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Sales Tax

BREAKING NEWS: House Passes Mobile Workforce State Income Tax Simplification Act

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Sep 21, 2016 | Income Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Moments ago, the United States House of Representatives (House) passed the Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) by voice vote. The Act will now be delivered to the United States Senate (Senate) for introduction and referral to committee for consideration. While the Senate Committee on Finance has not advanced a companion bill (S. 386) introduced by Senators John Thune (R-SD) and Sherrod Brown (D-OH) in February 2015, the bill currently touts 45 co-sponsors.

Background

The Mobile Workforce Act that passed today was introduced in May 2015 by Representatives Mike Bishop (R-MI) and Hank Johnson (D-GA). As highlighted in our prior coverage, the bill advanced out of the House Judiciary Committee in June 2015 by a vote 23-4. This legislation has been introduced in the House by each Congress since it was first introduced in 2006 by the 109th. While the legislation has seen some degree of success in the House, it has yet to advance beyond the Senate Committee on Finance. Notably, in May 2012, a prior version of the Act was passed in the House, but the Senate Committee on Finance did not take it up for consideration.

The Mobile Workforce Act

While the Mobile Workforce Act has been tweaked over the years, its underlying objective has largely remained the same—to providing a workable, national framework for the administration of, and compliance with, the states’ incongruent withholding and nonresident income tax payment laws. The version of the Act passed by the House today establishes a thirty-day safe harbor for traveling employees from nonresident state personal income taxes, and greatly reduces and simplifies the withholding and reporting burdens and related costs to their employers. Specifically, an employee working in a nonresident state for thirty or fewer days would not pay personal income tax to the nonresident state. Instead, the employee would remain fully taxable in its resident state on these earnings.

Under the Act, employers would not be required to withhold taxes in the nonresident state for employees whose travel falls at or below the thirty-day threshold in the state. In making this determination, the Act allows employers to rely on an employee’s annual determination of the time they will spend working in a state, absent fraud or collusion by the employee. The definition of “employee” has the same meaning given to it by the state in which the employment duties are performed, subject to only a few exceptions (including professional athletes, professional entertainers, and public figures who are persons of prominence who perform services for wages or other remuneration on a per-event basis).

As passed today, the “Act shall take effect on January 1 of the [second] year that begins after the date of the enactment of this Act” and retroactive application is expressly prohibited. Practically speaking, this means that the absolute earliest the Act could take effect is January 1, 2018 (assuming the Senate [...]

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BREAKING NEWS: Discussion Draft of Online Sales Simplification Act of 2016 Released

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Aug 25, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Today, the Chairman of the House Judiciary Committee, Rep. Goodlatte from Virginia, released the long-anticipated discussion draft of the Online Sales Simplification Act of 2016. Highlights of the bill include:

The bill implements the Chairman’s much-discussed ‘hybrid-origin’ approach.

The bill removes the Quill physical presence requirements for sales tax collection obligations under certain circumstances.

States may impose sales tax on remote sales IF the state is the origin state and it participates in a statutory clearinghouse AND the tax uses the origin state base and the destination state rate for participating states (the origin state rate is used if the destination state does not participate in the clearinghouse).

A remote seller will only have to remit the tax to its origin state for all remote sales.

A destination state may only have one statewide rate for remote sales.

Only the origin state may audit a seller for remote sales.

States that do not participate in the clearinghouse have significant restrictions on the ability to extract the tax from the remote seller.

Below is a more in-depth discussion of the intricacies of the bill.

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Breaking News: Physical Presence Requirement Bill Introduced in Congress

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 15, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Yesterday, Congressman Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives (House). The bill would codify the physical presence requirement established by the US Supreme Court in Quill. The bill would specifically define physical presence, creating a de minimis threshold, and would significantly affect existing state efforts to expand the definition of physical presence and overturn Quill.

Not only would the bill preempt the ‘nexus expansion’ laws, such as click-through nexus provisions, affiliate nexus provisions, reporting requirements and marketplace collection bills, but it would likely halt the South Dakota and Alabama (and other state litigation) specifically designed to overturn Quill. It would also move all future litigation on this issue to federal courts.

The bill would be effective as of January 1, 2017. The bill was referred to the House Committee on the Judiciary, which Rep. Sensenbrenner is a sitting member of (and former Chairman).

Summary

The bill defines “seller”, and provides that states and localities may not: (1) obligate a person to collect a sales, use or similar tax; (2) obligate a person to report sales; (3) assess a tax on a person; or (4) treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

Persons have a physical presence only if during the calendar year the person: (1) owns or leases real or tangible personal property in the state; (2) has one or more employees, agents or independent contractors in the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or (3) maintains an office in-state with three or more employees for any purpose.

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Pennsylvania General Assembly Passes Revenue Package with Significant Digital Tax Expansion

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 14, 2016 | Audits, Pennsylvania, Sales Tax, Tax Base, Transaction Taxes

Yesterday, a legislative conference committee was appointed to approve an already agreed-upon $1.3 billion revenue package, which was immediately approved by both the House (116-75) and Senate (28-22) and sent to Governor Wolf for approval. The governor subsequently issued a press release confirming that he “will sign this revenue package.” A copy of the conference committee report (in full) that passed is available here.

The final revenue package includes (among a host of other revenue raising changes) a new tax on digital content and services, as described in more detail below. Specifically, the expansion captures most (if not all) digital goods within the sales and use tax imposition by defining them as tangible personal property. A number of digital services are also captured in the broadly defined language. (more…)

Breaking News: Tennessee Submits Proposed Economic Nexus Regulation for Publication

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 16, 2016 | Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Tennessee, Transaction Taxes

Earlier today, the Tennessee Department of Revenue (DOR) submitted a new sales and use tax regulation for publication titled “Out-of-State Dealers” (Rule 1320-06-01-.129) that would administratively create an economic nexus threshold. With the submission, Tennessee becomes the most recent addition to the growing list of states seeking to directly attack the Quill physical presence standard. As detailed in our prior blog, both Alabama and South Dakota are already litigating whether their economic nexus standards are sufficient to satisfy the dormant commerce clause substantial nexus requirement. Additionally, at least 11 different bills in eight different states have been introduced in state legislatures so far in 2016. With states continuing to attack Quill from all angles, remote sellers are scrambling to keep up with the increasingly volatile nexus landscape. (more…)

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

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 15, 2016 | Alabama, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, South Dakota, Transaction Taxes

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 the Alabama imposition is through a regulation and not a statute, the arguments in each state’s litigation may not be parallel.

DOR Explanation of the Assessment

The DOR asserts that under the new regulation Newegg has a “substantial economic presence” in Alabama. According to Newegg, the DOR “has offered no basis for its determination” that the regulation’s requirements were satisfied during the Assessment Period. Specifically, Newegg notes that the DOR “conclusion appears to be based solely upon the fact that Newegg had ‘significant sales into Alabama,’ i.e., more than $250,000 of retail sales to Alabama customers.”

Newegg’s Grounds for Appeal

Newegg requests that the Tax Tribunal cancel the Assessment, citing the following grounds as the primary basis:

The application of the new regulation to Newegg (and the Assessment) are unconstitutional because Newegg did not (and does not) have the necessary physical presence required to satisfy the “substantial nexus” standard for sales and use taxes under the Commerce Clause, as described by the US Supreme Court in Quill.
The new regulation is invalid because retailers must “lack an Alabama physical presence” for it to apply. Therefore, it conflicts with both the Alabama sales and use tax statutes and the US Constitution, each of which requires a physical presence in the state by (or on behalf of) the retailer.
The application of the new regulation to an internet retailer with no physical presence in Alabama is inconsistent with the authorizing seller’s use tax statute. Specifically, none of the provisions of the sales and use tax statutes (or any other provision in the Alabama Code) authorize the DOR to impose seller’s use tax collection obligations on internet retailers with no physical presence in the state.

The State of Nexus in Other States

The Alabama litigation represents the third prominent nexus case that involves Newegg. Not only is the company involved in South Dakota (see our prior coverage of the South Dakota lawsuits here), but it is also one of the three taxpayers involved in the Ohio Commercial Activity Tax (CAT) litigation (
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Cook County Circuit Court Dismisses 201 False Claims Act Lawsuits

by Mary Kay McCalla Martire | May 24, 2016 | Constitutional Issues, False Claims Act, Illinois, Nexus, Sales Tax

At a hearing yesterday, Cook County Circuit Judge James Snyder granted the State of Illinois’ (State) Motion to Dismiss 201 Illinois False Claims Act (FCA) cases filed by the law firm of Stephen B. Diamond, PC (Relator) against out-of-state liquor retailers. The lawsuits alleged that the defendants were obligated to collect and remit sales tax on their internet sales of alcohol shipped to Illinois customers. The complaints admitted that the defendants lacked any physical presence in the state, and would not qualify for any Illinois liquor retail license, but nevertheless asserted a tax collection obligation for sales and a tax remission obligation for gallonage tax arising under the 21st Amendment of the US Constitution and the Supreme Court’s decision in Granholm v. Heald, 544 U.S. 460 (2005).

In its motion to dismiss and at oral argument, the State relied upon the favorable standard for consideration of motions to dismiss False Claims Act cases filed by the State established by the Illinois Appellate Court in two prior cases: State ex rel. Beeler, Schad & Diamond v. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d 507 (1st Dist. 2006) and State ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 132999 (Apr. 21, 2015). In both cases, the appellate court held that when the State moves to dismiss a qui tam action allegedly filed on its behalf, its motion should be granted absence evidence of “glaring bad faith” on the part of the State in moving to dismiss. The State argued that it had concluded that the Relator’s claims were weak, based in part on the Relator’s admission that the defendants lacked nexus. In response, the Relator argued that the State had acted in bad faith by relying on Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and other commerce clauses nexus rulings and, according to the Relator, ignoring the 21st Amendment and Granholm, which the Relator alleged supplanted any nexus analysis (a point the State and the defendants vigorously disputed in briefing prior to argument).

After hearing argument, Judge Snyder ruled from the bench that the Diamond firm had failed to meet its burden of proving bad faith by the State in moving to dismiss the 201 lawsuits.

The Diamond firm will have 30 days from the date of entry of the Circuit Court’s dismissal orders to either seek reconsideration or appeal from the trial court’s ruling.

Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | May 6, 2016 | Alabama, Audits, Nationwide Importance, Sales Tax, Tax Base, Transaction Taxes

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 the Department for ignoring judicial precedent in favor of their own administrative practices and guidance.

This decision is important in analyzing the taxability of mixed/bundled sales to Alabamans (i.e., where services and some degree of tangible personal property are provided as part of the same transaction). As with any decision, taxpayers should consider potential refund claims. (more…)

No Surprises in Ohio CAT Nexus Oral Argument

by Diann Smith and Stephen P. Kranz | May 4, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Ohio, Sales Tax, Transaction Taxes

Oral argument before the Ohio Supreme Court took place on May 3 in the three cases challenging Ohio’s Commercial Activity Tax (CAT) nexus standard. Crutchfield, Inc. v. Testa, Case No. 2015-0386; Mason Cos. Inc. v. Testa, Case No. 2015-0794; Newegg, Inc. v. Testa, Case No. 2015-0483. Ohio imposes its CAT on a business that has more than $500,000 in annual gross receipts in the state, even if the business has no physical presence in the state. These three taxpayers have challenged this standard as violating the Commerce Clause substantial nexus test.

The oral argument in the cases proceeded as expected. The majority of the time for both parties was taken up by questions from the bench. Several judges quizzed the taxpayers’ counsel about the assertion that no business was conducted in Ohio. The judges focused on activities such as products being received by customers in Ohio and software being placed on customers’ computers in Ohio to facilitate ordering or to track customer activity in Ohio. The taxpayers’ counsel vigorously disagreed with this construction of the facts – noting that whatever happened in Ohio, all of the taxpayers’ actions occurred elsewhere. He stated that the activities called out by the judges were no different than receiving and reviewing a catalog in the state.

The taxpayers’ counsel repeatedly cited to Tyler Pipe as the controlling law in this case – noting that before a state could impose a tax on a business, that business had to do something in the taxing state (or have something done on its behalf) that helped it establish and maintain a market in the state. According to the taxpayers’ counsel, it was not enough that a market exists in the taxing state; the taxpayer had to be doing something in the taxing state. He asserted that the taxpayer conducted no business activities in the state and thus Tyler Pipe prevented the state from imposing the CAT on them. This became the taxpayers’ mantra throughout the argument. (more…)

BREAKING NEWS: Sales Tax Battle Breaks Out in South Dakota; Quill’s Last Stand?

by McDermott Will & Emery and Stephen P. Kranz | Apr 29, 2016 | Audits, Constitutional Issues, Nexus, Sales Tax, South Dakota, Transaction Taxes

This post is a follow-up to a previous post from April 21, 2016.

Introduction

On March 22, 2016, South Dakota Governor Dennis Daugaard signed into law Senate Bill 106, which requires any person making more than $100,000 of South Dakota sales or more than 200 separate South Dakota sales transactions to collect and remit sales tax. The requirement applies to sales made on or after May 1, 2016.

The law clearly challenges the physical presence requirement under Quill, and that’s precisely what the legislature intended. The law seeks to force a challenge to the physical presence rule as soon as possible and speed that challenge through the courts.

As we discussed in our earlier post, the big question in response to the legislation was whether taxpayers should register to collect tax. For those who did not register, an injunction is now in place barring enforcement of the provisions until the litigation is resolved.

Last night and this morning two different declaratory judgment suits were filed in the Sixth Judicial Circuit Court of South Dakota regarding S.B. 106’s constitutionality, and more may follow. As has already been reported in a few outlets, one of these cases is American Catalog Mailers Association and NetChoice v. Gerlach (the ACMA Suit). In ACMA, the plaintiffs are trade associations representing catalog marketers and e-commerce retailers. The complaint can be found here.

What has yet to be widely reported is the other suit. This suit (the State Suit) was filed by South Dakota. Letters sent by South Dakota indicated that identified retailers needed to register by April 25. Because the new law does not become effective until May 1, many observers thought that South Dakota might wait to file until after that date. However, the suits have already been filed.

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