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Texas Comptroller’s Office Holds Roundtable on Proposed Regulation Targeting IT, Pharmaceutical Industries

by and | Aug 9, 2016 | , , ,

On August 4, 2016, representatives of the Texas Comptroller of Public Accounts held a limited-invite roundtable to discuss the proposed amendments to 34 Tex. Admin. Code 3.584, relating to the reduced rate available under the Texas Franchise Tax for retailers and wholesalers. As previously reported, these proposed revisions were published in the Texas Register on May 20, 2016 and have the potential to double the tax rate for a substantial number of businesses – namely those in the information technology and pharmaceutical industries.

Members of the Comptroller’s office present included Karey Barton, Associate Deputy Comptroller for Tax, Theresa Bostick, Manager of Tax Policy, William Hammer, Special Counsel for Tax and Jennifer Burleson, Assistant General Counsel. Several representatives of businesses and trade groups, along with legal and accounting professionals, were also present.

Ms. Bostick opened the meeting by reiterating the language of the statute and the proposed regulation, and clarifying the application of the proposed regulation’s language. To briefly summarize, the proposed rule provides that a retailer is considered to produce the products it sells (and therefore may be disqualified from the lower Franchise Tax rate available for retailers) if it “acquires the product and makes modifications to the product that increase the sales price of the product by more than 10 percent.” See proposed Rule 3.584(b)(2)(C)(i). A business will also be considered a producer if it “manufactures, develops, or creates tangible personal property that is incorporated into, installed in, or becomes a component part of the product that it sells.” See proposed Rule 3.584(b)(2)(C)(ii). The proposed Rule offers two examples of businesses that will now be considered “producers” rather than retailers: (1) a business that produces a computer program, such as an application or operating system, that is installed in a device that is manufactured by a third party; and (2) a business that produces the active ingredient in a drug that is manufactured by an unrelated party. These proposals represent substantial changes to both the current version of Rule 3.584 and prior Comptroller interpretations of the retailer/producer distinction, and are not supported by the language of the statute that the Rule purports to interpret.

Ms. Bostick explained that the Comptroller had received several comments on the 10 percent rule (some of which were reiterated at the roundtable, including comments that the 10 percent rule should be interpreted as a safe harbor rather than a ceiling and that it should be applied to both modification and development), and that the Comptroller will consider how to define “modification” in the context of Rule 3.584(b)(2)(C)(i) (such language was not provided at the roundtable). She then focused on Rule 3.584(b)(2)(C)(ii) and the examples provided thereunder, explaining that these provisions are meant to convey that if a taxable entity produces (with “development” being equivalent to “production” in this context) tangible personal property that is incorporated into, installed in, or becomes a component part of a product it sells, that business is considered a producer of the product. Because the Comptroller’s representatives view [...]

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Breaking News: Physical Presence Requirement Bill Introduced in Congress

by , and | Jul 15, 2016 | , , , , ,

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 , and | Jul 14, 2016 | , , , ,

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…)



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Breaking News: Tennessee Submits Proposed Economic Nexus Regulation for Publication

by , and | Jun 16, 2016 | , , , , ,

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…)



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Washington ALJ Upholds B&O Assessment on German Company’s Royalty Income

by and | Jun 16, 2016 | , , ,

On May 31, 2016, the Washington Department of Revenue (DOR) Appeals Division released a Determination (No. 15-0251, 35 WTD 230) denying a German pharmaceutical company’s business and occupation tax (B&O) protest. The administrative law judge (ALJ) ruled that while the nondiscrimination provisions contained in Article 24 of the US-Germany Income tax Treaty (Treaty) “may apply,” the B&O does not discriminate against non-US businesses because it is imposed on any business deriving royalty income from Washington sources and applies equally to foreign and US companies. The ALJ also found that the company could avoid double taxation of the royalty income by excluding income taxed by Washington from its German tax base. While the company also challenged the constitutionality of the 2010 B&O economic nexus law, the ALJ declined to entertain it—citing a lack of authority to rule on the constitutionality of Washington statutes.

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

by , and | Jun 15, 2016 | , , , , , ,

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:

  1. 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.
  2. 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.
  3. 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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Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

by , and | May 6, 2016 | , , , , ,

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…)



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No Surprises in Ohio CAT Nexus Oral Argument

by and | May 4, 2016 | , , , , , ,

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…)



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

by and | Apr 29, 2016 | , , , , ,

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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Should I Register in South Dakota?

by and | Apr 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 violates the physical-presence requirement under Quill, and that’s precisely what the legislature intended. The law is intended to force a challenge to the physical presence rule as soon as possible.

The South Dakota Department of Revenue (Department) has begun taking steps to enforce the law. We are aware that remote sellers recently received letters from the Department giving the sellers a deadline of April 25, 2016 to either register with the state and commit to collection, or notify the Department that the seller does not meet the law’s gross receipts/sales transactions thresholds. If the seller does neither of these things, South Dakota will assume that the seller does not intend to comply and that South Dakota may initiate legal action against the seller under the new law.

Remote sellers who have received these letters, as well as any other remote sellers who have exposure under the new law, are probably looking for answers to one question: Should we register and begin collecting? There are two important issues to discuss in determining whether to comply: (1) retroactivity and (2) refunds. (more…)



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