2017 State Tax Legislative Outlook

Transcription

1 Maria Todorova, Partner, Sutherland Madison Barnett, Counsel, Sutherland Robert Garvey, Principal, PwC TEI San Diego State and Local Tax Seminar September 29, State Tax Legislative Outlook All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

2 Agenda Sales Tax Nexus Expansion Combined Reporting Market-Based Sourcing Apportionment Ecommerce Platform Collection Taxation of Digital Goods Qui Tam/False Claims Act 2

3 SALES TAX NEXUS EXPANSION 3

4 What Is the Nexus Standard? The nexus standard set by the U.S. Supreme Court in Quill Corp. v. North Dakota (1992) still applies. In order for a state to impose a sales and use tax collection obligation on an out-of-state seller, the U.S. Supreme Court has held that a physical presence in the state is required. Quill Corp. v. North Dakota (1992). The physical presence must be more than de minimis. 4

5 Shifting Nexus Landscape The U.S. Supreme Court has not accepted a nexus case since Quill. Federal legislation addressing state sales tax collection is caught up in political wrangling. States have taken action to overturn Quill. Aggressive nexus positions Anti-Quill legislation Anti-Quill legislation that allows for immediate review by state courts Use tax reporting 5

6 Direct Marketing Association Justice Kennedy s Concurrence In Direct Mktg. Ass n v. Brohl, 135 S. Ct (2015), Justice Anthony Kennedy went out of his way to invite reconsideration of Quill. Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.it should be left in place only if a powerful showing can be made that its rationale is still correct. In response, states have taken legislative efforts to force remote vendors to collect sales tax. 6

7 Economic Nexus Alabama The Alabama Department of Revenue promulgated regulation imposing sales and use tax reporting and collecting obligations on out-of-state retailers without physical presence in Alabama if such retailer had at least $250,000 in retail sales of tangible personal property the prior calendar year. Based on commentary from the Alabama Revenue Commissioner, Alabama is willing to litigate the validity of its regulation, even in light of Quill. 7

8 Economic Nexus Alabama Once the regulation became effective, the Alabama Department of Revenue asserted that various remote retailers had substantial economic presence and had failed to report and collect Alabama sales and use tax. Newegg Inc. v. Ala. Dep t of Revenue, (Ala. Tax Tribunal) On June 8, 2016, Newegg filed suit against the Alabama Department of Revenue in the Alabama Tax Tribunal. Newegg contended that the Department s attempt to apply its regulation is unconstitutional and violates U.S. Supreme Court precedent. Newegg also argued that the regulation conflicts with Alabama's statutes. 8

9 Economic Nexus South Dakota On March 22, 2016, South Dakota enacted S.B. 106, which imposes a South Dakota sales and use tax reporting and collection on out-of-state retailers without physical presence in South Dakota if such retailers have in the current year or had in the prior year either: $100,000 of gross revenue from the sale of tangible personal property, electronic products, or services delivered into South Dakota; or 200 separate transactions in which tangible personal property, electronic products, or services were delivered into South Dakota. S.B. 106 permits the state to bring a declaratory judgment action in any South Dakota Circuit Court against any person [that South Dakota] believes meets the criteria of section 1 of [S.B. 106] to establish that the obligation to remit sales tax is applicable and valid under state and federal law. S.B. 106 does not require that the state attempt to collect sales tax from a remote seller before seeking such a judgment. On April 29, 2016, however, taxpayers challenged the constitutionality of S.B Complaint, Am. Catalog Mailers Ass n v. Gerlach, No. 32CIV16- (6th Cir., S.D.). 9

10 Economic Nexus South Dakota South Dakota v. Wayfair Inc., No. 32CIV (6th Cir., S.D.) On April 28, 2016, the South Dakota Department of Revenue filed suit in state court against several large online retailers (Wayfair Inc., Systemax Inc., Overstock.com Inc., and Newegg.com Inc.) that failed to register to collect and remit sales tax under S.B On May 25, 2016, the retailers filed a Notice of Removal for the case to be transferred to federal court asserting that the case raises an express question of federal law. South Dakota v. Wayfair Inc., No. 3:16-CV RAL (D.S.D.). On July 22, 2016, the Department filed a Motion to Remand asserting that the case should be remanded back to state court because the federal court lacked jurisdiction in declaratory judgment cases. The Department also argued for removal based on federal-state comity grounds, the Tax Injunction Act, and violation of the 11 th Amendment. On July 22, 2016, the retailers filed a Motion for Summary Judgment asserting the applicability of Quill and the importance of Congress. 10

11 Proposed Economic Nexus Tennessee: On June 16, 2016, the Tennessee Department of Revenue proposed regulation imposing sales and use tax reporting and collecting obligations on out-of-state retailers without physical presence in Tennessee if such retailer had at least $500,000 in retail sales of tangible personal property during the calendar year. Illinois: On April 15, 2016, the Illinois General Assembly proposed S.B to amend Illinois sales tax law to provide that a retailer is also presumed to be maintaining a place of business in this State if the retailer's total gross receipts from sales occurring in Illinois in the previous calendar year is $1,000,000 or more. Minnesota: On April 1, 2016, the Minnesota Legislature proposed H.B that would require a remote seller that does not have physical presence in the state to collect and remit Minnesota sales tax if the seller: engaged in one of several specified activities that do not require an instate physical presence; and made taxable sales to 20 or more Minnesota purchasers that aggregate to more than $200,000 or makes 200 or more taxable in-state sales. 11

12 COMBINED REPORTING 12

13 Combined Reporting for 2016 Combined Reporting Separate Reporting Not applicable * Based upon general rules. 13

14 Push for Combined Reporting Pushed in 2016 to no avail: - Alabama - Kentucky - Louisiana - Maryland - Pennsylvania Success in 2015: - Connecticut Pending in 2016: - New Jersey 14

15 Push for Combined Reporting Indiana: On March 24, 2016, the Indiana General Assembly enacted S.B. 323 calling for a study to be performed by the legislative services agency examining mandatory unitary combined reporting. - S.B. 323 as initially introduced included provisions that would have instituted mandatory unitary combined reporting. 15

16 MARKET-BASED SOURCING APPORTIONMENT 16

17 Sales Factor: Weighting for 2016 Single sales factor (DC) Three factor, triple weighted sales Three factor, double weighted sales Three factor Not applicable, no general corporate income tax * Based upon general sourcing rules. 17

18 Shift Toward Market-Based Sourcing Changing economy causing states to shift toward adoption of market-based sourcing 23 states and the District of Columbia have adopted market-based sourcing for service receipts Since 2014, the following jurisdictions have shifted to market-based sourcing: - Connecticut - New York - District of Columbia - Pennsylvania - Louisiana - Rhode Island - Massachusetts - Tennessee - Nebraska 18

19 Recently Enacted Market-Based Sourcing Connecticut - On June 6, 2016, S.B. 502 was enacted, which adopts marketbased sourcing effective for taxable years beginning on or after January 1, Louisiana - On June 28, 2016, H.B. 20 was enacted, which adopts marketbased sourcing effective for taxable years beginning on or after January 1, North Carolina - On July 1, 2016, H.B was enacted, which adopts proposed market-based sourcing provisions and requires the North Carolina Department of Revenue to issue related proposed regulations. 19

20 Market-Based Sourcing for 2016 Market-based sourcing (DC) Service performed sourcing Income producing activity / cost of performance sourcing Not applicable * Based upon general sourcing rules. 20

21 Market-Based Sourcing Final Regulations and Guidance California - On September 15, 2016, the California Franchise Tax Board filed its final amendments to 18 CCR governing market-based sourcing of sales of intangible property, amending its rules governing the sourcing of income from interest, marketable securities, dividends and goodwill. The effective date is January 1, Massachusetts - On January 2, 2015, the Massachusetts Department of Revenue issued its new final regulation, 830 CMR , that provides market-based sourcing rules for apportioning receipts from services and transactions involving intangible property. Michigan - On October 16, 2015, the Michigan Department of Treasury issued guidance, Michigan Revenue Administrative Bulletin , on how to determine where the recipient of services receives the benefit of those services. 21

22 Market-Based Sourcing Final Regulations and Guidance Nebraska - On December 27, 2015, the Nebraska Department of Revenue amended business entity regulations, Neb. Admin. Code et seq., on apportionment to incorporate market-based sourcing rules. Rhode Island - On December 23, 2015, the Rhode Island Division of Taxation issued its new final regulation, R.I. Regs. CT 15-04, that provides market-based sourcing rules. The effective date was January 12,

23 Market-Based Sourcing Draft Regulations and Guidance New York - On October 15, 2015, the New York State Department of Taxation and Finance issued draft market-based sourcing regulations that describe how to source receipts under the hierarchies described in NY Tax L 210-A.4 for digital products, and NY Tax L 210-A.10 for other services and other business activities. Tennessee - On February 25, 2016, the Tennessee Department of Revenue issued draft market-based sourcing regulations. Market-based sourcing was enacted during the 2015 session (H.B. 644). 23

24 ECOMMERCE PLATFORM COLLECTION 24

25 Sales Tax Collection Generally, sales or use tax is either: - Paid by seller; - Collected by seller from customer and remitted to state; or - Paid by customer. Thus, either the seller or the customer in a retail transaction is responsible for collecting or paying the sales or use tax. 25

26 Ecommerce Platform Collection With the expansion of electronic commerce marketplaces, states have looked for opportunities to shift the tax collection obligation to new types of entities. States have focused on: - Online hotel intermediaries (OTC); - Marketplaces (e.g., Ebay); - Transportation platforms (e.g., transportation network companies); - Financial entities; and - Common carriers. 26

27 Ecommerce Platform Collection States have attempted to shift the tax collection obligation to these entities through: - Asserting these entities are the seller/vendor/retailer OTCs - Asserting these entities are agents for the sellers - Enacting legislation to require such entities to collect tax OTCs Short-term rental platforms Transportation platforms - Proposing legislation to require such entities to collect Credit and debit card processors Marketplaces 27

28 Ecommerce Platform Collection Marketplaces New York New York s 2015 Budget Bill proposed to create a new class of sales tax payer a marketplace provider. Marketplace providers would have been responsible and liable for collecting and remitting New York sales tax on sales by all marketplace sellers with which they have an agreement, irrespective of whether the marketplace seller has nexus in New York. Marketplace providers would have all the duties, benefits and entitlements of a person required to collect the sales tax as if such marketplace provider were the vendor, operator or recipient with respect to such sale, occupancy or admission. This proposal was ultimately removed from the final Budget Bill. 28

29 Ecommerce Platform Collection Marketplaces Washington In Washington, H.B proposed legislation that would have created a sales tax collection requirement for marketplace facilitators. The legislation would have shifted the obligation to collect Washington sales and use tax from the actual seller of the product to the marketplace facilitator. A marketplace facilitator would have been deemed to be an agent of any marketplace seller selling through the marketplace facilitator s marketplace. As such, the marketplace facilitator would have been required to collect Washington sales tax on all retail sales to Washington customers made through the marketplace facilitator s marketplace even when the sales are not made by the marketplace facilitator and even when the actual seller has nexus and an independent sales tax collection requirement in Washington. 29

30 Ecommerce Platform Collection Marketplaces Other States 2016 Minnesota - Several bills included language that would have required marketplace providers that facilitate sales to customers in the state to collect and remit sales tax for the marketplace seller unless the seller is already collecting. - Bills were never passed. Oklahoma - H 2531would have required marketplace providers to collect and remit sales and use tax. - Language was modified before enactment to allow marketplace providers to collect. Rhode Island - H 7375 would have required marketplace providers to collect and remit sales tax. - Bill was referred to House Committee on Finance. 30

31 TAXATION OF DIGITAL GOODS 31

32 What Are Consumer Digital Goods? Often digital equivalents to historically tangible items, e.g., books, music, video games and videos (movies, television) Important distinctions with cloud-based services and B2B services Influence of the Streamlined Sales and Use Tax Agreement 32

33 Alabama Proposed Regulations Rental Tax Applies to Streaming Video The Alabama Department of Revenue (DOR) proposed amendments to the state s rental tax regulations, which would have applied the tax to digital transmissions including on-demand movies and TV, and streaming audio and video. Prop. Ala. Admin. Code r After heavy scrutiny during the comment period, and a letter from the Alabama Legislative Council that indicated that the Council would use its administrative review powers to reject enactment of the proposed rule, the Alabama DOR withdrew the proposed amendments. 33

34 California Localities Communication Users Tax Specific California localities have explored expanding their Utility User Tax (UUT) to apply to video services. For example, Bencia and City of Indio have issued an administrative ruling indicating that in response to a recent growth of video services using new technologies, the cities are applying/expanding their existing ordinances to tax video services. Video services include: - Subscription on-demand - One-time on-demand 34

35 QUI TAM/FALSE CLAIMS ACT 35

36 Overview Under-collection Over-collection Qui tam/ False Claims Act risk Class action risk 36

37 State False Claims Acts Approximately 30 jurisdictions have False Claims Acts Some states restrict their False Claims Act provisions to Medicaid and/or contractor-type frauds. A number of state False Claims Act provisions contain explicit tax bars prohibiting qui tam actions for allegedly false tax claims (e.g., CA, DC, HI, MA, NM, NYC, NC, TN, VA). Some state False Claims Act provisions impose a tax bar only with respect to income tax matters (e.g., IL, IN, RI). A number of states do not appear to restrict the action to a particular subject matter (e.g., DE, FL, NV, NH, NJ). In 2010, New York became the first state to explicitly authorize the application of its False Claims Act to tax claims. 37

38 State False Claims Acts Extremely high stakes Generally treble damages plus substantial penalties for each return filed Extended statute of limitations period Up to 30% of proceeds are awarded to the whistleblower Tried in the public domain, often labeled as tax fraud 38

39 Repeat Relators Illinois has seen hundreds of qui tam actions filed by a Chicago-based class action plaintiffs law firm. The state has intervened for many of these cases to be dismissed. State of Illinois ex rel. Stephen B. Diamond, PC v. Lush Internet, Inc., No. 13-L (Ill. Cir. Ct. 2016) Plaintiff alleged a Lush affiliate underpaid sales and use taxes on online sales, arguing that the affiliate had sufficient nexus with the state. Circuit Court of Cook County held that the plaintiff failed to prove by a preponderance of the evidence that the affiliate (1) had nexus with Illinois; and (2) knowingly failed to collect taxes. State of New York ex rel. Stephen B. Diamond PC v. My Pillow Inc., No /14 (N.Y. Sup. Ct. 2016) Plaintiff alleged that the company failed to collect and remit sales tax on online and telephone purchase orders. On July 20, 2016, the company settled the suit agreeing to pay $1.1 million $887,200 paid to the state and $221,800 to the relators. 39

40 Continued Fine Tuning Some states are seeking expansion of their False Claims Act provisions to authorize application to tax claims. On June 8, 2016, the Michigan Senate proposed S.B to allow qui tam actions for tax law violations if the net income or sales of a company exceed $1 million for the tax year and damages pleaded exceed $350,000. Illinois has attempted to curb its False Claims Act without success. On February 20, 2015, the Illinois General Assembly proposed H.B and its companion bill S.B to provide that no court could have jurisdiction over a qui tam action relating to a tax administered by the Illinois Department of Revenue, unless the action is brought by the Attorney General. 40

41 Questions? Maria M. Todorova Sutherland Asbill & Brennan LLP Madison Barnett Sutherland Asbill & Brennan LLP Robert Garvey PricewaterhouseCoopers LLP

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