Michael Bannasch

Transcription

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2 2 Michael Bannasch

3 3 Physical presence nexus requirement Sales tax definitely Other taxes? Not so sure National Bellas Hess Due Process Clause = Commerce Clause Quill No it doesn t but we get to the same answer

4 4 Due Process Clause Protects persons (including businesses) from being taxed without at least a minimum connection to a state Taxpayer must purposefully direct its activities toward the state (or purposefully avail itself of the benefits of a market) (Dormant) Commerce Clause States can t pass laws that discriminate against or unduly burden interstate commerce There must be a balance between the benefit to the state vs. the cost to the businesses to comply

5 5 May 2016 SB 106 requires sales tax to be collected by remote sellers with no physical presence in South Dakota if: Gross revenue exceeds $100,000 OR 200 or more separate transactions Knew it was unconstitutional Provided a fast-track to the courts Said they wouldn t apply retroactively

6 6 April 28, 2016 South Dakota sues Wayfair, Systemax, Overstock.com and NewEgg Systemax agrees to begin collecting tax Wayfair et al fight and win South Dakota Supreme Court says the law is unconstitutional Only the U.S. Supreme Court (or Congress) can overturn the Quill precedent

7 7 Due Process Clause does not require physical presence Commerce Clause currently does but should it? For state taxes, Complete Auto Transit four-prong test provides proper analysis of Commerce Clause This test does not require physical presence to establish substantial nexus The physical presence nexus standard actually burdens interstate commerce by creating market distortions

8 8 [T]he Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court s decisions in Quill and National Bellas Hess should be, and now are, overruled. Goodbye physical presence

9 9 What replaces the physical presence nexus standard Whether South Dakota s thresholds definitely (or just presumably) create substantial nexus Whether something more than thresholds are necessary Virtual contacts and extensive virtual presence what are these? Whether South Dakota s thresholds would be valid in other (larger) states

10 10 Whether South Dakota s law is constitutional Remand to SD Supreme Court Law must not discriminate against or unduly burden interstate commerce Nexus is just one of the four prongs for analyzing whether a tax meets Commerce Clause requirements The tax system itself can t be too burdensome

11 11 Didn t rule on constitutionality because not enough info presented, but said: South Dakota s tax system includes several features that appear designed to prevent undue burdens upon interstate commerce Safe harbor thresholds No retroactivity Member of Streamlined Sales Tax Single state-level tax administration Uniform definitions and rules Simplified tax rate structure Access to compliance software paid for by the state (and immunity from audit liability for companies that use the software)

12 12 Appears the real test now is whether a law imposes on an undue burden on interstate commerce Burden is in the eye of the beholder As pertains to a specific taxpayer? Or to commerce as a whole? Business might have nexus, but the system is too complex and/or thresholds too low Law would be unconstitutional because of undue burdens

13 13 28 of 45 states have officially done something Approx. 7 states already effective Approx. 10 effective October 1, 2018 Others effective as late as January 1, 2019, or pending litigation being resolved More states likely to react without legislation or regulation

14 14 Alabama Threshold is $250k sales Also requires some other activity (e.g. distribution of advertising into state) Massachusetts Threshold is $500k sales Only applies to sales made via Internet Oklahoma, Pennsylvania, Washington Threshold is $10k sales Collection is elective alternative to use tax reporting

15 15 Retroactivity States being too aggressive Unlikely AL changed its effective date, MS and TN talking like they are going to change theirs, etc. Existing physical presence Tax registration discloses date first doing business in state Voluntary disclosures Or will states just be glad to collect going forward?

16 16 Don t be too quick to dismiss this for your business Service providers States that broadly tax services: HI, NM, SD, WV Computer services: AR, CT, DC, IL, KS, MA, MN, MS, NE, NJ, OH, PA, RI, SC, TN, TX, WA, WY Management consulting services: CT Advertising services: CT, MD Sellers of manufacturing equipment Michigan has very broad exemptions Some states much more restrictive: e.g. OH and TX Some states have no exemption or only a reduced rate: e.g. AL, CA Need to comply with exemption certificate requirements

17 17 Which states to begin collecting All 45 states All Streamlined Sales Tax States plus non-streamlined states with applicable economic nexus laws Only states with applicable nexus laws Which compliance solution Avalara vs. all others When to begin

18 18 Streamlined Sales Tax Agreement 24 states participate Single, state-level administration Uniform definitions of products and services Simplified tax rate structures Other uniform rules (e.g. return due dates) One-stop for registration Volunteer seller program

19 19 Streamlined Volunteer Seller Program Pro: No charge for most sales tax compliance services when using a Certified Service Provider Register a seller in all Streamlined member states Set-up and integrate software with the seller s system Identify which products and services are taxable (mapping) Determine the appropriate sales or use tax rate and calculate the tax due at the time of the sale Prepare and file the required sales and use tax returns for each of the Streamlined States Remit the tax to each of the Streamlined States Resolve any notices or audits by any of the Streamlined States Con: Must comply with all Streamlined States Approx. 15 of which already have economic nexus rules

20 20 Streamlined Volunteer Sellers Meets all of these criteria during immediately preceding 12 months with regards to a state No fixed place of business for more than 30 days Less than $50k of property in-state Less than $50k of payroll in-state Less than 25% of total property or total payroll in-state Was not collecting tax Was not required to register and collect tax as a statutory requirement for the seller to be able to sell a particular type of product (e.g. tobacco, fuel) Generally retain volunteer seller status for two years Then recertify compliance every year after

21 21 Threshold measurements often include non-taxable sales (wholesale vs. other) Might be required to comply but have very little to remit Local jurisdictions that are self-administered Do they have laws that will allow nexus other than physical presence? How will the thresholds apply? What is going to happen to the thresholds based on number of transactions?

22 22 OUR MESSAGE Can t comply too costly Won t comply unconstitutional or unfair Don t need to comply doesn t affect me Consider exposure calculation so you can see what you have at risk if you don t collect it from customers Expect states will get more aggressive Some states tax services more broadly Not all states provide the same exemptions from tax Ultimately your decision, but we want it to be an informed decision The problem is only going to get bigger

23 23 OUR MESSAGE I need to comply starting yesterday Need to implement intelligently States are not expecting implementation as of June 21 Did you already have physical presence? Does a voluntary disclosure make sense? Begin implementation in stages vs. all at once? Look at taxability of products and services In-house vs. third-party compliance solution Begin registrations

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