Posted tagged ‘computers’

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.

Weekly SALT News Update

September 6, 2011

The Alliance for Main Street Fairness Launches Website Targeting Amazon.com

On August 25th, the Alliance for Main Street Fairness launched a web site that asked individuals to anonymously submit stories relating to Amazon.com’s alleged efforts to avoid collecting state sales taxes. The Alliance, representing mainly brick-and-mortar business, has pushed for states to enact “Amazon” laws, arguing that such laws promote tax fairness.  Conversely, opponents to “Amazon” laws believe that states are reaching beyond their constitutional limits.

Although Supportive of “Amazon” Law, Wal-Mart Not Collecting California Sales Taxes by Online Retail Partner

CSN Stores, LLC is a Wal-Mart Marketplace vendor which uses an online platform.  During June, California Governor Jerry Brown signed the state’s “Amazon” law, which had been supported by Wal-Mart.  The California law established nexus and collection obligations for remote sellers who maintain in-state affiliate relationships.  While CSN has been making online sales into California, Wal-Mart has not collected taxes on those sales, according to the Los Angeles Times.

Streamlined Sales Tax Governing Board Opposes Federal Digital Goods and Services Taxation Act

On August 31, the Streamlined Sales Tax Governing Board passed a resolution opposing the Digital Goods and Services Tax Fairness Act.   The Act seeks to set national guidelines for state and local taxation of digital goods in a stated attempt to promote neutrality, simplicity, and fairness in the taxation of digital goods and digital services.  The Board opposes the Act because they believe that it contains language that conflicts with the Streamlined Sales and Use Tax Agreement.  Furthermore, some Board delegates argue that federal legislation should not address the digital goods taxation issues.  Instead, those delegates argue that the issue should be addressed through the streamlined agreement.

Pennsylvania Third Party Preparers Required to File Electronically or Pay Penalty

On August 27, the Pennsylvania Department of Revenue issued a notice that any third party preparer who prepares fifty (50) or more Pennsylvania corporate tax reports is required to file electronically for all calendar years following the calendar year in which the third party preparer prepares fifty (50) or more Pennsylvania corporate tax reports.  If a third party preparer fails to file corporate tax reports electronically per the requirements of the notice, the preparer will be subject to a penalty of 1% of the tax due, amounting to a minimum penalty of $10 and a maximum penalty of $500.  Certain exceptions allowing for a waiver of penalty exist under delineated exclusions contained in the notice.

State DOR Rulings

The Iowa Department of Revenue issued two rulings. The first ruling addresses the taxation of “loyalty points” that are awarded by mobile companies and then used to reduce the purchase price of cell phones. In the analysis, such reductions in price are treated akin to coupons, and reductions of the purchase price subject to sales tax.

In the other ruling,  the Iowa Department of Revenue ruled that where a cell phone is replaced under a warranty program, the replaced cell phone is not subject to sales tax, but the deductible paid in the exchange (in this case, $100) is subject to sales tax.

Missouri’s Department of Revenue recently issued a ruling regarding the taxation of iPads and similar equipment. Missouri provides for a  sales tax holiday for retail sales of clothing, personal computers, and school supplies. The question is whether an iPad is a “computer” and therefore exempt from sales tax on the holiday. The Department answered in the affirmative for iPads, but not for “readers” such as the Kindles.

New Regulations

Rhode Island proposes a new regulation for the taxation of the sale of marijuana. The rule provides that such sale would be exempt when prescribed, just like other prescription drugs.

Legislative Affairs

Maryland’s  Department of Legislative Services staff are expected to testify to the Maryland Senate that a gross receipts tax would bring in more gross revenue. (We are withholding comment on the University of Maryland’s new uniforms, which apparently are a hit on campus.) You can see the a Power Point presentation here.

Judicial and Administrative Decisions

New York disregards the form of a transaction as between a husband and a wife.

The New York Division of Tax Appeals ruled that the auditor failed to give adequate notice for records. As time was running out for making the assessment, the auditor rushed through an audit, requested records, but failed to give a reasonable opportunity to the taxpayer to comply. The auditor than generated an estimated audit, which the taxpayer challenged as improper and inaccurate. The taxpayer won.