Oral Arguments Heard in South Dakota’s Challenge to Quill

Posted August 31, 2017 by Jennifer Weidler Karpchuk
Categories: Sales and Use Tax, SALT, SALT Update, South Dakota, Uncategorized

By: Jennifer Weidler Karpchuk

On August 29, oral arguments were held in South Dakota v. Wayfair, Inc. S.D., No. 28160, which challenges the state’s remote sales tax legislation, S.B. 106. 

Enacted during March 2016, S.B. 106 requires remote sellers to collect and remit tax to the state – even if they have no physical presence in the state – if they have more than $100,000 in sales or make more than 200 separate sales into South Dakota annually. The Bill was specifically crafted as a vehicle to undo the U.S. Supreme Court’s ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which prohibits states from imposing sales and use tax collection obligations on sellers who do not have a physical presence in the state. The lower court found in favor of the taxpayers, holding that the law was unconstitutional pursuant to Quill, and the State quickly appealed to the South Dakota Supreme Court.

During oral arguments at the South Dakota Supreme Court, the State asked the court for an expeditious denial of its appeal so that it can file a writ of certiorari with the U.S. Supreme Court.  Additionally, the State requested that the court provide “a critical and important voice” urging the U.S. Supreme Court to grant cert.

Counsel for the taxpayers explained that the purposeful drafting of an unconstitutional bill in order to challenge a long-standing U.S. Supreme Court decision was unconventional and controversial. Counsel questioned whether purposefully enacting unconstitutional legislation creates bad precedent/practice.

Further, counsel for the taxpayers argued that Congress has the power to regulate interstate commerce and that Congress should decide the fate of state sales tax collection. Currently, there are four different bills pending before Congress seeking to deal with this issue, one of which we previously discussed here.

Counsel for the taxpayers also claimed that important facts were not developed and included in the record at the lower court – such as, what the projected lost revenue is to the State. Counsel for the taxpayers concluded by asking that the decision be affirmed as unconstitutional, without the court weighing in on complex policy issues.

Once the South Dakota Supreme Court issues its opinion, the parties will have 90 day to petition the U.S. Supreme Court for cert.

H.R. 327 Passes – Pennsylvania Creates New Tax Modernization Subcommittee

Posted June 21, 2017 by Jennifer Weidler Karpchuk
Categories: Pennsylvania, SALT Update, Uncategorized


By: Jennifer Weidler Karpchuk

On June 19, the House unanimously voted to approve H.R. 327, thereby establishing a subcommittee on tax reform and modernization.  You can see our previous discussion of H.R. 327 here.

Since H.R. 327 was a House Resolution, it does not need to be approved by the Senate.  The subcommittee will have nine Finance Committee members who will be responsible for submitting their findings and recommendations by November 30, 2018.

A Federal-Level Attempt to Codify the “Physical Presence” Nexus Standard From Quill

Posted June 15, 2017 by SALT Blawg
Categories: nexus, SALT

Tags: , , , , , , ,

By Adam Koelsch

On June 12, 2017, The Honorable James Sensenbrenner (R. WI 5th District) introduced into the U.S. House of Representatives a bill, designated H.R. 2887, which would codify the nexus standard set forth by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

The bill is set against the backdrop of multiple recent attempts by the states to persuade the Supreme Court to take a case that would revisit and overturn Quill.  Quill held that the dormant Commerce Clause of the U.S. Constitution prohibits a state (or local taxing authority) from imposing upon a retailer an obligation to collect and remit sales tax from its sales to customers within that state if the retailer does not have a “physical presence” in that state.

Various state court decisions have interpreted Quill to limit the physical presence standard to sales taxes only.  With respect to other taxes, those courts adopted a more expansive “economic presence” standard, that is, broadly speaking, a standard by which a court attempts to determine whether a person exploited the state’s market, received protection from the state, and/or derived some benefit from the state, thereby subjecting the person to tax.

H.R. 2887, however, would prohibit a state from taxing, or regulating, a person’s activity in interstate commerce unless the person is “physically present in the State during the period in which the tax or regulation is imposed.”  H.R. 2887 § 2(a).  Essentially, the bill would roll-back the state court economic nexus decisions and require application of Quill to all tax types.

The bill defines “physical presence” as:  (A) maintaining a commercial or legal domicile in the state; (B) owning, holding a leasehold interest in, or maintaining real property such as an office, retail store, warehouse, distribution center, manufacturing operation, or assembly facility in the state; (C) leasing or owning tangible personal property (other than computer software) of more than de minimis value; (D) having one or more employees, agents, or independent contractors present in the State who provide on-site design, installation, or repair services on behalf of the remote seller; (E) having one or more employees, exclusive agents or exclusive independent contractors present in the state who engage in activities that substantially assist the person to establish or maintain a market in the State; or (F) regularly employing in the State three or more employees for any purpose.  H.R. 2887 § 2(b)(1).

Owning real property in a state has been traditionally recognized as providing sufficient nexus to subject a person to tax.  In addition, practitioners familiar with nexus issues will recognize elements taken from Supreme Court case law interpreting the Quill standard, such as the affirmation in subsection (D) that the presence of a single employee (Standard Press Steel Company v. State of Washington, 419 U.S. 560 [1975]) or an independent contractor (Scripto Inc. v. Carson, 362 U.S. 207 [1960]) is sufficient to subject a person to tax.

But parts of the physical presence standard set forth by the bill are more novel.  Subsection (C) of the above definition would likely have significant impact upon the debate regarding the taxability of computer software, which some states have considered tangible personal property, even when transmitted entirely over the internet.  Indeed, the manner by which courts interpret the term “tangible personal property” in subsection (C) will bear upon the question of whether states will be permitted to tax items such as streaming videos and music, when the taxpayer has no other presence in the state.  Moreover, Courts might interpret subsection (F) to expand the ability of states to claim that an out-of-state business entity has established nexus in the state by allowing any three of its employees to work from their homes in that state, although the allowance was made solely for the employees’ convenience, and although the business otherwise does not have any operations in the state.

The bill also sets forth a definition of “de minimis physical presence,” which includes: (a) entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the State, whether by an Internet-based link or platform, Internet Web site or otherwise; (b) any presence in a State for less than 15 days in a taxable year (or a greater number of days if provided by State law); (c) product placement, setup, or other services offered in connection with delivery of products by an interstate or in-State carrier or other service provider; (d) internet advertising services provided by in-State residents which are not exclusively directed towards, or do not solicit exclusively, in-State customers; (e) ownership by a person outside of the State of an interest in a limited liability company or similar entity organized or with a physical presence in the State; (f) the furnishing of information to customers or affiliate in such State, or the coverage of events or other gathering of information in such State by such person, or his representative, which information is used or disseminated from a point outside the State; or (g) business activities directed relating to such person’s potential or actual purchase of goods or services within the State if the final decision to purchase is made outside the State.  H.R. 2887 § 2(b)(2).

Finally, the bill also provides that “[a] State may not impose or assess a sales, use, or similar tax on a person or impose an obligation to collect or report any information with respect thereto, unless such person is either a purchaser or a seller having a physical presence in the State.”  H.R. 2887 § 2(c).

That provision that would eliminate remote seller sales and use tax reporting requirements recently enacted by a number of states, most notably, in Colorado.  See Colo. Rev. Stat. § 39-21-112 (3.5).

Furthermore — because that provision provides that a sales and use tax may not be imposed upon anyone who is not a “seller,” and because the term “seller” specifically excludes “marketplace providers” and “referrers,” as defined elsewhere in the bill (H.R. 2887 § 4[a][1], [5], [7][A], [B]) — that provision would prohibit state measures such as Minnesota H.F. 1, which was passed on May 30, 2017, that impose sales tax and use tax collection requirements upon marketplace providers, e.g., eBay and Amazon.

Interestingly, the bill provides that the federal courts will now have jurisdiction to hear civil actions filed to enforce the provisions of the bill.  H.R. 2887 § 3.  Currently, lawsuits involving state taxes are largely absent from the federal system as a result of the Tax Injunction Act, which provides that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”  28 U.S.C. § 1341.  H.R. 2887, however, allows any taxpayer challenging a state tax based upon nexus may bring suit in federal court.  Obviously, this new “federal option” would change the dynamic of SALT litigation involving nexus questions.

In short, the bill, if passed, would make dramatic changes to State and Local Tax law and litigation landscape.

Resolution Proposes Establishing Pennsylvania Subcommittee on Tax Modernization and Reform

Posted June 13, 2017 by Jennifer Weidler Karpchuk
Categories: Pennsylvania, SALT Update, Uncategorized

By: Jennifer Weidler Karpchuk

During May 2017, H.R. 327 was introduced and reported as committed by the House on June 13, 2017.  H.R. 327 would establish a select subcommittee on tax modernization and reform to investigate, review, and make recommendations concerning the process, rates, and methods by which revenue in Pennsylvania is collected and assessed on taxpayers.

The purpose of the Resolution is to examine and review Pennsylvania’s system of taxation to ensure an equitable and efficient means by which taxes are assessed and collected and to facilitate a fair and competitive marketplace in an ever-changing global economy.

The subcommittee would investigate, review, and make findings and recommendations regarding: (1) the rates and means by which taxes are assessed and collected; (2) whether certain taxes are outdated or could be modernized to reflect the current economy; and (3) how to maintain competitiveness and reduce the overall burden on taxpayers without jeopardizing the stability of overall revenue. The subcommittee would also review other states’ best practices and methods for levying and collecting various taxes.  Finally, the subcommittee would develop recommendations which: (1) encourage equitable and fair tax policy; (2) provide certainty and uniformity for taxpayers; (3) facilitate cost-effective and economic tax collection practices; and (4) promote transparency and simplicity to aid taxpayer understanding of Pennsylvania’s tax policies.

The subcommittee would be responsible for submitting a report of its findings by November 30, 2018.

H.R. 327 is a step in the right direction. Whenever a state is willing to reconsider its own practices and to analyze what other states are doing well and use that knowledge to reevaluate its own system, there is great potential that both taxpayers and the taxing state can benefit.

You can follow the progress of the Resolution here.

Tennessee Agrees to Halt Out-of-State Sales Tax Collection Pending Outcome of Litigation Challenging Quill

Posted June 7, 2017 by Jennifer Weidler Karpchuk
Categories: Uncategorized

By Jennifer Weidler Karpchuk

During 2016, Tennessee amended its law to join the growing list of states challenging Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (see past coverage here).  Pursuant to Tenn. Comp. R. & Regs. § 1320-05-01.129(2) (“Rule 129”), out-of-state dealers were required to register by March 1, 2017 and begin collecting sales tax by July 1, 2017.  Essentially, Rule 129 requires an out-of-state seller to collect and remit Tennessee sale and use tax based solely upon solicitation of sales from outside of Tennessee  in excess of the $500,000 statutory minimum in the state.  Thus, Rule 129 is a direct challenge to Quill, as it intentionally runs afoul of the Quill physical presence standard.

During March, a lawsuit was filed in the Davidson County Chancery Court by the American Catalog Mailers and NetChoice (an association of e-commerce retailers) challenging Rule 129 on the basis of Quill.  The complaint seeks a declaratory judgment against the Tennessee Department of Revenue regarding Rule 129.

On April 10, 2017, the Court issued an agreed Order preventing the enforcement of Rule 129 while the lawsuit is pending.  During May, the Department released Notice #17-12, which confirms that the Department will not require taxpayers to collect and remit tax pursuant to Rule 129 while the case is pending.

Crutchfield Settles; Eyes Turn to South Dakota and Alabama for Challenge to Quill

Posted April 26, 2017 by Jennifer Weidler Karpchuk
Categories: Alabama, Ohio, SALT Update, South Dakota, U.S. Supreme Court, Uncategorized

By: Jennifer Weidler Karpchuk

As our previous post explains, the U.S. Supreme Court had extended the time to file petitions for certiorari in Crutchfield Corp. v. Joseph W. Testa, Tax Commissioner of Ohio (U.S. Supreme Court Docket No. 16A774), involving the Ohio Commercial Activity Tax (“CAT”).  However, prior to the deadline, the parties agreed to forego further litigation and entered into an undisclosed settlement agreement.  As such, the Ohio Supreme Court’s decision upholding the Ohio CAT stands. See Crutchfield Corp. v. Joseph W. Testa, Tax Commissioner of Ohio, 2016 WL 6775765 (2016).

Those hoping the U.S. Supreme Court would revisit Quill through Crutchfield may be disappointed by this settlement, but should look to South Dakota and Alabama as their respective test cases challenging Quill make their way through the courts. See South Dakota v. Wayfair, Inc., et al., S.D. Cir. Ct., 6th Jud. Dist., Dkt. No. 32CIV16-000092, 03/06/2017; Newegg Inc. Notice of Appeal, Alabama Tax Tribunal.

Don’t Delay – Pennsylvania’s 2017 Tax Amnesty Program Starts Today

Posted April 21, 2017 by Jennifer Weidler Karpchuk
Categories: Corporate Tax, Franchise Tax, Income Tax, Pennsylvania, Sales and Use Tax, SALT, SALT Update, Uncategorized

By Jennifer Weidler Karpchuk

As of today, April 21, 2017, Pennsylvania’s 2017 Tax Amnesty Program has officially commenced.  Those individuals with potential Pennsylvania tax liabilities should consider taking advantage of the program, which is slated to run through June 19, 2017.  During those sixty (60) days, the Pennsylvania Department of Revenue will waive all penalties and half of the interest for anyone who participates.  For more information, see our previous blog post hereContact us to find out if amnesty is the right choice for you.