27th Annual Tuesday & Wednesday, January 23 24, 2018 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop II Advanced: Nexus Wars!!! Is Quill Ripe for Reconsideration? Emerging Issues in State Tax Nexus The Most Rapidly Changing Area of Taxation Wednesday, January 24, 2018 11:00 a.m. to 12:30 p.m.
Biographical Information Christine T. Mesirow, Section Chief, Taxation, Ohio Attorney General Mike DeWine 30 E. Broad St.; 25 th Floor, Columbus, OH 43215 614-995-3753 Fax: 866-459-6679 Christine.mesirow@ohioattorneygeneral.gov Christine has practiced in the area of state and local taxation for more than 25 years, in both the private and public sectors. She began her career in state & local tax as an assistant attorney general in the Taxation Section. Christine then moved to Dallas, where she gained experience in multistate tax issues affecting technology service providers as the state tax counsel for Electronic Data Systems Corp., representing the company in state tax controversies throughout the country. She later was a state & local tax consultant with PricewaterhouseCoopers and was of counsel with Bricker & Eckler LLP. Prior to her current appointment as chief of the tax section, she served as the Chief Legal Counsel for the Ohio Department of Taxation. Christine s broad range of experience in both tax controversy and tax administration issues provides her with an understanding of many issues confronted by those who must navigate the sometimes complex legal, policy and business issues challenging government and industry in the administration of and compliance with state tax law. Christine is a graduate of the Ohio State University Moritz College of Law. Shirley K. Sicilian, Managing Director of State and Local Tax Controversy, KPMG LLP 1801 K Street, NW, Ste. 12000, Washington, DC 20006 ssicilian@kpmg.com 202-533-3466 Fax: 202-379-7731 Shirley Klenda Sicilian is National Director of State and Local Tax Controversy in KPMG LLP's Washington National Tax office. In this role, Ms. Sicilian supports KPMG s network of controversy specialists in every state and delivery of KPMG SALT controversy services nationwide. Prior to joining KPMG, Ms. Sicilian was General Counsel for the Multistate Tax Commission, an intergovernmental agency whose membership includes forty-seven states and the District of Columbia. She previously served as Director of Policy and Research, and then General Counsel, for the Kansas Department of Revenue. Before working in the tax area, Ms. Sicilian worked in public utility regulation, serving as Chief of Economic Policy and as Assistant General Counsel for the Kansas Corporation Commission. Ms. Sicilian received the national Paull Mines Award for Outstanding Contribution to State Tax Jurisprudence in 2013. And Tax Analysts - State Tax Notes named her as one of ten finalist for its 2013 Person of the Year, citing her as one of the most influential legal thinkers in the field. Ms. Sicilian has been appointed to serve on a variety of advisory and deliberative boards; is a frequent writer, instructor, and speaker on state tax topics; and has authored several briefs before various State Supreme Courts and the U.S. Supreme Court. Her publications include the corporate income tax chapter for State Business Taxes, a Law Journal Press publication updated semi-annually. Shirley is a graduate of the University of Kansas with a Masters of Economics and Juris Doctorate.
Biographical Information Nicole L. Johnson, Associate, State & Local Tax Group, Morrison & Foerster LLP 250 West 55th St., New York, NY 10019 NJohnson@mofo.com 212.336.4305 Nicole Johnson is an associate in the State + Local Tax Group in Morrison & Foerster LLP s New York office. Her practice focuses on state and local tax controversies at the audit, administrative, and judicial levels. Ms. Johnson s practice encompasses matters regarding sales and use taxes, property taxes, franchise and income taxes, gross receipts taxes, insurance taxes, and telecommunication taxes, among others. She has written and spoken on various state and local tax issues and is a co-editor of the firm s newsletter State + Local Tax Insights. Prior to joining Morrison & Foerster in 2010, Ms. Johnson was a state and local tax manager with one of the big four accounting firms, where she focused on complex state and local tax controversies and planning opportunities. Ms. Johnson graduated from University of Minnesota, Twin Cities (B.S.B. 2001), cum laude from William Mitchell College of Law (J.D., 2004) and clerked for the Honorable Michael B. Thornton of the United States Tax Court.
Nexus Wars!! Is Quill Ripe for Reconsideration? Emerging Issues in State Tax Nexus The Most Rapidly Changing Area of Taxation 27 th Annual Ohio Tax Conference (Workshop II) January 24, 2018
Agenda Direct Challenges to Quill By Statute By Regulation Indirect Challenges to Quill Notice and Reporting Marketplace Providers Affiliate Nexus Click-Through Nexus No Challenge to Quill Physical Presence through use of software on mobile devices and computers Physical Presence through use of CDN service providers with servers in state What s Next? 1
Background: Bellas Hess and Quill National Bellas Hess v. Department of Revenue (1967) The U.S. Supreme Court reversed the Illinois Supreme Court s decision that National Bellas Hess, a mail order business with no physical presence in Illinois, was required to collect and remit the State s use tax. Quill v. North Dakota (1992) The U.S. Supreme Court reversed the North Dakota Supreme Court s decision, which declined to follow Bellas Hess because the tremendous social, economic, commercial, and legal innovations of the past quarter-century have rendered its holding obsolete. Justice Scalia s concurrence, joined by Justices Kennedy and Thomas, explained that he would not revisit the merits of [Bellas Hess], but would adhere to it on the basis of stare decisis. 2
Direct Challenges to Quill: By Statute South Dakota: First state to enact legislation challenging Quill. Effective May 1, 2016, sellers must remit sales tax if they have (1) $100,000 or more of gross revenue from sales in the State or (2) 200 or more separate transactions in the State. South Dakota v. Wayfair, Inc. On September 13, 2017, the South Dakota Supreme Court held the statute was invalid under Quill. Petition for cert. filed on October 2, 2017. Wyoming and Indiana: Enacted similar statutes, effective July 1, 2017. Cases challenging the validity of the statutes are pending in both States. Vermont and North Dakota: Enacted similar statutes, but effective only if Quill is overturned. 3
Direct Challenges to Quill: By Regulation Alabama: Effective January 1, 2016, sellers must remit sales tax if they have over $250,000 in sales in the State. Newegg v. Department of Revenue, filed June 8, 2016, is currently pending at the Alabama Tax Tribunal. Alabama reported that it received $4.3 million in fiscal 2016, and $15 million as of January 2017 for fiscal 2017, which began October 1, 2016. Tennessee: Effective January 1, 2017, sellers must remit sales tax if they have over $500,000 in sales in the State. On March 30, 2017, two trade associations filed a complaint challenging the Regulation in Tennessee Chancery Court. The Tennessee General Assembly recently passed legislation prohibiting the collection of any internet sales or use taxes authorized under [the regulation] and permitted under a ruling of any court, until such court s ruling has been fully reviewed and the [regulation] has been approved by the general assembly. Massachusetts: Issued guidance requiring Internet vendors to collect for the period beginning October 1, 2017. 4
Economic Nexus State Threshold Effective Date Alabama Connecticut $250,000 and one or more nexuscreating activities 100 retail sales and regular or systematic solicitation of sales Currently Enforceable Prospective Application Only if Upheld January 1, 2016 Yes No Unclear Yes No Indiana $100,000 or 200 transactions July 1, 2017 No No Maine $100,000 or 200 transactions October 1, 2017 Mississippi North Dakota South Dakota Tennessee Vermont Wyoming $250,000 plus purposeful or systematic exploitation of the Mississippi market $100,000 or 200 transactions $100,000 or 200 transactions $500,000 and regular or systematic solicitation Regular, systematic, or seasonal solicitation of sales and either $100,000 or 200 transactions $100,000 or 200 transactions Yes, but filing of action by state will enjoin Yes December 1, 2017 Yes No When US Supreme Court overturns Quill Pending resolution of litigation Pending resolution of litigation and approval by General Assembly When US Supreme Court or federal law removes the physical presence requirement Pending resolution of litigation No No No No No Yes Yes Yes Yes Yes
Indirect Challenges: Notice & Reporting Direct Marketing Association v. Brohl (10th Cir. Feb. 22, 2016), upheld Colorado s notice and reporting statute. The court limited Quill to sales and use tax collection and found that the statute was neither facially discriminatory nor discriminatory in effect. Justice Gorsuch, then a judge on the 10 th Circuit Court of Appeals, concurred. The U.S. Supreme Court denied review. The parties agreed that the notice and reporting requirements will become effective July 1, 2017. Similar statutes have been enacted in Alabama (effective July 1, 2017), Louisiana (enacted July 1, 2017), Oklahoma (effective November 1, 2016), and Vermont (effective July 1, 2017). The Oklahoma law does not require remote sellers to report purchasers information to the State. 6
Indirect Challenges: Notice & Reporting Enacted statutes that require out-of-state sellers to either: (1) collect sales and use tax; or (2) provide notice to customers of sales and use tax obligations. Rhode Island Statute is effective August 17, 2017. Applies only to sellers with (1) $100,000 or more of gross revenue from sales in the State or (2) 200 or more separate transactions in the State. Relies on cookie, affiliate and click-through nexus theories. Washington Statute is effective January 1, 2018. Applies only to sellers with at least $10,000 of gross receipts from sales to customers in the State. Statute applies to sellers with no physical presence in Washington no attempt to reconcile with Quill. 7
Indirect Challenges: Marketplaces Marketplace Provider $ $ minus fee Customer Good/Service *The marketplace provider, rather the retailer, may ship the good (e.g., Fulfillment by Amazon ). Retailer 8
Indirect Challenges: Marketplaces Minnesota Effective on the earlier of (1) July 1, 2019 or (2) the date that Quill is overturned, retailers must collect and remit sales and use tax if its sales are facilitated or processed by a marketplace provider that maintains a place of business in Minnesota. De minimis exception for retailers with less than $10k in annual Minnesota sales. A marketplace provider must collect and remit sales and use tax for all sales facilitated for a retailer, unless: (1) the retailer provides the marketplace provider with proof of registration before the marketplace provider facilitates a sale; or (2) upon inquiry by the marketplace provider, the commissioner discloses that the retailer is registered to collect Minnesota sales and use tax. Estimated annual increase in revenue of $10 million to $20 million. 9
Indirect Challenges: Marketplaces Washington Effective January 1, 2018, marketplace providers must either: (1) collect sales and use tax; or (2) comply with the State s notice requirements. Applies to marketplace providers with at least $10,000 of gross receipts from sales (whether in its own name or as the retailers agent) to Washington customers. May require marketplace providers to provide documentation related to sales made by retailers. Rhode Island Effective August 17, 2017, marketplace providers must provide the State with a list of the names and addresses of the retailers that use its marketplace to sell taxable goods to Rhode Island customers. Exception: Within 90 days of the sale, the retailer provides the marketplace provider with a copy of a Rhode Island sales tax permit, resale certificate, or exemption certificate. Applies only to marketplace providers that have (1) $100,000 or more of gross revenue from sales in the State or (2) 200 or more separate transactions in the State. 10
Indirect Challenges: Marketplaces South Carolina Issued a $12.5 million assessment to an Amazon subsidiary that operates Amazon s marketplace, based on the subsidiary not having collected sales tax on sales made by retailers to South Carolina customers. The assessment is based on existing law. South Carolina does not have a statute or regulation that specifically addresses marketplace providers. Arizona Through a letter ruling, the Arizona Department of Revenue has taken the position that a marketplace provider must collect and remit transaction privilege tax on receipts from sales on behalf of retailers, provided the marketplace provider has nexus with Arizona. Utah, also through letter ruling, reached the opposite conclusion with respect to the State s sales and use tax marketplace providers have no collection obligations. 11
Indirect Challenges: Affiliate Nexus Minnesota: Enacted an expanded definition of the term affiliate to include: An entity that has the same or similar business name as the retailer and sells from a Minnesota location products that are similar to those products sold by the retailer; An entity that maintains a place of business in Minnesota and uses trademarks, service marks, or trade names in Minnesota that are the same or substantially similar to those used by the retailer. Rhode Island: Recently enacted a similar statute. 12
Indirect Challenges: Click-Through Rhode Island: Enacted click-through nexus statute, effective August 17, 2017. Applies only to sellers that have (1) $100,000 or more of gross revenue from sales in the State or (2) 200 or more separate transactions in the State. Rather than registering and collecting tax, sellers may provide notice to customers of sales and use tax obligations. 13
Indirect Challenge: Click-Through Illinois: Amended regulation provides that a retailer may rebut the presumption of nexus based on click-through agreements with persons located in Illinois if the retailer maintains the following records: Retailer Agreements An agreement prohibiting the persons operating under the agreement from engaging in solicitation activities in Illinois. Annual Certification A certification, on a Department prescribed form, by the person operating under the agreement that they have not engaged in any prohibited solicitation activities in Illinois at any time during the previous year. Solicitation a direct or indirect communication to a specific person, including emails or text messages, done in a manner that is intended and calculated to incite a person to purchase tangible personal property from a specific retailer. Solicitation does not mean advertisement. Nevada: Recently adopted a similar regulation. 14
No Challenge: Physical Presence Via Software and Services Massachusetts: Regulation 830 CMR 64H.1.7 provides that physical presence for an internet vendor exists if it had in excess of $500,000 in sales delivered to Massachusetts addresses in 100 or more transactions. Premised on the vendors contacts with Massachusetts that facilitate the vendors ability to make sales. These contacts include: Property interests in and use of in-state software, such as apps, and ancillary data, such as cookies, distributed to or stored on the computers or mobile devices of Massachusetts customers. Use of content distribution networks that use in-state servers or other computer hardware Use of marketplace facilitators and/or delivery companies that may fulfill orders and process payments or perform other services 15
No Challenge: Physical Presence Via Software and Services Ohio: R.C. 5741.01(I)(2) Definition of Substantial Nexus with this State sets a presumption of nexus if seller does any of the following: Uses in-state software to sell or lease taxable tangible personal property or services Uses a content distribution network in Ohio to enhance the delivery of the seller s web site to consumers. Threshold sales must be in excess of $500,000 in a year. Presumption may be rebutted by demonstrating that those activities are not significantly associated with the seller s ability to establish or maintain a market in Ohio 16
Economic Threshold + Software-Related Presence State Threshold Effective Date Currently Enforceable Prospective Application Only if Upheld Massachusetts $500,000 and 100 transactions for retailers with software in state (apps, cookies, etc.) September 22, 2017 Yes No Ohio $500,000 for retailers with software or content distribution networks in state January 1, 2018 Yes, as of January 1, 2018 No 17
What s next? What might we expect now that the U.S. Supreme Court has (hasn t) taken the South Dakota case? Where might potential litigants go from here? Where might states go from here? Will Congress react?
Because: Cats! 19
Questions? 20
Presenters Shirley Sicilian KPMG 202.533.3466 ssicilian@kpmg.com Nicole Johnson Morrison & Foerster LLP 212.336.4305 njohnson@mofo.com Christine Mesirow Chief, Tax Section Ohio Attorney General 614.466.5967 Christine.Mesirow@ohioattorneygeneral.gov 21