. 257 (which was unanimously passed by both chambers of the General Assembly) will add a new section to the Indiana Code chapter on retail transactions that specifically provides that “[a] transaction in which an end user purchases, rents, leases, or licenses the right to remotely access prewritten computer software over the Internet, over private or public networks, or through wireless media: (1) is not considered to be a transaction in which prewritten computer software is delivered electronically; and (2) does not constitute a retail transaction.” The new law will also clarify that the sale, rental, lease or license of prewritten computer software “delivered electronically” (i.e., downloaded software) is subject to the Gross Retail and Use Taxes. Continue Reading BREAKING: Indiana Enacts Cloud Software Tax Exemption

On Tuesday, April 17, 2018, at 10:00 am (EST) the United States Supreme Court will hear oral arguments in South Dakota v. Wayfair, Inc., a state tax case poised to reconsider the dormant Commerce Clause physical presence standard upheld by the Court on stare decisis grounds in the historic mail-order case Quill Corp. v. North Dakota (U.S. 1992), which was litigated by McDermott Will & Emery. The Court is expected to consider whether a 2016 South Dakota law imposing sales and use tax collection obligations on online retailers–and other sellers–with no physical presence in the state is permissible given, among other things, the advances in technology and e-commerce since Quill was decided.

For those that would like to attend the South Dakota v. Wayfair, Inc. oral argument as a member of the public (as opposed to as a member of the US Supreme Court Bar), the Supreme Court Police give out 100–150 numbered tickets between 7:00 am–7:30 am. The doors to the building open at 8:00 am.  Once inside, the line re-forms in the hallway by the Gallery steps and at 9:00 am, the public is allowed upstairs to the Gallery.  The argument will begin at 10:00 am.  Given the popularity of this case, it is anticipated that only around 50 seats will be available to the general public for this argument—so plan to arrive early to ensure you have the best chance to make it in!

After the oral argument concludes, we invite you to join COST, Bloomberg Tax, McDermott Will & Emery, and lawyers involved in many respects of the litigation for a moderated roundtable discussion at the DC office of McDermott Will & Emery, which is just minutes away from the Supreme Court. The roundtable discussion will begin at 12:00 pm (EST) and explore the issues before the Court and opinions regarding the many possible outcomes from the case.

We expect a full house and space will be limited, so please register your interest now so that we can plan to accommodate as many as possible. This case promises to revolutionize the world of SALT, no matter the outcome.

Due to the current impact and the likelihood that states will consider legislation and agency guidance addressing federal tax reform implications for state business taxes, a united, effective, nationwide advocacy effort is needed to ensure the issues are consistently addressed on a multi-state basis. In preparation for anticipated ramifications, a multi-state coalition will need to consider the subjects summarized below. For further coverage, continue reading here.

How McDermott Will & Emery Can Help You:

  • Formation of a coalition of companies and industry trade organizations dedicated to proactively addressing state tax issues raised by federal tax reform on a nationwide basis
  • Identify and track, in real time, proposed state legislative and regulatory responses to federal tax reform
  • Analyze proposed state reforms and develop substantive amendments and comments
  • Develop and implement advocacy campaigns to secure favorable legislative and regulatory outcomes, including
    • Preparation of all advocacy collateral
    • Organization of on the ground advocacy, including retaining in-state advocates where needed
    • Activating allied organizations to ensure broad support
  • Provide support concerning the proper reporting of state responses to federal tax reform on company financial statements

Coalition Goals: 

  • Prevent state legislation expanding tax base through decoupling from federal deductions
  • Support state legislation adopting comprehensive federal reform conformity, with appropriate deviations
  • Identify and remedy Commerce Clause issues
  • Encourage states revenue department to publish guidance on issues such as definitional questions, apportionment approaches and problems with different group calculations
  • Identify and act on opportunities to address related issues through state responses to federal reform
  • Prepare to address potential nexus changes in response to South Dakota v. Wayfair

Continue Reading McDermott’s Take on State Tax after Reform