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You’re Invited: COST, Bloomberg Tax and McDermott Will & Emery to Host Post-Oral Argument Roundtable Discussion

by McDermott Will & Emery | Mar 13, 2018 | Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, South Dakota, Transaction Taxes

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.

South Dakota Supreme Court Rules in Favor of Remote Retailers; Next Step US Supreme Court?

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Sep 15, 2017 | Constitutional Issues, Nationwide Importance, Nexus, South Dakota

Yesterday, the South Dakota Supreme Court released its much-anticipated opinion in the Wayfair litigation, affirming a March 2017 trial court decision granting the remote retailer’s motion for summary judgment on the basis that the economic nexus law enacted in 2016 (SB 106) is unconstitutional and directly violates the US Supreme Court’s dormant Commerce Clause precedent in Quill Corp. v. North Dakota.

The South Dakota litigation remains at the front of the pack of a host of state court cases challenging similar state economic nexus laws across the United States. The expedited review (and decision) by the South Dakota Supreme Court here is significant, and puts the litigation well within the range of cases that would be decided by the end of the October 2017 Term (i.e., by July 2018), assuming cert is granted—which is by no means a guarantee. The state has 90 days to file a cert petition with the US Supreme Court, which can be extended upon request. Stay tuned, as this litigation is far from over and the sitting US Supreme Court will be tasked with deciding whether they will honor Justice Kennedy’s request to bring a case before the Court in DMA v. Brohl.

The full South Dakota Supreme Court opinion is available here.

Wrapping Up August – and Looking Forward to September

by McDermott Will & Emery | Sep 5, 2017 | Uncategorized

Upcoming McDermott Will & Emery SALT Activities in September:

September 14, 2017: Robin Greenhouse, Kristen Hazel, Sandra McGill and Alysse McLoughlin will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about local tax updates and ethics.

September 15, 2017: Jane Wells May is speaking in Austin, TX at the ABA Tax Section Meeting about “False Claims Acts and State Taxes.”

September 18, 2017: Mary Kay Martire is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about “Third Party Tax Enforcement Actions.”

September 19, 2017: Arthur Rosen is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about sales tax nexus –“Son of Quill: The Sequel.”

September 19, 2017: Stephen Kranz is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about uncollectible debts – “Breaking Bad from Bad Debt.”

September 26, 2017: Cate Battin and Mary Kay Martire are presenting a “National Update on Key SALT Issues” in Rolling Meadows, IL, at the 18th Annual SALT Conference of the Taxpayers Federation of Illinois.

September 28, 2017: Eric Carstens and Nick Furtwengler will be speaking at the TEI Emerging Tax Professionals Seminar, taking place in McDermott’s Chicago, IL office, about the SALT portions of “Acquiring or Expanding a Business,” “Integration and Compliance” and “The Audit Notice Arrives: Now What?”

Wrapping up August:

Our August 2017 blog posts are available on insideSALT.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

August 1, 2017: Implications of Federal Partnership Audit Rules for State and Local Taxation

August 8, 2017: MTC Offers 18 State Marketplace Seller Amnesty Initiative

August 14, 2017: Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

August 15, 2017: Illinois Court Upholds Cook County’s Beverage Tax Finding It Passes Constitutional Muster and Related Developments

August 16, 2017: Delaware (Re)Proposes Unclaimed Property Reporting and Examination Manual Regulation

August 18, 2017: MTC Marketplace Seller Voluntary Disclosure Initiative Underway

House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 24, 2017 | Audits, Constitutional Issues, Income Tax, Local Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

The No Regulation Without Representation Act of 2017 (NRWRA) is scheduled for a hearing before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Tuesday, July 25 at 10:00 am EDT in 2141 Rayburn House Office Building. The bill was introduced by Congressman Jim Sensenbrenner (R-WI) last month with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in more detail below, the bill would codify the Bellas Hess “physical presence” requirement upheld by the US Supreme Court in Quill and make that requirement applicable to sales, use and other similar transactional taxes, notice and reporting requirements, net income taxes and other business activity taxes. Extending the concept to an area far beyond state taxation, the bill would also require the same physical presence for a state or locality to regulate the out-of-state production, manufacturing or post-sale disposal of any good or service sold to locations within its jurisdictional borders.

In the last Congress, the Business Activity Tax Simplification Act of 2015 (BATSA) would have codified a physical presence requirement in the context of business activity taxes (e.g., net income and gross receipts taxes). However, the scope of NRWRA’s limitations on interstate regulation and tax differs from the standard set forth in BATSA. Specifically, under BATSA, assigning an employee to a state constitutes physical presence, whereas under NRWRA a company does not have physical presence until it employs more than two employees in the state (or a single employee if he or she is in the state and provides design, installation or repair services or “substantially assists” in establishing or maintaining a market). Under NRWRA, activities related to the potential or actual purchase of goods or services in the state or locality are not a physical presence if the final decision to purchase is made outside of the jurisdiction. (more…)

Connecticut Will Make You Disclose Personal Customer Data!

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Jul 6, 2017 | Connecticut, Constitutional Issues, Nationwide Importance, Nexus, North Carolina, Sales Tax

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 [...]

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Massachusetts DOR Sending Letters to Sellers Regarding July 1 Effective Date of Economic Nexus Directive

by Arthur R. Rosen and Richard C. Call | Jun 28, 2017 | Constitutional Issues, Massachusetts, Nexus, Procedure, Sales Tax, Transaction Taxes

Recently, the Massachusetts Department of Revenue (Department) sent letters to several companies regarding Directive 17-1. The Directive announces a “rule” requiring remote internet sellers to register for and begin collecting Massachusetts sales and use tax (sales tax) by July 1, 2017, if they had more than $500,000 in Massachusetts sales during the preceding year. The legal premise behind the rule is that the Department believes sellers with more than $500,000 in annual Massachusetts sales must have more than a de minimis physical presence so that requiring sales tax collection would not be prohibited by Quill Corp v. North Dakota, 504 US 298 (1992). The Directive’s examples of such physical presence include the presence of cookies on purchasers’ computers, use of third-party carriers to make white-glove deliveries and the use of online marketplaces to sell products. The Directive also states that sellers who fail to collect tax beginning July 1, 2017 will be subject to interest and penalties (plus, of course, any uncollected taxes).

We think the Directive is contrary to law on three main grounds. First, we believe that the items that the Department asserts create physical presence are insufficient to establish more than a de minimis physical presence. For example, the presence of cookies on computers in a state appears to be less of a physical presence than the floppy disks the seller in Quill sent into North Dakota (which were used by its customers to place orders) that the United States Supreme Court viewed as de minimis. Second, the Directive violates the state administrative procedures act because it constitutes an administrative rule that was not validly adopted. Third, the Directive’s rule violates the Internet Tax Freedom Act, a federal statute, because the rule discriminates against internet sellers.

By its own terms, the Directive applies only prospectively. The Directive does not assert a blanket rule that internet sellers are liable for sales tax for periods prior to July 1, 2017, if they met a certain sales threshold. The risks from non-collection for such periods are dependent on a company’s specific facts. The letters advise sellers that they may be eligible for voluntary disclosure for such prior periods.

Companies have two general options: (1) register and begin collecting or (2) not register or collect. Litigation has been brought on behalf of a number of sellers to challenge the Directive on the grounds identified above. One important aspect of that litigation is the request for an injunction barring the enforcement of the Directive pending a court decision; an injunction would likely prompt many sellers to take a “wait and see” approach. Ultimately, sellers must make a business decision based on their own facts and business circumstances.

BREAKING NEWS: Expanded “Physical Presence” Codification Bill Introduced in House

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 13, 2017 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

On, June 12, 2017, the No Regulation Without Representation Act of 2017 was introduced by Congressman Jim Sensenbrenner (R-WI) with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in detail below, the scope and applicability of the “physical presence” requirement in the 2017 bill is significantly broader than the first iteration of the bill that was introduced last year. Not only does the bill expand the physical presence rule to all taxes, it expands the rule to all regulations.

2016 Bill

In July 2016, Congressman Sensenbrenner introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives. The bill provided that states and localities could 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. “Similar tax” meant a tax that is imposed on the sale or use of a product or service.

Under the 2016 bill, persons would have a physical presence only if the person: (1) owns or leases real or tangible personal property (other than software) 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. The bill provided that “physical presence” did not include the following: (1) click-through referral agreements with in-state persons who receive commissions for referring customers to the seller; (2) presence for less than 15 days in a taxable year; (3) product delivery provided by a common carrier; or (4) internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

The bill did not define the term “seller,” but did provide that “seller” did not include a: (1) marketplace provider (specifically defined); (2) referrer (specifically defined); (3) carrier, in which the seller does not have an ownership interest, providing transportation or delivery of tangible personal property; or (4) credit card issuer, transaction billing processor or other financial intermediary. Under the 2016 bill, persons not considered “sellers” (e.g., marketplace providers) were protected as well because the bill provided that a state may not impose a collection or reporting obligation or assess tax on “any person other than a purchaser or seller having a physical presence in the State.”

2017 Bill

The scope of the 2017 bill is significantly broader than the bill introduced in 2016 and would require a person to have “physical presence” in a state before the state can “tax or regulate [the] person’s activity in interstate commerce.” (emphasis added) The new bill applies the “physical presence” requirement to sales and [...]

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Illinois Bills to Watch

by Catherine A. Battin and Mary Kay McCalla Martire | May 24, 2017 | False Claims Act, Illinois, Income Tax, Interest and Penalties, Nexus, Sales Tax, Unclaimed Property

Just days away from the May 31 close of its regular legislative session, the Illinois General Assembly has yet to enact the comprehensive series of tax and budget reforms that were first proposed by the Illinois Senate leadership late last year. Yesterday, the Senate passed a modified version of Senate Bill (SB) 9, the tax proposal we described in a previous post, without any Republican support. SB 9 now moves to the Democratically-controlled House for consideration. Even if approved by the House, it seems likely that Illinois’ Republican Governor will veto the legislation. (more…)

Illinois Department of Revenue Reaffirms Cloud-Based Services Not Taxable

by Mary Kay McCalla Martire and Nick Furtwengler | May 16, 2017 | Illinois, Sales Tax

In two recent General Information Letters (GILs), the Illinois Department of Revenue (Department) reaffirmed that computer software provided through a cloud-based delivery system is not subject to tax in Illinois. The Department announced that while it continues to review cloud-based arrangements and may determine they are taxable at some point, any decision to tax cloud-based services will be applied prospectively only. The GILs also recognize Quill’s physical presence requirement for Commerce Clause nexus. (more…)

NCSL Task Force on SALT Meets in Anticipation of Active Legislative Sessions

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jan 17, 2017 | Audits, Constitutional Issues, Federal Tax, Income Tax, Nationwide Importance, Nexus, Sales Tax, Tax Base, Transaction Taxes

On Saturday, January 14, the National Conference of State Legislatures (NCSL) Task Force on State and Local Taxation (Task Force) met in Scottsdale, Arizona to discuss many of the key legislative issues that are likely to be considered by states in 2017. The Task Force consists of state legislators and staff from 33 states and serves as an open forum to discuss tax policy issues and trends with legislators and staff from other states, tax practitioners and industry representatives.

Below is a short summary of the key sessions and takeaways from the first Task Force meeting of 2017. PowerPoints from all sessions are available on the Task Force website.

Nexus Expansion Legislation Expected to Continue

With lawsuits pending in South Dakota and Alabama over actions taken by states in 2016, MultiState Associate’s Joe Crosby provided an overview of 2016 nexus expansion legislation (as well as legislation introduced thus far in 2017), with NCSL’s Max Behlke pointing out that he expects a lot of states to act on this trend this year.

In particular, it was pointed out that the US Supreme Court’s denial of cert in DMA v. Brohl (upholding the decision of the 10th Circuit) should give states confidence about their ability to constitutionally adopt similar notice and reporting laws. Last month, Alabama Revenue Commissioner Julie Magee publicly stated that Alabama plans to introduce notice and reporting legislation similar to Colorado, along with at least two other states.

Economic nexus laws directly challenging Quill, similar to South Dakota SB 106 passed last year, are also expected to be prevalent in 2017—with five states (Mississippi, Nebraska, New Mexico, Utah and Wyoming) already introducing bills or formal bill requests that include an economic nexus threshold for sales and use tax purposes. Notably, the Wyoming bill (HB 19) has already advanced through the House Revenue Committee and its first reading by the Committee of the Whole and is expected to receive a final vote in the House this week. The Nebraska bill (LB 44) takes a unique approach in that it would impose Colorado-style notice and reporting requirements on remote sellers that refuse to comply with the economic nexus standard.

Behlke pointed out that he doesn’t see Congress acting on the remote sales tax issue in early 2017 due to other priorities—including federal tax reform. With a final resolution of the kill-Quill efforts by the US Supreme Court most likely not possible until late 2017 (or later), state legislatures are likely to feel the need to take matters into their own hands. From an industry perspective, this presents a host of compliance concerns and requires companies currently not collecting based on Quill to closely monitor state legislation. This is especially true given the fact that many of the bills take effect immediately upon adoption.

(more…)

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