Archive for the ‘SALT’ category

Oral Arguments Heard in South Dakota’s Challenge to Quill

August 31, 2017

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.

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

June 15, 2017

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.

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

April 21, 2017

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.

Update on Supreme Court Retroactivity Litigation

April 6, 2017

By Adam Koelsch

As previously reported on the SALT Blawg, Chamberlain Hrdlicka attorneys Stewart M. Weintraub and Adam M. Koelsch, together with Peter L. Faber of McDermott, of Will & Emery LLP, filed in the U.S. Supreme Court an amicus brief on behalf of the American College of Tax Counsel in support of the petitioners challenging a retroactive repeal of tax legislation by the state of Michigan.  Although the petitioners and the amici had asserted various reasons for granting certiorari, the most prominent of those assertions was that the repeal, stretching seven years into the past, violates the Due Process Clause of the U.S. Constitution.

Subsequent to those submissions, the Supreme Court removed from its conference calendar the petition submitted in another pending retroactive tax legislation case from Washington state (Dot Foods, Inc. v. State of Washington), presumably to consider it jointly with the Michigan cases at a later date, and also ordered Michigan to submit a response to the petitions filed — moves widely seen as signaling that the Court is interested in addressing Due Process issue.

Michigan has since submitted its response, setting forth a novel basis for denying cert.:  that the 2014 legislation challenged by the petitioners — which repealed retroactive to 2008 a statute authorizing a three-factor apportionment election that had existed since 1970 — was a “legislative clarification” of a 2008 Business Tax statute that had supposedly mandated single-factor apportionment for all prospective years, and was therefore not retroactive at all.  Thus, according to Michigan, application of that principle of state statutory-construction law constitutes an adequate and independent state law ground to uphold the decision of the Michigan state court, thereby depriving the Supreme Court of jurisdiction to review the issue.

Not so, replied the petitioners.  IBM and Skadden Arps submitted reply briefs on March 24 and 27, respectively.  IBM’s brief challenged the assertion that the doctrine of “legislative clarification” in fact exists, and asserted that the any new law that applies to activities (or tax years) in the past is, by definition, retroactive.  Skadden Arps, in its brief, added that the Michigan Court of Appeals had never mentioned the doctrine in its decision, while explicitly acknowledging the statute’s retroactive effect, and that, in any event, “the Supremacy Clause does not allow federal retroactivity doctrine to be supplanted by the invocation of a contrary approach to retroactivity under state law.”  On March 28, a brief filed on behalf of Goodyear Tire, Deluxe Financial Services, and Monster Beverage reiterated the arguments of IBM and Skadden Arps.

The briefs for the Michigan petitioners and for the petitioners in Dot Foods will all be considered during the Court’s conference on April 13, and the Court’s decisions could be announced as early as April 17.

Here, you can find copies of:  the Michigan response briefthe IBM reply briefthe Skadden Arps reply brief, and the Goodyear et al. reply brief.

Recent Developments Regarding the “Throw Out Rule” by the New Jersey Tax Court and the Multistate Tax Commission

February 20, 2017

By Adam Koelsch

Recently, in Elan Pharm. v. Division of Taxation, the Tax Court of New Jersey issued a non-binding opinion that further limits the Division of Taxation’s enforcement of the controversial “throw out rule.”

Sometimes, when a multi-state taxpayer apportions its income, that taxpayer will source a receipt to a state in which the receipt is not subject to tax, either because the state has chosen not to tax it or because the state is not able to do so. One reason that a receipt may not be taxable, and a reason at issue in Elan Pharm., is P.L. 86-272 — a federal law that prohibits a state from taxing a business whose activities in that state are limited to the sale and/or the solicitation of sales of tangible personal property shipped from another state. This type of income sourcing creates “nowhere income,” that is, income that is not taxed by any jurisdiction.

In order to combat this, some states have employed a tactic known as a “throw out rule.” Under the rule, non-taxed receipts are ignored in calculating the state’s share of total receipts by subtracting the non-tax receipts from the apportionment denominator. As the Tax Court noted, “[b]y throwing out receipts from the denominator, the sales fraction always increases, causing the apportionment formula and the taxpayer’s resultant CBT [Corporation Business Tax] liability to New Jersey to increase.” The New Jersey throw out rule (former N.J. Stat. Ann. § 54:10A-6[B]), which was repealed by legislation in late 2008, continues to be enforced by the Division for the tax periods between January 1, 2002 and June 30, 2010.

Previously, in Whirlpool Properties, Inc. v. Director, Division of Taxation, 26 A.3d 446 (N.J. 2011), the New Jersey Supreme Court had held that, under the fair apportionment prong of the U.S. Supreme Court’s Complete Auto Transit test, application of the throw out rule to receipts sourced to states that simply choose not to impose a tax (as opposed to being unable constitutionally to impose a tax) is unconstitutional.

Recently, on February 7, 2017, the Multistate Tax Commission, in a staff comment regarding the operation of a proposed throw out rule in its Model Regulations, has suggested that the rule should apply only when a state cannot impose an income-based tax under the constitution or P.L. 86-272, and should not consider whether the state actually chooses to impose a tax.

In Elan Pharm., the taxpayer had filed income tax returns in six states, including New Jersey, for 2002. The taxpayer had received receipts from forty-four states in which it had claimed it was not taxable because the state lacked jurisdiction under P.L. 86-272. The taxpayer had property in thirty-nine states and payroll in forty-eight states. Nevertheless, the Division had included in the apportionment denominator only those receipts from the six states in which the taxpayer had filed, excluding the remainder of the receipts under the throw out rule.

The Tax Court, however, disagreed with the Division’s application of the rule. The Tax Court noted that several states in which the taxpayer conducted business (not just the six in which it had filed) had “throwback rules” — that is, a rule by which sales receipts are reassigned to the state from which goods are shipped when the purchaser’s state cannot impose an income or franchise under the constitution or P.L. 86-272. Thus, because certain receipts captured under the throwback rule could have been taxed by the shipping states, those receipts could not be excluded by application of the throw out rule by New Jersey.

In addition, the Court found that the presence of taxpayer’s property and/or payroll in many of the states from which excluded receipts had been sourced created sufficient nexus to render the receipts taxable in those states despite P.L. 86-272, and therefore could not be excluded using the throw out rule.

Despite its repeal, the throw out rule remains a subject of controversy which will continue to impact businesses operating in New Jersey. Indeed, understanding application of the rule is especially important to business entities that had never previously filed CBT returns in New Jersey — and therefore cannot benefit from the statute of limitations for the years that the rule was effective — because of their mistaken belief that their activities were insufficient to create nexus.

The New Jersey Tax Court opinion can be found here

Chamberlain Hrdlicka Attorneys Submit Supreme Court Amicus Brief in High-Profile Tax Retroactivity Case

January 14, 2017

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Just a few weeks ago, Chamberlain Hrdlicka attorneys Stewart M. Weintraub and Adam M. Koelsch, together with Peter L. Faber of McDermott, Will & Emery LLP, filed in the U.S. Supreme Court an amicus brief on behalf of the American College of Tax Counsel in support of the petitioners challenging the Michigan Court of Appeals’ September 2015 decision in Gillette Commercial Operations N. Am. v. Dep’t of Treasury.

In the amicus, the attorneys argued that the Court of Appeals  had misapplied the holding of the Supreme Court in United States v. Carlton in order to sustain a retroactive repeal of tax legislation relied upon by the state. According to the attorneys, that retroactive repeal, stretching seven years into the past, violates the Due Process Clause of the U.S. Constitution.

The petitions had been scheduled for a conference on January 19.  The Court removed the petitions, as well as the petition submitted in the case of Dot Foods, Inc. v. State of Washington, from the conference calendar and ordered Michigan to respond to the petitions by March 13.  Dot Foods, Inc. is another retroactivity case in which Weintraub and Faber had raised similar due process arguments in an amicus brief submitted for the College.

In light of these actions, it is possible that the Court may be interested in reviewing these cases. If the Court were to grant certiorari, it is hoped that the subsequent opinion would provide some much needed guidance regarding the ability of state legislatures to enact retroactive tax changes.

A copy of the Brief is available here.

Philadelphia RAR Overpayments – Not for the Faint of Heart

January 12, 2017

Chamberlain Hrdlicka’s SALT Practice Chair, Stewart Weintraub, recently wrote an article about Philadelphia RAR Overpayments for the Journal of Multistate Taxation and Incentives.

His article, “Philadelphia RAR Overpayments – Not for the Faint of Heart,” discusses a recent Philadelphia case in which a statute of limitations barring a refund did not prohibit credits against future taxes.

Stewart outlined the Philadelphia Business Income and Receipts Tax (BIRT) structure, the facts of the case, the statute of limitations issues and the case’s conclusion. The article explores the possibility of broader implications.

Reference the full article here.