Sales Tax Affiliate and Click-Through Nexus:
After the Amazon Ruling Mastering the New Demands of Sales Tax Compliance for Multi-State Companies
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THURSDAY, JANUARY 30, 2014
Presenting a live 110-minute teleconference with interactive Q&A
Pat Derdenger, Tax Partner, Steptoe & Johnson, Phoenix
Arthur Rosen, Partner, McDermott Will & Emery, New York
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Sales Tax Affiliate and Click-Through Nexus: After the Amazon Ruling
Jan. 30, 2014
Pat Derdenger, Steptoe & Johnson
Arthur Rosen, McDermott Will & Emery
Today’s Program
Recent Developments and Background
[Arthur Rosen]
Practical Compliance Concerns
[Pat Derdenger]
Slide 8 – Slide 57
Slide 58 – Slide 84
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
RECENT DEVELOPMENTS AND BACKGROUND
Arthur Rosen, McDermott Will & Emery
Agenda
I. Recent Developments
II. Background
III. Income Tax Implications
IV. Other Aspects of State Actions
A. Amazon Tax Collection Deals
B. VDA Offers
C. Other Concerns
9
Agenda
I. Recent Developments
II. Background
III. Income Tax Implications
IV. Other Aspects of State Actions
A. Amazon Tax Collection Deals
B. VDA Offers
C. Other Concerns
10
Recent Developments – Click-Through Nexus
• Click-Through Nexus Laws
Legend
Nexus without statute
Legislation under
consideration
Nexus legislation passed
Legislation considered but
not passed or passed then
vetoed
Other (incl. notification
requirement)
Oregon
MD
CT CT
NH NH
VT
Pennsylvania
W. VA
Michigan
Miss. Alabama
Oregon
Nevada
Utah
Minnesota
Iowa
Indiana Ohio
Del.
N.
J.
CT
Mass.
Vt.
PA
New York
W. Va.
Missouri
Louisiana
Wisconsin
Illinois*
Michigan
Miss. Alabama Georgia
Florida
TN S. Carolina
N. Carolina
Virginia Kentucky
Wyoming
Colorado
North Dakota
South Dakota
Nebraska
Kansas
Oklahoma
Texas
Arizona New Mexico
California
Idaho
Montana Maine
R.I.
Arkansas
Hawaii Alaska
D.C.
M.D.
Washington
No state sales or use tax *The Illinois Supreme Court has recently struck down
the state’s click-through nexus law.
11
Recent Developments – Click-Through Nexus
State Effective Date Affiliate Threshold Statute
Arkansas (rebuttable presumption) Oct. 24, 2011 More than $10,000 Ark. Code Ann. § 26-52-117
California (rebuttable presumption)
Sept. 15, 2012. More than $10,000 and (and more than
$1,000,000 in annual in-state sales whether a
result of click-through referrals or otherwise)
Cal. Rev. & Tax. § 6203(c)(5)
Connecticut (irrebuttable presumption) July 1, 2011 More than $2,000 Conn. Gen. Stat. § 12-407(a)(12)(L)
Georgia (rebuttable presumption) Oct. 1, 2012 More than $50,000
Ga. Stat. Ann. § 48-8-2(8)(M)
Illinois (irrebuttable presumption) July 1, 2011 More than $10,000 35 ILCS §§ 105/2 and 110/2
Kansas (rebuttable presumption) Oct. 1, 2013 More than $10,000 Kan. Stat § 79-3702(h)(2)(C)
Maine (rebuttable presumption) Oct. 9, 2013 More than $10,000 Me. Rev. Stat. Ann. § 1754-B(1-A)(C)
Minnesota (rebuttable presumption) July 1, 2013 More than $10,000 Minn. Stat. § 297A.66, Subd. 4a
Missouri (rebuttable presumption) Aug. 28, 2013 More than $10,000 Mo. Rev. Stat. § 144.605(2)(e)
New York (rebuttable presumption) June 1, 2008 More than $10,000 N.Y. Tax Law § 1101(b)(8)(vi)
North Carolina (rebuttable presumption) Aug. 7, 2009 More than $10,000 N.C. Gen. Stat. § 105-164.8
Rhode Island (rebuttable presumption) July 1, 2009 More than $5,000 R.I. Gen. Laws § 44-18-15
Vermont (rebuttable presumption) When adopted in
15 other states.
More than $10,000 Vt. Stat. Ann. tit. 32, § 9701(9)(I)
(H.B. 436)
• The Pennsylvania DOR requires remote sellers to collect sales and use tax. Pa. Sales and Use Tax Bulletin 2011-01 (Dec. 1, 2011)
12
Recent Developments – Click-Through Nexus
I. Amazon.com, LLC v. New York State Department of Taxation and Finance, 20
N.Y.3d 586 (N.Y. 2013)
A. The New York Court of Appeals upheld the New York Amazon Law as facially
constitutional.
B. The Court found that although physical presence is generally necessary for
sales tax nexus, it need not be substantial, and can be met if economic
activities are performed in the state by a seller on behalf of the taxpayer.
C. “Active, in-state solicitation that produces a significant amount of revenue
qualifies as ‘demonstrably more than a slightest presence . . . . The bottom
line is that if a vendor is paying New York residents to actively solicit business
in this State, there is no reason why that vendor should not shoulder the
appropriate tax burden.’”
D. The United States Supreme Court denied certiorari on December 2, 2013.
13
Recent Developments – Click-Through Nexus
I. Performance Marketing Ass’n v. Hamer, No. 114496 (Ill. S. Ct. Oct. 18, 2013).
A. “In short, under the Act, performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached. However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reaches the same dollar threshold, will not trigger an Illinois use tax collection obligation.
B. “The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the ITFA.”
C. Commerce clause challenge not reached.
14
Recent Developments – Use Tax Notice Requirements
I. Colorado
A. Colo. Rev. Stat.
39-21-112(3.5)(d)
II. Kentucky
A. Ky. Rev. Stat. Ann.
139.450
III. Oklahoma
A. 68 Okla. Stat.
1406.1
IV. South Carolina
A. S.C. Code Ann.
12-36-2691(E), -2692
V. South Dakota
A. S.D. Codified Laws
10-63-2
15
Recent Developments – Use Tax Notice Requirements
I. Colorado
A. Retailers that do not collect Colorado sales and use tax are required to send
notification to all of their Colorado purchasers by January 31 of each year showing
the total amount paid by the purchaser for Colorado purchases made from the
retailer in the previous calendar year. The notification must state that Colorado
requires a sales or use tax return to be filed and sales or use tax paid on certain
Colorado purchases made by the purchaser from the retailer.
B. Such retailers must also file an annual statement for each purchaser with the
Colorado Department of Revenue showing the total amount paid for Colorado
purchases of such purchasers during the preceding calendar year.
C. Failure to send the notification or file the annual statement will result in a penalty
of $10 for each such failure, unless the retailer shows reasonable cause for such
failure.
16
Recent Developments – Use Tax Notice Requirements
I. Kentucky
A. Retailers not required to collect Kentucky sales and use tax that make total gross sales of $100,000 or more to
Kentucky residents or businesses located in Kentucky must notify the purchaser that the purchaser is required to
report and pay the Kentucky use tax directly to the Department of Revenue.
II. Oklahoma
A. Retailers not required to collect Oklahoma sales and use tax must provide notification to its customers that use
tax is imposed and must be paid by the purchaser, unless otherwise exempt, on the storage, use, or other
consumption of the tangible personal property in this state.
III. South Carolina
A. Certain people owning distribution facilities and making specified capital investments in the state who make
sales through their websites must notify a purchaser in a confirmation email that the purchaser may owe South
Carolina use tax on the total sales price of the transaction and include in the email an Internet link to the South
Carolina Department of Revenue’s website that allows the purchaser to pay the use tax.
B. Such people must also notify South Carolina purchasers of their potential use tax obligations on their invoices.
C. Such people must also, by February first of each year, provide to each purchaser to whom tangible goods were
delivered in the state a statement of the total sales made to the purchaser during the preceding calendar year.
IV. South Dakota
A. Retailers not required to collect South Dakota sales and use tax must give notice that use tax is due on
nonexempt purchases of tangible personal property, services, or products transferred electronically and must be
paid by the South Dakota purchaser.
17
Recent Developments – Use Tax Notice Requirements
I. Direct Marketing Ass’n v. Brohl, Dkt. No. 12-01175 (10th Cir. Aug. 20, 2013)
A. In May 2012, Colorado appealed a ruling by the U.S. District Court for the
District of Colorado striking down as unconstitutional a reporting requirement
imposed on out-of-state vendors that do not collect and remit state sales and
use taxes.
B. The federal appellate court declined to rule on the merits of the Association’s
Commerce Clause claims against Colorado, saying the Tax Injunction Act
deprived the district court of jurisdiction to enjoin the state’s tax collection
efforts.
C. The DMA will file in Colorado state court.
18
Recent Developments – Federal Legislation
I. Marketplace Fairness Act [S. 743] [113th Congress]
A. Introduced: April 16, 2013.
B. Passed by the Senate: May 6, 2013.
C. Referred to the House Committee on the Judiciary Subcommittee on Regulatory Reform, Commercial And Antitrust Law : June 14, 2013.
D. This bill provides a state two options for gaining the Congressional authorization to require remote sellers to collect sales tax:
1. SSUTA member states have to provide 90 days notice that they will exercise authority under the Act;
2. Non-SSUTA members may exercise authority by complying with the minimum simplification requirements under the Act by enacting legislation that (1) specifies the taxes to which the authority applies; and (2) identifies products and services that will be excluded from the authority.
E. The MFA only applies to remote sales and remote sellers.
19
Recent Developments – Federal Legislation
I. Marketplace Fairness Act [S. 743] [113th Congress]
A. Chairman Goodlatte’s Principles:
1. Tax Relief – Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.
2. Tech Neutrality – Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.
3. No Regulation Without Representation – Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.
4. Simplicity – Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.
5. Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.
6. States' Rights – States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.
7. Privacy Rights – Sensitive customer data must be protected.
20
Slide Intentionally Left Blank
Agenda
I. Recent Developments
II. Background
III. Income Tax Implications
IV. Other Aspects of State Actions
A. Amazon Tax Collection Deals
B. VDA Offers
C. Other Concerns
22
Nexus Analytical Framework Nexus with the
Transaction
Due Process
Part of Unitary Business
Commerce
Clause
Substantial
Nexus
Nexus with the Person
Due Process
Minimum Nexus
Minimum Contacts/Purposeful
Availment
Commerce
Clause
Substantial
Nexus
Sales and Use Taxes
Physical
Presence
Other Taxes
???
23
Due Process Clause
I. Due Process Clause & Taxpayer’s Right—U.S.
Const. amend. XIV,
1 A. “[N]or shall any State deprive any person of life, liberty, or property, without due
process of law”
B. Similar to the U.S. Const. amend. V
24
Due Process Clause Nexus with the Transaction
I. Allied Signal v. Dir., Div. of Tax., 504 U.S. 768 (1992) A. “. . . there must be a connection to the activity itself [nexus with the
transaction], rather than a connection only to the actor the State seeks to tax [nexus with the person] . . . . The constitutional question in a case such as Quill Corp. is whether the State has the authority to tax the corporation at all [nexus with the person].”
II. MeadWestvaco Corp. v. Illinois Dep’t of Revenue, 553 U.S. 16 (2008) A. “. . . apportionment [can] permissibly be applied to a multistate business
lacking the ‘physical unity’ of wires or rails but exhibiting the ‘same unity in the use of the entire property for the specific purpose,’ with ‘the same elements of value arising from such use.’”
B. “The conclusion that the asset served an operational function was merely instrumental to the constitutionally relevant conclusion that the asset was a unitary part of the business being conducted in the taxing State rather than a discrete asset to which the State had no claim.”
25
Due Process Clause Nexus with the Person
I. Burger King v. Rudzewicz, 471 U.S. 462
(1985) A. “The connection to a state that is necessary to support in
personam jurisdiction is purposeful direction of activities into
state.”
II. Quill Corp. v. North Dakota, 504 U.S.
298 (1992) A. “The connection to a state that is needed to support tax
jurisdiction is comparable to that need to support general in
personam jurisdiction.”
26
Due Process Clause Nexus with the Person
I. World-Wide Volkswagen Corp. v.
Woodson, 444 U.S. 286 (1980) A. The requisite contacts with a state must come as a result of
defendant’s (i.e., taxpayer’s) own activities.
27
Due Process Clause Nexus with the Person
I. Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011) A. “[Defendant’s] attenuated connections to the state fall far short of the “the
continuous and systematic general business contacts” necessary to empower [the state] to entertain suit against them on claims unrelated to anything that connects them to the state.”
II. J. McIntyre Machinery, Ltd. v. Nicastro, 131 S.Ct. 2780 (2011) A. “As a general rule, the exercise of judicial power is not lawful unless the
defendant ‘purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’ Hanson v. Denckla, 357 U.S. 235, 253 (1958). … [T]he general rule is applicable in this products-liability case, and the so-called ‘stream-of-commerce” doctrine cannot displace it.”
III. Daimler AG v. Bauman, Dkt. No. 11-965 (U.S. Jan 14, 2014) A. “[O]nly a limited set of affiliations with a forum will render a defendant
amenable to all-purpose jurisdiction there. . . . Accordingly, the inquiry under Goodyear is not whether a foreign corporation’s in-forum contacts can be said to be in some sense ‘continuous and systematic,’ it is whether that corporation’s ‘affiliations with the State are so ‘continuous and systematic’ as to render [it] essentially at home in the forum State.’”
28
Due Process Clause Nexus with the Person
I. Gordon v. Holder, 632 F.3d 722 (D.C. Cir. Feb. 18, 2011), remanded to
2011 U.S. Dist. LEXIS 139201 (D.D.C. Dec. 5, 2011)
A. “Although Quill did not deal with excise taxes, there remains an
open question whether a national authorization of disparate state
levies on e-commerce renders concerns about presence and burden
obsolete.”
II. See also Red Earth LLC v. U.S., 728 F.Supp.2d 238 (W.D.N.Y. 2010), aff’d
657 F.3d 128 (2d Cir. 2011)
29
Commerce Clause Nexus Overview
I. U.S. Const., art. I,
8, cl. 3 A. “The Congress shall have the power . . . to regulate commerce . . . among the
several states.”
B. Has a direct and an implied aspect
1. Direct aspect comes from the language: “Congress shall
have the power”
2. Implied aspect (the “Negative/Dormant Commerce
Clause”) derives from a judicial interpretation that the CC
“of its own force” limits state taxes where Congress has
been silent.
30
Commerce Clause Nexus with the Transaction
I. Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977) A. The Court’s contemporary standard
B. Tax on interstate commerce valid if:
1. Tax applied to an activity having a substantial nexus with the
taxing state;
2. Is fairly apportioned;
3. Does not discriminate against interstate commerce; and,
4. Is fairly related to the services provided by the state.
31
Commerce Clause Nexus with the Transaction
I. Goldberg v. Sweet, 488 U.S. 252 (1989) A. “We doubt that States through which the telephone call's
electronic signals merely pass have a sufficient nexus to tax that
call. . . . We believe that only two States have a nexus substantial
enough to tax a consumer's purchase of an interstate telephone
call.”
32
Commerce Clause Nexus with the Person
I. Quill Corp. v. North Dakota, 504 U.S.
298 (1992) A. For a state to have taxing jurisdiction over a person under dormant
Commerce Clause principles, the person must have substantial
nexus with the state, which for sales and use tax purposes, equates
with physical presence in the state.
33
Attributional Nexus
I. When can another entity’s in-state activities create nexus for an out-of-state entity?
34
Attributional Nexus
I. Representative approach
A. Bloomingdale’s By Mail, Ltd. v. Commonwealth, 567 A.2d 773 (Pa. Commw. Ct. 1989)
B. SFA Folio Collections, Inc. v. Bannon, 585 A.2d 666 (Conn. 1991)
II. Alter ego approach
A. Pearle Health Serv., Inc. v. Taylor, 799 S.W.2d 655 (Tenn. 1990)
III. Unitary/affiliate approach
A. Comptroller v. Armco Export Sales Corp., 572 A.2d 562 (Md. App. 1990)
B. SYL, Inc. Comptroller of the Treasury, 825 A.2d 399 (Md. Ct. App. 2003)
C. California Assembly Bill 155
D. Alabama Admin. Code 810-6-2-.90.01 (effective Aug. 24, 2012)
35
Attributional Nexus Representative Approach
I. Scripto Inc. v. Carson, 362 U.S. 207 (1960) A. “True, the ‘salesmen’ are not regular employees of appellant devoting
full time to its service, but we conclude that such a fine distinction is without constitutional significance. The formal shift in the contractual tagging of the salesman as ‘independent’ neither results in changing his local function of solicitation . . .”
II. Tyler Pipe Indus., Inc. v. Washington Dep’t of Rev., 482 U.S. 232 (1987) A. The “crucial factor governing nexus” is whether the activities
performed by the independent contractor on behalf of the out-of-state company are “significantly associated with the taxpayer’s ability to establish and maintain a market in [the] state for the sales.”
36
Attributional Nexus – Representative Approach
• N.M. Taxation & Rev. Dep’t v. BarnesandNoble.com LLC, Docket No.
33,627 (N.M. S. Ct. 2013)
― Taxpayer, an online retailer with no physical presence in New
Mexico, had substantial nexus with the state through the
taxpayer’s sister corporation, which did have a physical presence
in the state.
― The sister corporation: (1) Displayed the taxpayer’s website in its
in-state retail stores, (2) shared the same trademark, and
therefore brand loyalty, with the taxpayer, and (3) engaged in
cross-marketing activities for the taxpayer’s benefit, all of which
maintained the taxpayer’s market in New Mexico.
• See also Haw. Letter Ruling 2012-10 (July 10, 2012) (The
establishment of a shopping rewards program and return policy with
an affiliated retailer that maintains physical locations within Hawaii
creates sufficient nexus for the general excise tax)
37
Attributional Nexus – Unitary/Affiliate Approach
• Comptr. of the Treas. v. W.L. Gore, Nos. 1696, 1697 (Md. Ct. Spec. App., Jan.
24, 2013)
― The Maryland Court of Special Appeals ruled that two subsidiaries of Gore,
one holding its intangible assets and one holding its financial assets, had
royalty and loan interest income apportionable to Maryland based upon a
unitary relationship with the parent company, which generated income in
Maryland. Nexus sufficient to justify taxation arises from the economic
reality that a parent's business in the taxing state produces a subsidiary's
income. The subsidiaries’ income was entirely the product of expenses
that the parent deducted in Maryland, so the subsidiaries’ income was
earned in Maryland.
38
Slide Intentionally Left Blank
Agenda
I. Recent Developments
II. Background
III. Income Tax Implications
IV. Other Aspects of State Actions
A. Amazon Tax Collection Deals
B. VDA Offers
C. Other Concerns
40
Economic Nexus
I. Is physical presence necessary to create taxable nexus for taxes other than sales and use taxes?
II. Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
A. “Although we have not, in our review of other types of taxes, articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes, that silence does not imply repudiation of the Bellas Hess rule.”
41
Economic Nexus
I. Geoffrey, Inc. v. South Carolina Tax Comm‘r., 437 S.E.2d 13 (1993), cert. denied, 510 U.S. 992 (1993)
A. “…by licensing intangibles for use in this state and deriving income from their use here, Geoffrey has a ‘substantial nexus’ with South Carolina [for purposes of the state’s income tax].”
II. Other Intangible Property Companies Cases
A. Geoffrey, Inc. v. Comm’r of Rev., 899 N.E.2d 87 (Mass. 2009), cert. denied, 129 S. Ct. 2853 (2009)
B. Geoffrey, Inc. v. Oklahoma Tax Comm’n, 132 P.3d 632 (Okla. Ct. App. 2005)
C. A & F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004), cert. denied, 126 S. Ct. 353 (2005)
D. Lanco, Inc. v. Dir., Div. of Tax., 908 A.2d 176 (N.J. 2006), cert. denied, 127 S. Ct. 2974 (2007)
42
Economic Nexus
I. Tax Comm’r v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.V. 2006), cert. denied, 551 U.S. 1141 (2007)
A. An out-of-state bank that issued credit cards to West Virginia customers had income tax nexus based on its “significant economic presence” in the state.
II. Capital One Bank v. Comm’r of Rev., 899 N.E.2d 76 (Mass. 2009), cert. denied, 129 S. Ct. 2827 (2009)
A. “While the concept of ‘substantial nexus’ is more elastic than ‘physical presence,’ it plainly means a greater presence, both qualitatively and quantitatively, than the minimum connection between a State and a taxpayer that would satisfy a due process inquiry.”
B. Capital One’s credit card business, generating millions of dollars in income, established substantial nexus with Massachusetts despite a lack of physical presence.
43
Economic Nexus
I. Quantitative Statutes
A. MTC Factor Presence ($500K in sales)
B. Cal. Rev. & Tax Code
23101 ($500K in sales)
C. Mich. Comp. Laws Ann.
206.621(1) ($350K in sales)
D. Ohio Rev. Code Ann.
5751.01 ($500K in sales)
E. Wash. Rev. Code Ann.
82.04.067 ($250K in sales)
II. Constitutional Challenges
A. The Ohio Tax Commissioner ruled that an out-of-state mail order company had substantial nexus with Ohio for purposes of the commercial activity tax because its gross receipts in the state satisfied the bright line presence standard (over $500,000 in receipts). In re L.L. Bean, Inc., (Ohio Dep’t of Taxation, Final Determination, August 10, 2010).
44
Economic Nexus
I. Qualitative Statutes
A. Connecticut
1. Conn. Gen. Stat.
12-216a (“Any company that derives income
from sources within this state and that has a substantial economic
presence within this state, evidenced by a purposeful direction of
business toward this state”)
2. $500,000 quantitative threshold adopted by informal
publication. Connecticut Informational Publication No. 2010(29.1)
(Dec. 28, 2010)
B. New Hampshire
1. N.H. Rev. Stat. Ann.
77-A:1(XII) (“substantial economic
presence”)
C. Wisconsin
1. Wisc. Stat.
71.22(1r) (“regularly selling products or services of
any kind or nature to customers in [Wisconsin]”)
45
Economic Nexus
I. Scripto Inc. v. Carson, 362 U.S. 207 (1960) A. “True, the ‘salesmen’ are not regular employees of appellant
devoting full time to its service, but we conclude that such a fine distinction is without constitutional significance. The formal shift in the contractual tagging of the salesman as ‘independent’ neither results in changing his local function of solicitation . . .”
II. Tyler Pipe Indus., Inc. v. Washington Dep’t of Rev., 482 U.S. 232 (1987) A. The “crucial factor governing nexus” is whether the activities
performed by the independent contractor on behalf of the out-of-state company are “significantly associated with the taxpayer’s ability to establish and maintain a market in [the] state for the sales.”
46
Slide Intentionally Left Blank
Agenda
I. Recent Developments
II. Background
III. Income Tax Implications
IV. Other Aspects of State Actions
A. Amazon Tax Collection Deals
B. VDA Offers
C. Other Concerns
48
Amazon Tax Collection Deals - Examples
I. Arizona A. On Oct. 26, Amazon revealed it reached agreement with
Arizona to start collecting taxes on sales of physical goods beginning Feb. 1, 2013, and on sales of digital goods and services beginning July 1, 2013.
II. Texas A. Amazon announced on Jan. 30, 2013 that it would open
three fulfillment centers in Texas as part of its sales tax collection agreement with the state.
III. Florida A. On June 13, 2013, Amazon.com agreed to establish new warehouse facilities in Florida. The
proposed expansion is estimated to create 3,000 full time jobs and result in $300 million in investment in Florida over the next three years. Amazon will begin to collect sales tax from Florida customers, as required under Florida law, upon completion of the facilities.
IV. Massachusetts A. On December 11, 2012, Massachusetts reaches an agreement with Amazon.com that the company
will start collecting and remitting the state’s sales tax beginning in November 2013.
49
VDA Offers
I. Voluntary Disclosure Agreements provide taxpayers with the opportunity to disclose tax compliance errors to the states without subjecting themselves to penalties and other enforcement actions.
II. Generally are non-statutory “settlements”
A. But see N.Y. Tax Law
1700
1. “Under the voluntary disclosure and compliance program, upon execution of a voluntary disclosure and compliance agreement by the eligible taxpayer and the commissioner, the commissioner shall waive any applicable penalties (including the additional rate of interest prescribed under section eleven hundred forty-five of this chapter) for the following: (1) Failure to pay any such tax liability; (2) Failure to file a return or report with respect to any such tax liability; and (3) Failure to pay estimated tax. In addition, no criminal action or proceeding shall be brought against an eligible taxpayer relating to the tax liability covered by the agreement.”
2. “To participate in the voluntary disclosure and compliance program, an eligible taxpayer must apply by submitting a disclosure statement in the form and manner prescribed by the commissioner. The disclosure statement shall contain all the information the commissioner reasonably deems necessary to effectively administer the program.”
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Other Concerns
I. Racketeer Influenced and Corrupt Organizations Act (“RICO”) Suits
A. United States v. Porcelli, 865 F.2d 1352 (2d Cir. 1989)
1. Porcelli failed to collect retail sales tax on the gasoline sold at his Gaseteria
gas stations, filed approximately one hundred fraudulent New York State sales
tax returns between 1979 and 1982, and, as a result, deprived New York of
nearly $5 million in sales taxes.
2. “We think that the prosecution of a state sales tax evader for a RICO violation
pushes that law to its outer limits, especially when that tax evasion was not
made criminal by the state itself at the time that the fraudulent returns were
filed. We nevertheless affirm the convictions . . . by virtue of the
extraordinarily broad sweep of RICO . . . .”
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Other Concerns
I. Racketeer Influenced and Corrupt Organizations Act (“RICO”) Suits
A. Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006)
1. “[W]e conclude Ideal cannot maintain its claim based on [RICO]. . . . Ideal’s
theory is that Joseph and Vincent Anza harmed it by defrauding the New York
tax authority and using the proceeds from the fraud to offer lower prices
designed to attract more customers. The RICO violation alleged by Ideal is
that the Anzas conducted National’s affairs through a pattern of mail fraud
and wire fraud. The direct victim of this conduct was the State of New York,
not Ideal. . . . The cause of Ideal’s asserted harms, however, is a set of
actions (offering lower prices) entirely distinct from the alleged RICO
violation (defrauding the State).”
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Other Concerns
I. False Claims Act Suits
A. What are they?
B. Derived from Federal False Claims Act
1. “Whistleblower” Relator gets rich reward for disclosing fraud on government
2. Typically an employee with inside knowledge
3. Allege a fraudulent failure to collect and remit tax
4. State can intervene and prosecute or let Relator proceed; benefit split
between Relator and State with Relator obtaining up to 30% in many cases.
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Other Concerns
I. False Claims Act Suits
A. Substantial Risks to Taxpayers:
1. Treble damages = to three times tax
2. Penalties for each “false” filing
3. Obligation to pay attorneys’ fees, costs and expenses in case of loss or
settlement
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Other Concerns
I. False Claims Act Suits
A. How widespread?
1. 29 states, New York City, Chicago, Allegheny County, PA
2. 9 prohibit tax actions (CA, HI, MA, NM, NC, TN, VA, DC and NY City)
3. 3 (IL, IN, RI) bar income tax actions
4. Remaining states have no tax bar
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Other Concerns
I. False Claims Act Suits
A. Difficulties for Taxpayers:
1. Pro – “whistleblower” sentiment
2. Fact intense, so hard to dismiss
3. May not involve State Revenue Departments; State AGs lack tax knowledge,
may seek to benefit from settlement rather than seek dismissal
4. Complex intersection of false claims and tax
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Other Concerns
I. False Claims Act Suits
A. Results:
1. Barrage of Illinois litigation in two waves, aimed at sales tax on ecommerce
and tax on shipping and handling charges
2. New York action v. Sprint-Nextel Corp.
3. Other state attorneys general (TN, NV) have opposed the litigation
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PRACTICAL COMPLIANCE CONSIDERATIONS
Pat Derdenger, Steptoe & Johnson
Sales Tax Affiliate Nexus
“Practical and Compliance Concerns”
By Pat Derdenger, Partner
Ben Gardner, Associate
Steptoe & Johnson LLP
[email protected]; [email protected]
(602) 257-5209
Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
Employee within a state. – Employees located in a state are sufficient to establish nexus. General
Trading Co.
Independent contractors. – The presence of even non-exclusive independent contractors
that solicit sales in the state is sufficient nexus. Scripto, Inc. v. Carson.
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
In-state deliveries by the vendor. – Illinois supreme court in Browns’ Furniture held that 15-18
deliveries per month from Missouri into Illinois was sufficient nexus.
Personalized delivery service. – An out-of-state vendor’s use of a third-party carrier to deliver products
into a state established nexus, where the carrier advertised for the remote vendor on its trucks, collected payments, set-up products, did minor repairs or picked up products for repair at the vendor’s out-of-state location. Furnitureland South.
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
Trade show attendance. – Rules vary by state.
– Not sufficient nexus. Florida Dep’t of Revenue v. Share Int’l, Inc.
– Conn. Gen. Stat. § 12-407(a)(15)(D) – no nexus if no sales are made at the show and the vendor is present at shows less than 14 days per year.
– Cal. Rev. & Tax Code § 6203(e) – no nexus if vendor attends shows less than 15 days per year and show activities generate less than $100,000 in California sales, but tax is due on sales made at the show.
– Iowa Pol. LTR 01300047 (2001) – more than one day’s attendance is sufficient nexus.
– Preifert Mfg. Co. (Wash. Bd. of Tax App.) – ranching equipment vendor had nexus by making occasional trips to state to meet with retailers and by attending horse shows.
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
Ownership of property in the state. – Must exceed an opaque de minimis threshold. See Quill (presence of
floppy discs in-state was not enough).
– Rental of personal property within the state is sufficient. Wabash Power Equipment Co. v. Lindsay.
– Sufficient nexus existed in part due to taxpayer’s ownership of a warehouse and apartment in state. In re Krystallos, Inc.
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
In state “agent.” – The “agent” does not need to be a common law agent or an exclusive
agent, but must help the vendor establish and maintain a market in the taxing state. Scripto, Inc.
– The operative inquiry – does the in-state party help the remote vendor establish and maintain a market for its products in the taxing state. Tyler Pipe.
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
In state warranty service. – Multistate Tax Comm’n bulletin for computer mail order
companies – in-state warranty repair services by independent contractor establishes nexus.
– Dell Catalog Sales cases • Nexus – Louisiana (2006); New Mexico (2008).
• No Nexus – Connecticut (2003).
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
In state affiliates. – Courts have generally held that affiliation alone does not
establish nexus. SFA Folio Collections (Conn.); SFA Folio Collections (Ohio); Current Inc. (Cal.). • But states keep trying to pass affiliate nexus laws.
– Borders Online (Cal.) – Out-of-state, online retailer had nexus because its in-state, bricks & mortar affiliate accepted returns for the online retailer and encouraged customers to shop online.
– BarnesandNoble.com, LLC (N.M.) – Nexus created through in-state affiliate book store who displayed the out-of-state vendor’s website in its stores, shared the same trademark (brand loyalty), and engaged in cross-marketing activities that benefited the vendor, all of which helped the online vendor establish and maintain a market in the state.
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Practical Concerns: Avoiding Nexus Pitfalls –
Employees, Agents, Property and Affiliates
– Possible Solutions
• Be aware of where the company has employees, agents, property
and affiliates and consider the nexus implications in advance.
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Slide Intentionally Left Blank
Practical Concerns: Location of Web Servers
Does use of a web server establish nexus?
– Rulings on Servers:
• New Mexico Taxation and Revenue Dep’t, Ruling No. 401-97-6
(11/20/1997) – If a taxpayer “owns or leases the server . . . and the
server is in New Mexico, that in itself would create nexus for [the
taxpayer] with New Mexico”
– However, simply having a website on a computer server located in New
Mexico, but owned by a third party, is not nexus. N.M. Stat. § 7-9-3.3
» S.B. 207 was introduced in 2012 to repeal this exclusion, but the bill
died in committee.
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Practical Concerns: Location of Web Servers
• Va. Dep’t of Taxation, Pub. Doc. Ruling No. 05-128 (08/02/05) –
“out-of-state seller whose only presence in Virginia is a computer
server [owned by another business] used to create or maintain an
Internet website does not have nexus for sales and use tax
purpose”
– But, if the dealer owns or rents the server and it is located in Va.,
the dealer may have nexus. See Va. Dep’t of Taxation, Pub.
Doc. Ruling No. 04-38 (07/28/2004)
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Practical Concerns: Location of Web Servers
• Ill. Dep’t of Rev., General Information Letter No. ST 01-0088-GIL
(05/09/01) – “retailer’s use of a server located in Illinois, in and of
itself, is generally not sufficient to establish nexus for sales of
tangible personal property made through the internet”
– The retailer did not own or lease the server.
– Rather, it paid a fee to a web-hosting company for use of the
server (also used by others).
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Practical Concerns: Location of Web Servers
• Texas Comptroller of Public Accounts, Policy Letter Ruling No.
201103016L (03/24/2011)
– “If the entirety of your presence and business activity in Texas is limited
to: 1) having ONLY a website on a third-party server in Texas (upon
which the third-party provides all the functionality) and 2) delivering
physical products into the state via third-party common carrier, you are
not considered to be engaged in business in Texas.”
– The ruling indicated that the outcome might be different if the out-of-
state vendor stored digital inventory, such as software programs for
sale, on the server in Texas.
– Texas enacted HB 1841 in 2011, which codifies this ruling.
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Practical Concerns: Location of Web Servers
– Solutions
• Taxation may turn on whether you own or lease the server, or
contract with a third-party for a server service
• To be safe, use servers that are located in states in which you
already have physical presence – i.e. home state
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Practical Concerns: Business Entity Naming Policies
MTC Proposed Model Affiliate Sales Tax Nexus Statute (April 28, 2005) - An out-of-state vendor has substantial nexus for use tax collection if:
1. Out-of-state vendor and in-state business are “related parties”
2. Out-of-state vendor and in-state business use identical or similar name, trade name, trademark or goodwill to develop, promote or maintain sales, or in-state business provides services to or that benefit the out-of-state vendor’s in-state sales
3. Out-of-state vendor must have at least $100,000 of sales in previous year
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Practical Concerns: Business Entity Naming Policies
– Several states have adopted statutes similar to the MTC Proposed
Statute, for example:
• Alabama – Ala. Code § 40-23-190(a)(2)
• Idaho - Idaho Code § 63-3615A(1)(b)
• New Jersey - N.J. Rev. Stat. § 54:32B-2(i)(2)(b)
– Comptroller v. Furnitureland South, Inc., No. C-97-37872-OC, Md.
Cir. Ct., Aug. 18, 1999. - Nexus found in part through use of similar
logos between in-state and out-of-state parties
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Practical Concerns: Business Entity Naming Policies
– Solution
• Don’t use the same or a similar name for your in-state and out-of-
state affiliates or internet and bricks and mortar affiliates.
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Practical Concerns: Location of Distribution and
Fulfillment Activities
– States may find Nexus established through an affiliate engaging in
distribution and fulfillment activities on your behalf
• Lyon Metal Products, Inc. v. State Bd. of Equalization, 58 Cal. App. 4th
906 (Cal. Ct. App. 1997) – Nexus established in CA where goods were
stored in a warehouse in CA and delivered from there to customers
• Williams and Co., Inc. v. Dailey, 303 S.E.2d 737 (W. Va. 1983) – Nexus
established in part due to presence of taxpayer’s warehouse in state.
• Some states have adopted or considered legislation specifying that
maintaining a warehouse or distribution center in the state (even when
held by a related entity) establishes nexus, for example:
– Texas (S.1, 2011), Oklahoma (HB 2359, 2010), Virginia (SB 597,2012), Georgia
(SB 386, 2012), Kansas (SB 83, 2013), Maine (HB 251, 2013), Ohio (HB 59,
2013), W. Va. (HB 2754, 2013).
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Practical Concerns: Location of Distribution and
Fulfillment Activities
– States may find Nexus established through an affiliate engaging in
distribution and fulfillment activities on your behalf
• Other states have created temporary safe harbors for distribution centers.
– S. Carolina (S.B. 36, 2011) – distribution centers do not create physical presence until January 1, 2016 if: (1) a new facility is placed in service between January 1, 2011 and December 31, 2012; (2) the facility creates at least 2,000 new jobs; and (3) the remote vendor makes (or causes to be made) a $125 million capital investment in the facility.
– Tennessee (H.B. 2370, 2012) – distribution centers do not create physical presence until January 1, 2014 (or the effective date of federal legislation) if: (1) a new facility is placed in service between January 1, 2011 and January 1, 2014; (2) the facility creates at least 3,500 new jobs; (3) the facility maintains 3,500 jobs until January 1, 2016; and (4) the remote vendor makes (or causes to be made) a $350 million investment in the facility.
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Practical Concerns: Location of Distribution and
Fulfillment Activities
– Solution
• Locate distribution and fulfillment activities in states in which you
already have physical presence and nexus.
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Practical Concerns: Voluntary Disclosure Agreements
– VDA programs give taxpayer who have not filed tax returns in
one or more states to disclose the tax compliance error and
negotiate a settlement of any back taxes.
– Incentives:
• Penalties: States generally agree to waive penalties and other
types of enforcement actions (but usually not interest).
• Look-back period: States generally agree to limit the look-back
period (generally the past 3-6 years, depending on the state).
• Anonymity: In many states, taxpayer can come forward
anonymously through a representative and maintain anonymity
until a settlement agreement has been reached.
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Practical Concerns: Voluntary Disclosure Agreements
– Two approaches:
• State by state approach.
• Multistate Tax Commission’s Multi-state Voluntary Disclosure
Program.
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Practical Concerns: Voluntary Disclosure Agreements
– State by state approach.
• The taxpayer or its representative contacts each state directly.
• Good approach when there are a small number of states at issue.
• Procedures, eligibility and terms vary by state.
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Practical Concerns: Voluntary Disclosure Agreements
– MTC Multi-state Voluntary Disclosure Program.
• The MTC acts as an intermediary and single point of contact for working
out voluntary disclosure agreements with one or more states.
• Eligibility: Taxpayer must not have had any contact with a state regarding the tax
type for which voluntary disclosure is sought, such as.
» Filing a return for the tax type.
» Paying a tax.
» Receiving an inquiry from the state regarding the tax type.
• Most states participate in the MTC’s program.
– Exceptions: New Mexico, Illinois, Delaware, Nevada, Ohio, and New
York.
– California SBOE participates (i.e. sales tax), but the FTB does not (i.e.
income/franchise tax).
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Practical Concerns: Voluntary Disclosure Agreements
– Observation:
• Consider pursuing a VDA if it is clear that you have nexus in a state but
have not filed returns or paid tax.
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