Debate Over Nexus for Sales/Use Taxes Are We Headed Towards a New Frontier? Samantha K. Breslow Direct: 312-606-3206 Email: sbreslow@saltlawyers.com Justin B. Stone Direct: 312-606-3247 Email: jstone@saltlawyers.com Horwood Marcus & Berk Chartered 500 W. Madison Street, Suite 3700 Chicago, IL 60661 Horwood Marcus & Berk Chartered 2017 Learning Outcomes 1) Appreciate the numerous ways states are trying to tax out-of-state sellers. 2) Be aware of the single state attack on Quill and potential ramifications associated with its demise. 3) Understand the constitutional hurdles that a state must overcome to reverse Quill. 2 1
Agenda Setting the Stage Expanding Physical Presence and Economic Nexus Click-through Nexus Provisions Redefining Agent or Representative What It Means to Assist in Making a Market Expanding Nexus Marketplace Providers State Challenges to Quill Is Quill s Physical Presence Standard Still Viable? 3 Setting the Stage Expanding Physical Presence and Economic Nexus 2
Setting the Stage - Expanding Physical Presence and Economic Nexus Physical Nexus States have been enacting various nexus laws requiring tax collection and filing responsibilities that push the boundaries of physical presence in a state. Examples include: Independent contractor/agency nexus Click-through nexus and related compensated solicitation/referral arrangements Affiliate nexus Twenty-five states Specific notification and/or reporting requirements Some backtracking? E.g., Colorado repeal effort of reporting requirements (S.B. 238 passed the Senate but failed in the House) 5 Setting the Stage - Expanding Physical Presence and Economic Nexus Economic Nexus States are also adopting economic nexus standards to challenge Quill. Statutory E.g., South Dakota (S.B. 106), Wyoming (H.B. 19) S.D. Law struck down, upon advice of the taxpayer and the Department in South Dakota v. Wayfair Inc., 3:16-CV-03019-RAL Regulatory E.g., Alabama (Reg. 810-6-2-.90.03), Tennessee (Rule 1320-05-01-.129) TN enacted law to prohibit implementation of regulation (H.B. 261) Other Guidance E.g., Massachusetts (Directive No. 17-1, eff. July 1, 2017), revoked by Directive No. 17-2. 6 3
CLICK-THROUGH NEXUS PROVISIONS Click-Through Nexus Provisions Over 20 states have adopted click-through or affiliate marketing relationships program statutes, including: Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio Pennsylvania, Rhode Island, Tennessee, Vermont and Washington Corporate Reactions Ignore the statute Start collecting taxes Eliminate affiliate marketing relationships programs Maintain affiliate marketing relationships, but with safe-harbor agreements 8 4
REDEFINING AGENT OR REPRESENTATIVE Redefining Agent or Representative Agent Generally defined as one who represents and acts for another under a contract or otherwise. Representative Generally defined as a person or thing that represents another ; an agent. For Tax Purposes An agent or representative is usually defined as an independent person/contractor performing services on behalf of a principal. Issues Can it include a subsidiary, parent or other member of an affiliated group? Can a unitary relationship be enough? Does it have to be related to sales activities? Telebright Corp. v. Dir., New Jersey Div. of Taxation, 38 A.3d 604 (N.J. Super. Ct. App. Div. 2012) Does marketplace nexus exist? 10 5
WHAT IT MEANS TO ASSIST IN MAKING A MARKET What It Means to Assist in Making a Market Washington s Nexus Regulation A person is physically present in this state... the person, either directly or through an agent or other representative, engages in activities in this state that are significantly associated with the person's ability to establish or maintain a market for its products in Washington. WAC 458-20-193(102)(a)(iii). Oklahoma s Compliance Initiative Maintaining a place of business in this state means and shall be presumed to include... the presence of any person... that has substantial nexus in this state and that conducts any other activities in this state that are significantly associated with the vendor s ability to establish and maintain a market in this state for the vendor s sale. Okla. Stat. 1352(13)(a)(2)(e). 12 6
STATE CHALLENGES TO QUILL State Challenges to Quill In Direct Mktg. Ass n v. Brohl, 135 S. Ct. 1124 (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. 14 7
State Challenges to Quill South Dakota S.B. 106 requires any seller, whether they have a physical presence in the state or not, to collect and remit the state s sales taxes on taxable transactions effective May 1, 2016. The law specifies that collection and remittance requirements are triggered when: A seller s gross revenues from sales delivered to South Dakota exceed $100,000 in the previous or current calendar year; or A seller has 200 or more separate transactions or more delivered to South Dakota in the previous or current calendar year. Litigation has ensued, triggering the automatic injunction provision contained in the law, which precludes enforcement of the law until all litigation has been resolved. South Dakota v. Wayfair, Inc., et al., Hughes County Circuit Court Docket No. 32CIV16-00092 Am. Catalog Mailers Ass n v. Gerlach, No. 32CIV16- (6th Judicial Cir., S.D.) The law has been strategically positioned for an expedited appeals process, with the ultimate goal being to overturn the Quill physical nexus standard. Oral arguments scheduled for August 29, 2017. 15 State Challenges to Quill Alabama Alabama took a similar path through a regulation adopted by the Department of Revenue in 2015 effective January 1, 2016. Rule 810-6-2-.90.03 specifies that collection and remittance requirements are triggered when: A seller s gross revenues from sales of tangible personal property sold into the state exceed $250,000 in the previous calendar year, and Seller conducts one or more of the activities described in Section 40-23-68, Code of Alabama 1975. Litigation could not ensue until actual assessments were issued under the regulation, which began in June 2016. Litigation challenging the assessments have been filed. Newegg Inc. v. Alabama Dep t of Revenue, No. S 16-613 (Ala. Tax Tribunal) This litigation is slightly behind the South Dakota litigation, but the ultimate goal appears to be the same, which is to overturn the Quill physical nexus standard. 16 8
State Challenges to Quill Wyoming H.B. 19, codified as Wy. Stat. 39-15-501, requires out-of-state vendors with more than $100,000 in aggregate annual sales to customers in WY or 200 separate transactions involving WY customers to remit sales and use taxes WY law originally required retailers to comply on July 1, 2017 On July 7, 2017, WY Attorney General Peter K. Michael filed suit seeking a declaratory judgment requiring five vendors (Newegg, Overstock, Wayfair, Systemax, and Fanatics) with physical presence in WY to collect tax on sales of TPP and services in the state 17 State Challenges to Quill Massachusetts On July 28, 2017, the Massachusetts DOR proposed a regulation (830 CMR 64H.1.7) to require remote sellers with more than $500,000 in sales into MA and 100 or more transactional sales into the state during the previous 12 months to collect and remit sales tax to the state 18 9
State Challenges to Quill Other States Several state legislatures are considering similar actions as to South Dakota and Alabama in the 2017 session. Arkansas, Georgia, Hawaii, Indiana, Massachusetts, Mississippi, Nebraska, New Mexico, North Dakota, Utah, Washington, and Wyoming Economic nexus thresholds vary and many of the bills are coupled with other nexus expanding provisions and/or use tax reporting requirements. Massachusetts (H.B. 1) introduced a $500,000 sales tax economic nexus threshold to be established via Department of Revenue regulation and would require third-party processors to remit sales tax on a daily basis if the transaction involved a vendor or operators that employs 50+ people. Georgia (H.B. 61) introduced sales tax economic nexus provisions and use tax notification requirements, requiring remote sellers with $250,000 in in-state sales or at least 200 transactions to remit sales tax or to provide use tax notice. Mississippi (H.B. 480) introduced a $250,000 sales tax economic nexus threshold and a voluntary taxpayer program. 19 State Challenges to Quill Other Taxes Crutchfield, Inc. v. Testa (2016-Ohio-7760, P16 (Ohio Nov. 17, 2016), challenged Ohio s Commercial Activity Tax (CAT) nexus standard as violating the Commerce Clause s substantial nexus test. The Ohio Supreme Court held the CAT s factor presence meets constitutional requirements for substantial nexus and that Quill s physical presence rule does not apply to gross receipts taxes. 20 10
IS QUILL S PHYSICAL PRESENCE STANDARD STILL VIABLE? Issues Related to State Challenges to Quill Stare Decisis Definition Standards to overcoming South Dakota Cultural Changes Compare 1967 1992 with 1992 2017 Fairness Retroactivity States with anti-quill laws States without anti-quill laws States that litigate issue States that stand on the side line 22 11
Issues Related to State Challenges to Quill Stare Decisis The doctrine or principle that decisions should stand as precedents for guidance in cases arising in the future. A strong judicial policy that the determination of a point of law by a court will generally be followed by a court of the same or a lower rank in a subsequent case which presents the same legal problem, although different parties are involved in the subsequent case. Ballentine s Law Dictionary, 3 rd Ed. 23 Issues Related to State Challenges to Quill Stare Decisis Revisiting is appropriate where experience has pointed to the precedent s shortcomings. Pearson v. Callahan, 555 U.S. 223, 233 (2009). [W]e may ask [1] whether the rule has proven to be intolerable simply in defying practical workability; [2] whether the rule is subject to a kind of reliance that would lend a special hardship to the consequences of overruling and add inequity to the cost of repudiation; [3] whether related principles of law have so far developed as to have left the old rule no more than a remnant of abandoned doctrine; or [4] whether facts have so changed, or come to be seen so differently, as to have robbed the old rule of significant application or justification. Planned Parenthood v. Casey, 505 U.S. 833 854-855 (U.S. 1992) (internal citations omitted). 24 12
Issues Related to State Challenges to Quill Stare Decisis National Bellas Hess (1967) and Quill (1992): Perhaps long ago a seller s physical presence was a sufficient part of a trade to condition imposition of a tax on such presence. But in today's economy, physical presence frequently has very little to do with a transaction a State might seek to tax. Wire transfers of money involving billions of dollars occur every day; purchasers place orders with sellers by fax, phone, and computer linkup; sellers ship goods by air, road, and sea through sundry delivery services without leaving their place of business. It is certainly true that the days of the door-to-door salesperson are not gone. Nevertheless, an out-of-state direct marketer derives numerous commercial benefits from the State in which it does business. Quill Corp. v. N.D., 504 U.S. 298, 327-328, White, J., concurring in part and dissenting in part (1992). Also very questionable is the rationality of perpetuating a rule that creates an interstate tax shelter for one form of business -- mail-order sellers -- but no countervailing advantage for its competitors. If the Commerce Clause was intended to put businesses on an even playing field, the majority's rule is hardly a way to achieve that goal. Indeed, arguably even under the majority's explanation for its Commerce Clause nexus requirement, the unfairness of its rule on retailers other than direct marketers should be taken into account. I would think that protectionist rules favoring a $ 180-billion-a-year industry might come within the scope of such structural concerns. Id. at 329. 25 Issues Related to State Challenges to Quill Stare Decisis Quill (1992) to now: Retail Sales (Census Bureau Figures) 1998 Total Retail Sales: $2,581,762 million Total E-Commerce Sales: $4,984 million 2015 Total Retail Sales: $4,727,427 million Total E-Commerce Sales: $340,415 million Largest Companies by Market Cap 1992 Exxon ($75 billion) Wal-Mart ($74 billion) General Electric ($73 billion) Philip Morris ($70 billion) AT&T ($68 billion) 2017 Apple ($750 billion) Alphabet ($630 billion) Microsoft ($530 billion) Amazon.com ($470 billion) Berkshire Hathaway ($420 billion) 26 13
Issues Related to State Challenges to Quill Digital Goods Situsing Composition of the U.S. Supreme Court In his concurrence in Direct Marketing Ass'n v. Brohl, 814 F.3d 1129 (10 th Cir. 2016), Gorsuch states that Quill might be said to have attached a sort of expiration date for mail order and internet vendors' reliance interests on Bellas Hess's rule by perpetuating its rule for the time being while also encouraging states over time to find ways of achieving comparable results through different means. Federal Legislation What happens if there is no federal legislation and no U.S. Supreme Court decision? What if Quill is upheld? 27 Questions? Thank you! Samantha K. Breslow Direct: 312-606-3206 Email: sbreslow@saltlawyers.com Justin B. Stone Direct: 312-606-3247 Email: jstone@saltlawyers.com Horwood Marcus & Berk Chartered 500 W. Madison Street, Suite 3700 Chicago, IL 60661 Horwood Marcus & Berk Chartered 2017 14