Remote Seller Collection Authority Issues. August 22, 2016

Transcription

1 Midwestern States Association of Tax Administrators 2016 Annual Meeting Des Moines, IA Remote Seller Collection Authority Issues August 22, 2016 Andy Gerlach Secretary, South Dakota DOR Craig Johnson SSTBG Executive Director Carolynn S. Kranz Pres., ISTS / Kranz & Assoc. Fred Nicely Sr. Tax Counsel, COST

2 Agenda Overview States Nexus Expansion Efforts NCSL s Call to Act & Economic Nexus Federal Solutions South Dakota s Approach Alabama's Approach Outlook SSTGB Update

3 Overview of States Nexus Expansion Efforts

4 States Nexus Expansion Efforts Attributional/Affiliate Nexus Legislation Click-through Nexus Legislation Notice and Information Reporting Requirements Marketplace Provider Proposals 4

5 Affiliate/Attributional Nexus Taxpayers with related entities [in similar businesses] creates nexus for all affiliates Usually a rebuttable presumption 40 states have affiliate nexus provisions See N.M. Taxation & Revenue Dep t v. BarnesandNoble.com, 303 P.3d 824 (N.M. 2013) NM Supreme Court ruled an online retailer with no physical presence in NM had substantial nexus with the state through the taxpayer s sister corporation, which did have a physical presence in the state based on the sister corporation: (1) displayed the taxpayer s website in its retail stores, (2) shared the same trademarks, and (3) engaged in cross-marketing activities (e.g., rewards programs) which helped maintained the market in NM 5

6 2016 Leg. Update Affiliate Nexus 19 bills introduced in 8 states: Idaho - HB 581, HB 633 Louisiana - HB 6, HB 30, HB 96, HB 110 Massachusetts - S 1618 Minnesota - HF 2769, SF 2374, HF 3124, SF 3093, HF 3787, HF 848 Nebraska - LB 1087 Oklahoma - HB 2531, HB 2925 Rhode Island - H 7375 Utah - SB 182, HB 235 LA (HB 30) and OK (HB 2531) enacted affiliate nexus legislation this year. 6

7 Click-Through Nexus First adopted by New York in 2008 and at least 18 additional states since then. In-state website operators create a sales tax collection obligation (or rebuttable presumption) for remote sellers if operators in the state collectively refer a threshold amount of sales to the remote seller through links on their websites. 7

8 Click-Through Nexus Laws WA OR MT ND MN VT NH ME ID WY SD WI MI NY MA CT RI CA NV AZ UT CO NM NE KS OK IA MO AR IL TN IN TN OH KY PA WV VA NC SC NJ DE MD DC AK MS AL GA TX LA HI FL $10,000 Threshold $50,000 Threshold Less than $10,000 or not specified Note: PA was done via a regulation, not a law 8

9 Click-Through Nexus Overstock.com, Inc. v. New York State Department of Taxation and Finance, 20 N.Y.3d 586 (N.Y. 2013). The New York Court of Appeals upheld the New York clickthrough law as facially constitutional. The law was upheld, in large part, because it was not an absolute rule but rather a rebuttable evidentiary presumption. The United States Supreme Court denied cert on December 2, Compare Performance Marketing Ass n v. Hamer, 998 N.E.2d 54 (Ill. Sup. Ct. Oct. 18, 2013). Illinois former click-through law was absolute (not a rebuttable presumption). Violated Internet Tax Freedom Act (ITFA) because it imposed discriminatory tax on electronic commerce. Did not address the Commerce Clause challenge. 9

10 Use Tax Notice & Info. Reporting Req. 2010: Colorado was the first state to impose. The enacting legislation started as a click-through bill (similar to New York), but was modified during the legislative process. Requires retailers to: (1) notify Colorado purchasers that tax is due on their purchases; (2) send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, reminding these purchasers of their obligation to pay sales tax to the state; and (3) report information on Colorado purchasers to the state s tax authorities. See Colo. Rev. Stat (3.5). Prior to 2016, only 7 states enacted these provisions. Colorado was the only state that had penalty provisions. 10

11 Use Tax Notice & Info. Reporting Req. Feb. 22, 2016 DMA v. Brohl, 814 F.3d 1129 (10th Cir. 2016) 10 th Circuit issued decision on remand from Supreme Court Quill physical presence requirement is limited to tax collection. Complete Auto does not apply here because this case involves a reporting requirement and not a tax. Petition for en banc rehearing denied April 1. Cert petition to U.S. Supreme extended to August 29,

12 2016 Leg. Update - Notice & Reporting 18 bills introduced in 8 states: Iowa - HF 2319 Kansas - HB 2603 Louisiana - HB 110, HB 113, HB 294, HB 295, HB 1037, HB 1121 Minnesota - SF 3093, HF 3124, HF 2769, SF 2374 Oklahoma - SB 1301, HB 2531 Rhode Island - H 7375 Utah - SB 65 Vermont - H 753, H 873 OK HB 2531 and VT H 873 were enacted in May. 12

13 Marketplace Provider Proposals In 2015, several states proposed provisions that would impose burdens on marketplaces related to remote sales made through the marketplaces. New York and Washington proposed legislation that would have required marketplace providers to collect sales and use tax on sales made through the marketplaces (regardless of whether the seller was registered for sales tax in the state). Utah and South Dakota proposed information reporting requirements for marketplaces, requiring them to report the identity and contact information of remote sellers making sales into the state through the marketplace. Wisconsin enacted legislation exempting certain marketplace providers that have a distribution center in the state presumably asserting other marketplace providers with nexus in Wisconsin must collect the tax on 3 rd party sales

14 2016 Leg. Update - Marketplace Providers 14 bills introduced in 7 states: Louisiana - HB 110, HB 113, HB 294 (reporting only) Minnesota - HF 2769, SF 2374, HF 3124, SF 3093, HF 848 Mississippi - SB 2052, HB 418 Nebraska - LB 1087 Oklahoma - HB 2531 Rhode Island - H 7375 Utah - SB 65 (reporting only) MN (HF 848) marketplace provider imposition vetoed (bingo hall issue) 14

15 Federal Solutions

16 Federal Legislation The Proposals Since 2005, the following types of legislative bills have been introduced: Main Street Fairness Acts (MSFA) Marketplace Equity Act (MEA) Marketplace Fairness Acts (MFA) Remote Transactions Parity Act (RTPA) Online Sales Simplification Act (draft only) No Regulation Without Representation Act 16

17 Comparison of Federal Bills Origin Base Destination Rate Proposal (Goodlatte) 3 H.R. 2775, The Remote Transactions Parity Act S. 698, The Marketplace Fairness Act Parity at Point of Purchase (Regardless of Channel) Small Seller Exemption No Remote Sellers apply origin state laws to determine taxability and single rate for destination state. Nonremote sellers apply destination state laws to determine taxability and actual destination tax rate. Result is different tax rate and treatment depending on whether seller is remote or nonremote seller. No small seller exemption. Yes Destination Sourcing Model - uniform destination-based sourcing rules are applied to all transactions resulting in same taxability and rate applying to all sellers (and purchasers). Phased-out small seller exemption over three years. The first year is gross annual receipts under $10 million, the second year is under $5 million and the third year is $1 million. After the third year, the exemption will be zero. Sales made via an online marketplace are not exempted. Yes Destination Sourcing Model uniform destinationbased sourcing rules are applied to all transactions resulting in same taxability and rate applying to all sellers (and purchasers). A small seller exemption of $1 million in annual nationwide gross remote sales

18 Comparison of Federal Bills Origin Base Destination Rate Proposal (Goodlatte) 3 H.R. 2775, The Remote Transactions Parity Act S. 698, The Marketplace Fairness Act Audit Procedures 4 Remote sellers may be audited by their home state taxing authority. Unclear what happens (1) for NOMAD 5 state sellers since they do not have a sales tax audit program or (2) if fraud is involved. Single audit per state of remote seller handled by the certified software provider (CSP). Eliminates state audits for remote sellers under $5 million in gross annual receipts unless intentional misrepresentation or fraud. One audit per state with the potential for a maximum of 45 audits per year (i.e. 45 states have a sales and use tax system). Software Costs and Integration No assistance is provided to remote sellers to comply with the additional collection and reporting requirements. (Note: States have concerns regarding their costs to implement this new collection and distribution scheme, as well as providing credits and remote seller exemption certificate compliance.) Allows remote seller to select its own CSP. States compensate the CSP to cover set-up, installation, and maintenance costs as well as preparing and filing returns, making remittances, resolving notices and handling any audits for remote sellers. Software must work in all states qualified under the Act. Provides software free of charge for remote sellers and potentially creates multiple state software systems. Integration costs are not included.

19 Comparison of Federal Bills Origin Base Destination Rate Proposal (Goodlatte) 3 H.R. 2775, The Remote Transactions Parity Act S. 698, The Marketplace Fairness Act Liability Economic Neutrality Not specifically addressed in the proposal, but this proposal would not work unless the remote seller is liable for the tax that is not properly collected. Remote sellers would not collect tax on the same products or at same rate as nonremote sellers. The amount of tax collected from the purchaser and taxability of products will differ based on where the seller is located. Ensures the CSP, not the remote seller, is held liable for all regulation and compliance burdens unless the remote seller provided misleading, incomplete or inaccurate information. A purchaser would pay the same tax rate and on the same products to the seller, regardless of whether the seller is a remote or nonremote seller. Relieves remote sellers from liability to the state incorrect collection, remittance, or noncollection of sales and use taxes if the liability is a result of error or omission made by a CSP. All consumers would pay their home state s tax rate and on the same products, regardless of channel. All remote sellers would collect the same tax rate on a taxable item.

20 No Regulation Without Representation Act Recently introduced 7/14/2016 by Rep. Sensenbrenner (R-WI) H.R Bill would essentially codify Quill s physical presence States cannot require a person to: Collect sales/use tax; Report information about their sales; Assess sales or use tax; or Treat person as doing business in their state - Unless they have physical presence in the state

21 No Regulation Without Representation Act Physical Presence - Seller: Must have more than 14 days presence; or Own or lease real or tangible personal property; or Have employees, agents, independent contractors soliciting products or services from customers; or Offer any kind of installation, design, or repair services; or Maintain an office with three or more employees Federal courts have full and original jurisdiction

22 NCSL s Call to Act

23 U.S. Supreme Court Justice Opines Justice Kennedy s Concurrence in DMA v. Brohl (2015): 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. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess On Jan. 20, 2016, the NCSL issued a letter to state legislatures urging them to act with haste to expand state statutory authority to collect sales tax. 23

24 NCSL s Call to Act NCSL draft language includes: Legislative Findings (from 2015 Washington legislation) Nexus Expansion provisions to expand scope of doing business Affiliate/attributional nexus, click-through nexus, economic nexus Marketplace Sales Tax Collection Marketplace Use Tax Reporting and Registration Requirements (Referrer) Both reporting to state and notice to customers Direct Appeal to State Supreme Court to accelerate litigation Fixed future effective date (to avoid retroactivity concerns cited in Quill) 24

25 2016 Leg. Update - Economic Nexus 10 bills introduced in 8 states: Connecticut - SB 448 Louisiana - HB 110 Minnesota - HF 3787, SF 3441 Nebraska - LB 1087 Oklahoma SB 1251, SB 1301 Rhode Island - H 7375 South Dakota - SB 106 Vermont H 873 Thus far SD and VT enacted legislation. 25

26 Quill is Dead Original Legislation? In 2010, Oklahoma passed legislation that listed all of the steps it had taken to simplify its sales and use tax system, and declared that its tax system no longer presented an undue burden on interstate commerce and that any and all remote sellers are required to collect sales and use tax on sales made into the state See 68 Okla. Stat

27 Quill is Dead 2016 Activity Alabama Regulation - Eff. 1/1/2016 South Dakota Law - Eff. 5/1/2016 (S.B. 106) Vermont Law - Delayed Date (H. 873) later of 7/1/2017 or when a controlling court abrogates Quill s physical presence requirement Tennessee Regulation Eff. 7/1/2017 (registration by 1/1/2017) Regulation

28 South Dakota s Remote Sellers Sales Tax Law SB 106

29 December Discussion about potential legislation establishing a threshold for remote seller sales tax requirement in South Dakota. A bill is drafted establishing remote seller requirements; January eventually becoming SB106 Gov. Dennis Daugaard signs SB 106 into law March 22 with an effective date of May 1, Timeline March- April SB 106 is prepared to be implemented April Legal action associated with SB 106 takes place

30 Senate Bill 106 Background December Inability to collect sales tax from remote sellers threatens South Dakota s efforts to sustain a broad tax system, which allows South Dakota to keep taxes low. Because South Dakota doesn t have a state income tax, sales and use tax revenue are essential in funding state and local services. The growth of online retail ensures further erosion to our sales tax base.

31 Senate Bill 106 Background Remote Sellers must remit South Dakota sales tax if they meet one of two criteria January The seller s gross revenue exceeds $100,000. The sellers made 200 or more separate transactions into South Dakota. Any sales tax obligation required by this act cannot be applied to past sales.

32 Senate Bill 106 Background State Governments Multi-State Tax Commission (MTC) South Dakota Retailers Association (SDRA) Retail Industry Leaders Association (RILA) January These entities contend that South Dakota is the ideal target state for this legislation.

33 Getting Prepared Knowing this will take a long time March-April Developing a sound and fair legislative bill SDDOR identified 200+ companies who meet one or both of the remote seller sales tax requirements Accomplished through past audit information Staff training Media education and talking points

34 Legal Action April On April 28, 2016, the State of South Dakota filed a declaratory judgment action in the Sixth Judicial Circuit Court, Hughes County, against four remote sellers: Newegg, Overstock, Systemax, Wayfair. On April 29, American Catalog Mailers and NetChoice filed a declaratory judgment action against me in the Sixth Judicial Circuit Court, Hughes County.

35 Promoting Compliance March-April DOR sent 206 letters on March 25 to those most likely to meet one of the two remote seller requirements The letters explained the two criteria and how the companies can apply for a South Dakota Sales Tax License. DOR also created a new webpage with this information, which has more than 2,500 visits.

36 Remote Seller Compliance March-April After the letters were sent, 118 remote sellers applied for licenses, 93 of which have been issued. 45 of the applicants applied as a result of receiving DOR s letter.

37 Next Steps State of South Dakota v. Wayfair INC, Systemax INC, Overstock.com INC, Newegg INC On May 25, the defendants moved the case from State Circuit court to the United States District court, District of South Dakota, Central Division. American Catalog Mailers Association and Netchoice v. Andy Gerlach Venued in South Dakota s Sixth Judicial Circuit in Hughes Co., South Dakota.

38 SB 106 Effects As a result of SB 106, $108, has been collected in State sales and use tax. An additional $47, in municipal sales and use tax has been collected.

39 For more information, visit

40 The Movement to Overturn Quill: An Alabama Update

41 Alabama s Response to Kennedy s Concurrence in DMA Simplified Sellers Use Tax System Repositioned Alabama from being one of the most difficult states for remote sales tax collection to one of the easiest One return filed with ADOR One rate for state and local use tax 8% One audit 2% discount for participants Economic Nexus Rule for Large Remote Sellers Rule Effective Jan , remote sellers with a substantial economic presence in Alabama are required to collect and remit Alabama tax and file returns regardless of whether seller has a physical presence $250,000 in sales in Alabama equals substantial economic presence Remote sellers may comply with rule by participating in the Simplified Sellers Use Tax Remittance Program

42 Alabama Litigation Newegg Inc., v. Magee Docket # S Filed June 9 with the Alabama Tax Tribunal Challenges the Constitutionality of Alabama economic nexus rule

43 Outlook

44 Outlook Uncertain future Will United States Supreme Court ultimately consider one of the direct challenges to Quill (i.e., South Dakota SB 106 suits)? Will DMA (10th Cir.) or the Ohio CAT cases make it there first? Will Congress feel the heat from the states and finally pass one of the federal remote sales tax bills? Or, will Congress feel relieved and not act until the courts sort it all out? 44

45 Outlook Predictions Will a state court ignore Quill? James v. City of Boise, 136 S.Ct 685 (2016) if state courts were permitted to disregard this Court s rulings on federal law, the laws, the treaties and the constitution of the United States would be different in different states Will Congress act in its lame duck session this fall? Will SCOTUS reverse Quill? Retroactivity concerns? Legislating from the bench concerns? 45

46 Streamlined Sales Tax Governing Board Update

47 SSTGB 2016 Federal legislation Continue to support MFA/RTPA and educate members of Congress SSTGB s 10 years of experience shows it works Origin sourcing of interstate sales does not level the playing field Continue to coordinate with NCSL, NGA and others Other Issues / Areas of Focus New central registration system in place Allowing Non-SST states to use central registration system Barriers to entry for other states Consideration of sanctions

48 Streamlined State Status WA OR ID MT WY ND SD MN WI MI NY ME VT NH MA CT RI CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA NJ DE MD DC AZ NM OK AR TN NC SC AK MS AL GA TX LA HI FL Full Member States Associate Member States flex to full Advisory States Not Conforming Advisory States Considering SSUTA Non-sales tax states Project states Not Advisory Non-participating state

49 3500 Number of Active Streamlined Registrants

50 SSTGB 2016 State and Local Advisory Council issues Tax Administration Practices Post transaction issues Voluntary Disclosure agreements allowing sellers to register while working through the process Limited Power of Attorney Digital Goods Hot topic watching federal legislation in this area

51 SSTGB 2016 State compliance issues GA good faith, acceptance of SERs and local option sales tax issue IN acceptance of SERs from certain sellers MI direct mail sourcing/definitional issues legislation enacted RI clothing cap and threshold SSUTA amended WI local tax sourcing issue legislation enacted Sanctions Executive Committee Recommendations GA loss of voting rights on states compliance and amendments to the SSUTA IN loss of voting rights on states compliance

52 Questions? Andy Gerlach Secretary, South Dakota DOR (605) Craig Johnson SSTGB Executive Director (608) Carolynn S. Kranz ISTS / Kranz & Associates, PLLC cskranz@industrysalestax.com / cskranz@saltattorneys.com (215) Blog: Fred Nicely COST fnicely@cost.org (202)

53 Appendix

54 The Marketplace Fairness Act Passed Senate in 2013 (S. 743) Re-introduced March 10, 2015 (S. 698) Provides a state two options for gaining the Congressional authorization to require remote sellers to collect sales tax: SSUTA member states have to provide 180 days notice that they will exercise authority under the Act; Non-SSUTA members must comply with minimum simplification requirements.

55 The Marketplace Fairness Act The minimum simplification requirements include: Central administration; One audit per state; Uniform sales and use tax base among all state and local jurisdictions; Uniform sourcing rules; Information on the taxability of products and services; State must provide software, free of charge, capable of calculating sales tax due on remote sales and filing returns; Small seller exception of $1M in remote sales One year delayed effective date

56 The Remote Transactions Parity Act Introduced June 15, 2015 (H.R. 2775) Bi-partisan support in House Provides states with two options for gaining Congressional authorization, similar to the MFA Includes the minimum simplification requirements contained in the MFA, plus additional protections for remote sellers and certified software providers

57 The Remote Transactions Parity Act (cont.) Additional Protections include: If a remote seller uses a certified software provider, audits must go through that provider and not the seller; Software must include integration, set-up and maintenance; Remote sellers with less than $5M of gross receipts in the taxable year may not be audited, except in cases of fraud; A mandatory 3 year statute of limitations for assessments; The state must provide a taxability and exemption table; The state must provide rates and boundary database; Central registration system

58 The Remote Transactions Parity Act (cont.) No Preemption Small Remote Seller Exemption The small remote seller exemption applies to remote sellers with less than $10M in total gross receipts during the first year the state acts under the Act, less than $5M in the second year, and less than $1M in the third year. Completely phased out after the third year. Sellers utilizing an electronic marketplace are not considered small sellers and are not entitled to the exception, no matter the year.

59 Goodlatte Proposal Remote seller collects at destination rate Destination rate is limited to one rate per state Tax base / Taxability determined by origin state laws Remittance by remote seller is to origin state Origin state remits to clearinghouse Origin State state where business has the most employees Origin state does the audits Clearinghouse remits to destination state

60 Goodlatte Proposal States enter into a Distribution Agreement Requires state to select single statewide rate for remote sellers Enact laws to require state s own sellers to collect at participating states designated remote seller rates Non-Sales Tax States (New Hampshire, Oregon, Montana, Alaska and Delaware) Sellers have choice: Either collect at destination rate; or Report the details of transaction to destination state Sellers in these states have choice regardless of whether no sales tax state joins the compact

61 Goodlatte Proposal If Destination State does not join the compact: Remote seller imposes tax based on origin state laws and at origin rate and origin state keeps it Destination state must provide credit for tax paid by purchaser to seller at origin state rate against the use tax destination state may try to impose, even though destination state never received any of the tax If Origin State does not join the compact: Remote sellers in nonparticipating states must report the sales to the purchaser s (destination) state so destination state can collect use tax directly from purchaser

62 Goodlatte Proposal Initial Concerns: Tax parity is not achieved Taxation without representation Steps on State sovereignty Additional taxing regime Privacy concerns Legal challenges Increased fraud possibilities