Pennsylvania Sales Tax Collection, or Reporting & Notification Mandates Are Coming – Are You Ready?

Posted February 21, 2018 by Jennifer Weidler Karpchuk
Categories: Pennsylvania, Sales and Use Tax, SALT Update, Uncategorized

By: Jennifer Weidler Karpchuk

Starting March 1, 2018, a remote seller, marketplace facilitator, or referrer, with no physical presence in Pennsylvania but with $10,000 of annual sales into Pennsylvania, must elect to either collect sales tax on transactions, or to abide by various notice and reporting requirements. See HB 542, Act 43 of 2017. If no election is made, the remote seller, marketplace facilitator, and/or marketplace seller is deemed to have elected to comply with the notice and reporting requirements. The Department has begun mailing forms to taxpayers it believes qualify as referrers, marketplace sellers, or remote sellers. If a company receives a form, but does not believe it qualifies under any of the definitions, please contact us to seek further advice.

Key definitions:

Remote Seller. A person, other than a marketplace facilitator, marketplace seller or referrer, that does not maintain a place of business in Pennsylvania that, through a forum, sells tangible personal property at retail.

Marketplace Facilitator. A person that facilitates the sale at retail of tangible personal property. A person facilitates a sale at retail if the person or an affiliated person: (1) lists or advertises tangible personal property for sale at retail in any forum; and (2) either directly or indirectly through agreements or arrangements with third parties, collects the payment from the purchaser and transmits the payment to the person selling the property. The term includes a person that may also be a vendor.

Marketplace Seller. A person that has an agreement with a marketplace facilitator pursuant to which the marketplace facilitator facilitates sales for the person.

Referrer. A person, other than a person engaging in the business of printing or publishing a newspaper, that, pursuant to an agreement or arrangement with a marketplace seller or remote seller, does the following: (1) agrees to list or advertise for sale at retail one or more products of the marketplace seller or remote seller in a physical or electronic medium; (2) receives consideration from the marketplace seller or remote seller from the sale offered in the listing or advertisement; (3) transfers by telecommunications, internet link or other means, a purchaser to a marketplace seller, remote seller or affiliated person to complete a sale; (4) does not collect a receipt from the purchaser for the sale. The terms explicitly does not include a person that: (1) provides internet advertising services; and (2) does not provide the marketplace seller’s or remote seller’s shipping terms or advertise whether a marketplace seller or remote seller collects a sales or use tax. The term includes a person that may also be a vendor.

Election:

Act 43 of 2017 provides that, on or before March 1, 2018 (and before June 1 of each calendar year thereafter), a remote seller, marketplace facilitator, or referrer that has aggregate sales at retail of tangible personal property subject to tax within Pennsylvania or delivered to locations within Pennsylvania worth at least $10,000 during the immediately preceding twelve calendar month period must file an election with the Department of Revenue to collect and remit the sales tax, or to comply with the notice and reporting requirements.

• If an election is made, the individual must obtain a sales tax license.

• An election made on or after March 1, 2018 will be deemed to be in effect for the balance of the 2017-2018 fiscal year and for the 2018-2019 fiscal year. An election may be changed to elect to collect and remit the tax at any time during a fiscal year.

Notice Requirements.

The notice requirement of Act 43 of 2017 requires that a remote seller or marketplace facilitator post a conspicuous notice on its forum that includes all of the following:

• Sales and use tax may be due in connection with the purchase and delivery of the tangible personal property;

• The Commonwealth requires the purchaser to file a return if use tax is due in connection with the purchase and delivery; and

• The notice is required.

A referrer must post a conspicuous notice on its platform that includes all of the following:

• Sales or use tax may be due in connection with the purchase and delivery;

• The person to which the purchaser is being referred may or may not collect and remit sales tax to the Department in connection with the transaction;

• Pennsylvania requires the purchaser to file a return if use tax is due in connection with the purchase and delivery and not collected by the person; and

• The notice is required.

The referrer’s notice must be prominently displayed and may include pop-up boxes or notification by other means that appears when the referrer transfers a purchaser to another person to complete the sale.

Reporting Requirements.

Two types of reports are required under the new legislation – one to purchasers and one to the Department.

Reports to Purchasers.

− A remote seller or marketplace facilitator that does not elect to collect and remit the tax must, no later than January 31 of each year, provide a written report to each purchaser required to receive the notice that includes the following:

• A statement that the remote or marketplace facilitator did not collect sales tax in connection with the purchaser’s transactions and that the purchaser may be required to remit use tax to the Department;

• A list, by date, indicating the type and purchase price of each product purchased or leased by the purchaser from the remote seller or marketplace facilitator and delivered to a location within Pennsylvania;

• Instructions for obtaining additional information from the Department regarding whether and how to remit use tax to the Department; and

• A statement that the remote seller or marketplace facilitator is required to submit a report to the Department that includes the name of the purchaser and the aggregate dollar amount of the purchaser’s purchases.
 The report must be mailed by first-class mail, in an envelope prominently marked with words indicating that important tax information is enclosed, to the purchaser’s billing address, if known, or, if unknown, to the purchaser’s shipping address.

• If both the billing and shipping address are unknown, the report must be electronically sent to the purchaser’s last known email address with a subject heading indicating that important tax information is being provided.

− A referrer that does not elect to collect and remit the tax must, no later than January 31 of each year, provide a written notice to each remote seller to whom the referrer transferred a potential purchaser located in Pennsylvania during the immediately preceding calendar year that includes all of the following:

• A statement that a sales or use tax may be imposed by the Commonwealth on the transaction;

• A statement that the remote seller may be required to make the election;

• Instructions for obtaining additional information regarding sales and use tax from the Department.

Reports to Department.

− A remote seller or marketplace facilitator that does not elect to collect and remit tax must, by January 31 of each year, submit a report to the Department, which shall include with respect to each purchaser during the immediately preceding calendar year:

• Purchaser’s name;

• Purchaser’s billing address and, if different, the purchaser’s last known mailing address;

• Address within Pennsylvania where the products were delivered to the purchaser;

• Aggregate dollar amount of the purchaser’s purchases from the remote seller or marketplace facilitator; and

• Name and address of the remote seller, marketplace facilitator or marketplace seller that made the sales to the purchaser.
− A referrer who does not elect to collect and remit the tax must, no later than January 31 of each year, submit a report to the Department including a list of persons who received the required notice.
 These required reports must be submitted by an officer of the remote seller, marketplace facilitator or referrer and must include a statement, made under penalty of perjury, by the officer that the remote seller, marketplace facilitator or referrer made reasonable efforts to comply with the notice and reporting requirements.

Liability and Penalties.

The Department can assess a penalty of $20,000 or 20% of total sales (whichever is less) in Pennsylvania during the previous twelve months against a remote seller, marketplace facilitator or referrer that makes an election to comply with the notice and reporting requirements, or is deemed to have made an election, and fails to comply. The penalty is assessed separately for each violation, but can only be assessed once in a calendar year.

Notably, starting March 31, 2018, and for five years thereafter, the Department can abate or reduce any penalty or addition due to hardship or good cause shown. Additionally, the marketplace facilitator or referrer is relieved from liability if the marketplace facilitator or referrer can show that the failure to collect the correct amount of tax was due to incorrect information given to it by a marketplace seller or remote seller.

U.S. Supreme Court Agrees to Hear “Kill Quill” Case

Posted January 12, 2018 by Jennifer Weidler Karpchuk
Categories: Uncategorized

By:  Jennifer Weidler Karpchuk

The U.S Supreme Court has agreed to hear South Dakota v. Wayfair – a facial challenge by South Carolina to the U.S. Supreme Court’s 1992 decision in Quill v. North Dakota, requiring physical presence.

As previously reported, during August the South Dakota Supreme Court held oral arguments wherein South Dakota urged the court to reject its petition, which would allow it to expeditiously file a petition for cert with the US Supreme Court.  The South Dakota Supreme Court abided and quickly affirmed a March 2017 trial court decision granting the remote seller’s motion for summary judgment, holding that the economic nexus law (SB 106) was unconstitutional and directly violated the physical presence requirement of Quill. South Dakota v. Wayfair, Inc. S.D., No. 28160.  On October 2, 2017, South Dakota filed a petition for writ of certiorari with the U.S. Supreme Court.

The “Kill Quill” movement was spurred in large part by comments made by a concurring Justice Kennedy in Direct Marketing Association v. Brohl, 135 S.Ct. 1124 (2015).  Justice Kennedy criticized Quill stating that:

“The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions…Today buyers have almost instant access to most retailers via cellphones, tablets and laptops. As a result, a business may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term.  Given these changes to 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.”

Justice Kennedy then invited a challenge to Quill, writing: “the legal system should find an appropriate case for this Court to reexamine Quill.”

Since Justice Kennedy’s opinion, a number of state legislatures passed or considered passing legislation requiring remote vendors to collect sales tax – representing overt challenges to QuillSee, e.g., Alabama and Tennessee).

If South Carolina is successful, more states would be expected to quickly jump on the bandwagon and implement similar legislation and collection requirements.  If South Carolina is unsuccessful, states will likely still attempt to craft new ways to tap into what they perceive as lost revenue and there may be a stronger push on Congress to come up with legislation to address the issue.  Whatever decision the U.S. Supreme Court reaches will undoubtedly have substantial ramifications for the SALT world.

Hashing Out the SALT Issues Of Pennsylvania’s Medical Marijuana

Posted January 3, 2018 by Jennifer Weidler Karpchuk
Categories: Pennsylvania, SALT, SALT Update, Uncategorized

 


 

By: Jennifer Weidler Karpchuk

Pennsylvania recently joined 29 other states and D.C. in legalizing medical marijuana. With the growing acceptance of the use of marijuana for medicinal — and in some states, recreational — purposes, a new industry booms. With that boom comes revenue to the states in the form of new taxes.

As with any tax and policy, it is important to understand the history of how we got to where we are today. But it is particularly important to see what has framed our cultural views of marijuana. Medicinal marijuana has a long history, dating back to ancient cultures that used it as an herbal medicine, starting in Asia around 500 B.C. During the 17th century, the government encouraged production of hemp for rope, sails, and clothing.  Virginia went so far as to pass legislation requiring every farmer to grow hemp. Further, hemp was accepted as legal tender in Maryland, Pennsylvania, and Virginia. Hemp production flourished through the late 19th century, until other materials started to replace it.

During the 1830s, Sir William Brooke O’Shaughnessy found that marijuana helped to lessen stomach pain and vomiting in people with cholera. By the late 19th century it became a popular ingredient in many medicinal products and was sold in pharmacies.  Under the Food and Drug Act of 1906, over-the-counter marijuana products were required to be labeled.

Although legal, recreational use of marijuana did not begin in the United States until around 1900. During the Mexican Revolution, Mexicans began immigrating to the United States and introduced into American culture the recreational use of marijuana. Fear and prejudice followed the Spanish-speaking immigrants, and marijuana became associated with the newcomers. Crimes began to be attributed to marijuana and the Mexicans who used it.

The Great Depression further spurred resentment of the Mexican immigrants and public fear of their “evil weed,” which — combined with the Prohibition era’s view of all intoxicants — led 29 states to outlaw marijuana by 1931. The federal Marijuana Tax Act, enacted during 1937, essentially criminalized marijuana use by restricting possession to individuals who paid an excise tax. This was the first time federal law criminalized marijuana.  The Act, which tried to change behavior through taxation and regulation, was seen as less susceptible to legal challenge than outright prohibition.  The arguments supporting the act were not grounded in any scientific research or evidence. Instead, they were grounded in racism, hearsay, and stereotypes, namely that it caused black men to become violent and seduce white women and that it led Mexicans to murder their white neighbors.  This is also the time when the nomenclature changed from “cannabis” to “marijuana” in an attempt to link Mexicans to the drug and garner prohibition support from anti-immigrant sentiment.

In response to the Marijuana Tax Act, New York’s Mayor Fiorello Henry LaGuardia commissioned a report to study the effects of marijuana. After five years of extensive research, in 1944 the New York Academy of Medicine issued the La Guardia Report, which declared that the use of marijuana did not induce violence, insanity, or sex crimes, or lead to addiction or other drug use.

Despite the research, a culture of fear followed marijuana, spurred in large part by Harry Anslinger, then-commissioner of the Federal Bureau of Narcotics. Anslinger campaigned against marijuana for years and condemned the La Guardia Report as unscientific, while using fear and racism coupled with the mass media to propel his anti-marijuana views.

From 1937 through the 1960s, states began outlawing marijuana, culminating in the federal Controlled Substances Act of 1970. The Act was part of the “War on Drugs” and it repealed the Marijuana Tax Act and listed marijuana as a Schedule I drug — in the company of heroin, LSD, and ecstasy.  Schedule I drugs are those with no medical use and a high potential for abuse.

The Shafer Committee, an investigative body appointed by President Nixon, issued a report in 1972 that admitted that Anslinger’s attacks on marijuana had been baseless, recommended the removal of marijuana from the list of Schedule I drugs, and even questioned its designation as an illicit substance. However, Nixon and other government officials vehemently rejected the report’s findings. Marijuana’s designation as a Schedule I drug was, “more due to Nixon’s animus towards the counterculture with which he associated marijuana than scientific, medical, or legal opinion.”

At the same time, state interest in medical marijuana was emerging. During the 1970s, Oregon, Alaska, and Maine decriminalized marijuana, and New Mexico commissioned a short-lived medical marijuana research program. In 1996 California voters approved Proposition 215 (Compassionate Use Act), the first state legalization of marijuana for medicinal purposes. The use of medicinal marijuana was limited to those with severe or chronic illnesses. Other states followed suit and, to date, 29 states allow the use of marijuana for specified medical purposes, while eight states and Washington, D.C., have legalized marijuana for recreational use.

Research from states that have legalized medical marijuana shows that the average doctor in medical marijuana states prescribes 1,826 fewer doses of painkillers and 265 fewer doses of antidepressants annually. Additionally, states with medical marijuana have a 25 percent lower rate of opioid-related deaths than states that do not.

The Medical Marijuana Act (MMA) of 2016 legalized the use of some forms of medical marijuana in Pennsylvania by patients with specified serious medical conditions. The MMA was championed, through a bipartisan effort, specifically for children with extreme seizure disorders and other medical conditions.

The MMA did not legalize recreational marijuana, only medical marijuana. And it is not even a broad grant of legalization for all forms of medical marijuana for all persons. Instead, Pennsylvania limits the forms of medical marijuana that can be used and limits the types of eligible patients. The leaf and plant forms of marijuana are prohibited, with approved forms limited to pill, oil, and topical forms, vaporization or nebulization, tincture, and liquid. Further, only 17 medical conditions qualify for medical marijuana. Patients with any of these maladies must be certified by a practitioner registered to recommend medical marijuana. Patients must submit that certification to the Department of Health to receive a medical marijuana identification card. Practitioners who wish to certify patients must apply with the Department of Health and complete a four-hour training session.

There is a 5 percent tax on gross receipts from the sale of medical marijuana by a grower/processor to a dispensary. Receipts from the tax will be deposited into a fund that is used to pay for operating costs, financial assistance for those with demonstrated financial hardship, drug and alcohol treatment services, enforcement funding for police departments, and research into how medical marijuana can treat other conditions.  The sale of medical marijuana is not subject to Pennsylvania sales tax. The Department of Health, along with the Department of Revenue, may regulate the price of medical marijuana; if they deem the per-dose price excessive, they may impose a price cap.

Apart from the medical marijuana tax, businesses involved in the sale or disbursement of marijuana, like any other business, may be subject to various Pennsylvania taxes, including gross receipts, personal income, and corporate net income. Further, the new jobs the medicinal marijuana industry create will be a source of revenue from wage and employment taxes.

Applicants must also pay $5,000 per dispensary application and $10,000 per grower/processor application. Business licensees pay registration fees of $30,000 for each dispensary location and $200,000 for growers/processors.

While medical marijuana may be legal in Pennsylvania, from a federal perspective it is still an illegal, Schedule I, drug. The Rohrabacher- Blumenauer Amendment prohibits the U.S. Department of Justice from using federal funds to interfere with state medical marijuana programs or from prosecuting medical marijuana businesses that comply with state laws. However, because marijuana is still illegal under federal law, there are tax consequences. Internal Revenue Code (“IRC”) § 280E prohibits any business that is “trafficking in controlled substances” from taking any business expense deductions that would otherwise be available.

Because Pennsylvania follows federal taxable income, a business is likewise unable to use those deductions for purposes of its state tax liability. Despite the inability to take business expense deductions, a marijuana business must meet its federal, state, and local tax obligations.

There are important caveats to the lack of business expense deductibility. First, pursuant to IRC § 164, taxes paid relating to the disposition of property are a reduction in the amount realized on the disposition. Therefore, medical marijuana tax imposed on producers should allow for a reduction in gross receipts. This is not prohibited by IRC § 280E because the tax is not a deduction or credit. Second, those taxpayers who choose or are required to use the accrual method of accounting may skirt some of the effect of section 280E. Under the accrual method, cost of goods (COG) is an offset to gross revenue, not a deduction. Therefore, it is not prohibited by the language of section 280E. However, the IRS has taken the position that the COG deduction applies only to inventory costs allowable under section 471, which was in effect when section 280E became effective. Again, since Pennsylvania follows federal taxable income, corporate taxpayers in the marijuana industry should be able to benefit from the COG deduction allowed under the accrual method of accounting for Pennsylvania purposes as well.

Individuals and pass-through entities not subject to the corporate net income tax (that is, those taxpayers that do not start with federal taxable income) are permitted to deduct ordinary, reasonable, and necessary business expenses associated with the business activity. However, because no case law exists on the issue, it is unclear what will be viewed as “ordinary, reasonable, and necessary” for the medical marijuana industry for purposes of the deduction.

Third, to the extent a business is doing more than selling or producing medical marijuana, it should be able to deduct that portion of business expenses that are not attributable to the “trafficking of marijuana.” In Californians Helping to Alleviate Medical Problems, a medical marijuana facility bifurcated its business: one in which the facility bought and sold marijuana, and the other in which it provided counseling to customers as to which type of marijuana worked best for their ailments. The tax court allowed the facility deductions attributable to the counseling segment of the business.

Of the states that have legalized and are taxing medical marijuana, as the chart indicates, Pennsylvania’s 5 percent excise tax is not out of line with other states.

State Medical Marijuana Tax Recreational Marijuana Tax
Alaska No tax* Wholesale: $50 per ounce on flower; $15 per ounce for stems/ leaves
Arizona 6.6% state tax + 2-3% optional local tax N/A
Arkansas 4% state tax N/A
California Some medical marijuana sales are tax-exempt Retail: 15% excise tax; Wholesale: $9.25 per ounce of flowers; $2.75 for leaves
Colorado 2.9% sales tax Retail: 15% excise tax; Wholesale: 15% excise tax
Connecticut $3.50 per gram N/A
Delaware No tax* N/A
District of Columbia No tax No retail sales allowed
Florida No tax N/A
Hawaii 4% excise tax; 4.5% tax on Oahu N/A
Illinois 1% pharmaceutical tax Wholesale: 7% tax on cultivators/ dispensaries
Maine No tax Retail: 10% sales tax
Maryland TBD N/A
Massachusetts No tax Retail tax:10.75 %;  State tax: 6.25%; Local municipality tax: 2-3%
Michigan 3% sales tax N/A
Minnesota $3.50 per gram N/A
Montana Tax on gross sales* — 4% from July 1, 2017, to June 30, 2018; 2% after that N/A
Nevada 2% excise tax Retail: 10% excise tax; Wholesale: 15% excise tax
New Hampshire No tax* N/A
New Jersey 7% sales tax N/A
New Mexico No tax N/A
New York 7% excise tax N/A
North Dakota No tax N/A
Ohio TBD N/A
Oregon No tax* Retail: 17% state tax + 3%optional local municipality tax
Pennsylvania 5% excise tax on gross receipts from grower to dispensary N/A
Rhode Island $25 per plant tag for patients and caregivers N/A
Vermont Exempt from sales and use tax N/A
Washington 37% excise tax Retail: 8% sales tax + 37% excise tax
West Virginia No tax Wholesale: 10% excise tax
*State does not have a state sales tax.

It is estimated that annual sales in Pennsylvania will start at $125 million and increase at a rate of 180 percent per year for the first few years, resulting in about $6 million in revenue for the first year. If Pennsylvania were to legalize and tax recreational marijuana, it is estimated that would generate between $200 million and $350 million per year. During 2016 marijuana generated tax revenue of $220 million in Washington, $129 million in Colorado, and $65.4 million in Oregon.

Marijuana is a billion-dollar industry, and with that could come needed revenue for Pennsylvania, which has a projected budget shortfall of nearly $3 billion over 2017-2018. Medical marijuana typically has much lower tax rates than recreational marijuana, generally to avoid affecting the medical marijuana marketplace. Recreational marijuana has been approached in different ways by the states that have legalized its use. For instance, Massachusetts and Washington both levy sales taxes, while Alaska and California use a flat per-unit tax.

Typical sources of “sin” tax revenue are on the decline. Cigarette smoking is waning, resulting in declining state revenue.  Gas prices are also relatively low, meaning that states are unable to tap into traditional areas of easy revenue.  Taxpayers don’t want higher income taxes or higher sales taxes, yet they also do not want to give up services provided by the state. The legalized marijuana industry represents what many view as a solution to revenue shortfalls. And since many view marijuana as a vice, the industry accepts high tax rates as a cost of doing business.

Before state legislatures denounce legalization or impose rigid criteria on the medical marijuana industry, they should make sure that they are not acting out of an antiquated and unsubstantiated fear of marijuana, and instead are basing their actions on scientific research and an understanding of what responsible cultivation and use of marijuana could do for those suffering various maladies.  They should also consider the boost it could give the economy.  As acceptance and increased use of marijuana grows, so too will the SALT world surrounding it as the states try to find the best ways to capitalize on their newest “sin” tax.

South Dakota Files Petition for Writ of Cert with US Supreme Court

Posted October 3, 2017 by Jennifer Weidler Karpchuk
Categories: SALT, SALT Update, South Dakota, U.S. Supreme Court, Uncategorized

By: Jennifer Weidler Karpchuk

On October 2, 2017, South Dakota filed a petition for writ of certiorari with the United States Supreme Court, bringing the first facial challenge to Quill Corp. v. North Dakota in front of the Court.

As previously reported, during August the South Dakota Supreme Court held oral arguments wherein South Dakota urged the court to reject its petition, which would allow it to expeditiously file a petition for cert with the US Supreme Court.  The South Dakota Supreme Court abided and quickly affirmed a March 2017 trial court decision granting the remote seller’s motion for summary judgment, holding that the economic nexus law (SB 106) was unconstitutional and directly violated the physical presence requirement of Quill. South Dakota v. Wayfair, Inc. S.D., No. 28160.

The “Kill Quill” movement was spurred in large part by comments made by a concurring Justice Kennedy in Direct Marketing Association v. Brohl, 135 S.Ct. 1124 (2015).  Justice Kennedy criticized Quill stating that:

“The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions…Today buyers have almost instant access to most retailers via cellphones, tablets and laptops. As a result, a business may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term.  Given these changes to 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.”

Justice Kennedy then invited a challenge to Quill, writing: “the legal system should find an appropriate case for this Court to reexamine Quill.”

Since Justice Kennedy’s opinion, a number of state legislatures passed or considered passing legislation requiring remote vendors to collect sales tax – representing overt challenges to QuillSee, e.g., Alabama and Tennessee).  South Dakota’s law is now the first to make it in front of the US Supreme Court for review.  This case will be closely watched by the SALT community to see if it is the “appropriate case” for the Court to revisit Quill.

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.