Wayfair Substantial Nexus • What are economic contacts? • Court indicated approval of SD statutory standards of $100,000 in sales or 200 transactions as a sufficient “quantity of business” in the state. • Unclear if the level changes with the size of the state (per capita or market size) or the type of tax. • What are virtual contacts? • Court gave no clear guidance, but referred to “instant access to most consumers through an internet- enabled device,” a “virtual showroom,” and a “continuous and pervasive virtual presence.” • MTC working group has seized upon this to attack PL 86-272 immunity from state income taxes. 17
Nexus After Wayfair • With regard to sales/use tax, states responded quickly by adopting economic thresholds. • 44 states have now adopted economic nexus standards by statute or by rule. • Many have adopted South Dakota levels of $100,000 or 200 transactions, but some have selected higher levels (e.g., CA, NY, TN, and TX are at $500,000). • Kansas recently announced enforcement without a specific standard. • Among states that have a state sales tax, only Florida and Missouri have not announced enforcement based on economic nexus. 18
Post- Wayfair Economic Nexus for Sales Tax State Threshold(s) Enforcement Date Alabama $250,000 10/01/2018 Arizona $200,000 / $150,000 / $100,000 10/01/19 – 01/01/20 – 01/01/21 Arkansas $100,000 or 200 transactions 07/01/2019 California $500,000 04/01/2019 Colorado $100,000 12/01/2018 Connecticut $250,000 and 200 transactions; 12/01/2018; $100,000 and 200 transactions 07/01/2019 District of Columbia $100,000 or 200 transactions 01/01/2019 Georgia $250,000 or 200 transactions ; 01/01/2019; $100,000 01/01/2020 Hawaii $100,000 or 200 transactions 07/01/2018 Idaho $100,000 06/01/2019 Illinois $100,000 or 200 transactions 10/01/2018 (change to ROT 7/1/19) 19
Post- Wayfair Economic Nexus for Sales Tax State Threshold(s) Enforcement Date Indiana $100,000 or 200 transactions 10/01/2018 Iowa $100,000 01/01/2019 Kansas No threshold 10/01/2019 Kentucky $100,000 or 200 transactions 10/01/2018 Louisiana $100,000 or 200 transactions 07/01/2020 (likely) Maine $100,000 or 200 transactions 07/01/2018 Maryland $100,000 or 200 transactions 11/01/2018 (and after) Massachusetts $500,000 and 100 transactions (Internet); 10/01/2017; $100,000 gross receipts (all sellers) 10/01/2019 Michigan $100,000 or 200 transactions 10/01/2018 Minnesota 100 retail sales or 10 retail sales > $100k; 10/01/2018; $100,000 or 200 transactions 10/01/2019 20
Post- Wayfair Economic Nexus for Sales Tax State Threshold(s) Enforcement Date Mississippi $250,000 and regular solicitation 09/01/2018 Nebraska $100,000 or 200 transactions 04/01/2019 Nevada $100,000 or 200 transactions 11/01/2018 New Jersey $100,000 or 200 transactions 11/01/2018 New Mexico $100,000 in gross receipts 07/01/2019 (state level tax) New York $500,000 and 100 transactions 06/21/18 (but enacted later) North Carolina $100,000 or 200 transactions 11/01/2018 North Dakota $100,000 10/01/2018 Ohio $100,000 or 200 transactions 08/01/2019 Oklahoma $10,000 or notice and reporting; 07/01/2018; $100,000 11/01/2019 Pennsylvania $10,000 or notice and reporting; 04/01/2018; $100,000 07/01/2019 21
Post- Wayfair Economic Nexus for Sales Tax State Threshold(s) Enforcement Date Rhode Island $100,000 / 200 transactions or notice; 07/01/2018; $100,000 or 200 transactions 07/01/2019 South Carolina $100,000 in gross sales 11/01/2018 South Dakota $100,000 or 200 transactions 11/01/2018 Tennessee $500,000 10/01/2019 Texas $500,000 10/01/2019 Utah $100,000 or 200 transactions 01/01/2019 Vermont $100,000 or 200 transactions 07/01/2018 Virginia $100,000 or 200 transactions 07/01/2019 Washington $100,000 or 200 transactions 10/01/2018 West Virginia $100,000 or 200 transactions 01/01/2019 Wisconsin $100,000 or 200 transactions 10/01/2018 Wyoming $100,000 or 200 transactions 02/01/2019 22
Nexus After Wayfair • Lingering issues: • Should sales thresholds depend on state / market size? • Which sales count toward the threshold? All sales? Taxable sales ? What about sales made through a marketplace? [These questions answered in some states.] • What is a “transaction”? A single order? What about multiple use situations? • Good development: A number of states have eliminated the threshold based on transactions, instead focusing solely on sales volume. • Disturbing development: Some states are moving away from simplification. • Tennessee has eliminated, and Louisiana will phase out, a system by which remote sellers could collect at a uniform combined state and local rate. • Illinois has adopted a measure to change the tax due from remote sellers from use tax to the Retailer’s Occupation Tax, requiring application of local rates. 23
Nexus After Wayfair • With regard to business activity taxes, states are moving more slowly, but some changes take effect in 2020. • Oregon adopted a gross receipts tax with a threshold of $750,000 in sales for filing purposes, but which applies only to companies with at least $1,000,00 in sales. • Washington has recently enacted legislation to reduce its formerly higher gross receipts standards for B&O Tax to the same level it has adopted for sales tax ($100,000 in sales). • Hawaii recently adopted thresholds of $100,000 in gross receipts or 200 sales for purposes of its state income tax. 24 24
Implications of Wayfair • A seismic shift in the state sales and use tax landscape. • States increasingly are signaling a willingness to test the limits of their constitutional authority. • Although limited activity to date, the new nexus concept of “economic or virtual contacts” bodes a dramatic change for other types of state tax . • Expect new gross receipts taxes. • Beware the MTC assault on PL 86-272 with regard to income tax. • Action at the local level, by both large municipalities and tiny towns, is next. 25
Economic Presence As A Basis For States’ Extension Of State Taxes Martin Eisenstein, Brann & Isaacson meisenstein@brannlaw.com
Topics • Application of Wayfair To State Taxes Other Than Sales And Use Tax Collection • Efforts By States and Local Jurisdictions to Extend Economic Presence • Defenses to States’ Overeaching 27
Direct Taxes • Use Taxes Based on Purchases by Company • Income Taxes • Gross Receipts Taxes • Franchise Taxes • Taxes based on Income (CA) • Taxes Based on Paid In Capital (IL)/Net Worth (AL) (13 states have such taxes) 28
The Wayfair Effect: Physical Presence Is Not a Commerce Clause Requirement • Effect One: Removes the Commerce Clause physical presence requirement for all direct taxes (including use tax obligations) as well as tax collection Court confirmed the Complete Auto four part test applies to all state taxes The Court reinterpreted the substantial nexus prong to make clear that physical presence is not required First time that the U.S. Supreme Court ruled that physical presence not required for any tax 29
The Irony of Wayfair • Prior to Wayfair , the states argued (and largely prevailed) that physical presence test of nexus only applied to sales taxes. • Income taxes: Geoffrey v. 437 S.E.2d 13 (S.C. 1993). KFC Corp. v. Iowa Dep’t of Revenue , 792 N.W.2d 308 (Iowa 2010), cert. denied , 565 U.S. 817 (2011) • Gross Receipts taxes: MTC Factor Presence test adopted in 2002. Crutchfield Corp. v. Testa, 2016-Ohio-7760 30
States’ Responses to Wayfair • Sales and Use Taxes • All but FL, MO and KS have adopted laws that sales alone create nexus. • Laws probably apply to use tax obligations of purchaser (e.g. distribution of direct mail materials in the state) • Gross Receipts Tax • So far only Oregon but TX proposed rule. • Income Tax: None thus far (except HI) 31
Local Jurisdictions Impose Gross Receipts Taxes Based on Sales Alone • Effect Two: Local jurisdictions have sought to impose taxes on companies without a physical presence. • Portland, Oregon referendum adopted on 11/6/18: 1% gross receipts tax on sales in Portland on a “large retailer,” • San Francisco referendum adopted on 11/6/18: 1% gross receipts tax if more than $500,000 of SF gross receipts • Amendment to Philadelphia BIRT (Business Income and Receipts Tax): $100,000 of receipts may create nexus • However, regulation continues to recognize PL 86-272 for income taxes. 32
Home Rule Sales Tax Jurisdictions Effect Three : Home Rule sales tax jurisdictions Six states with home rule jurisdictions: Alabama, Alaska, Arizona, Colorado, Idaho, and Louisiana. • Tax is administered by the local jurisdictions, so that there is registration and tax filings at both the state and local level as well as separate tax base and audit enforcement. • Only states with home rule jurisdictions that so far threaten to impose sales tax on companies without a physical presence are Louisiana and Alaska (Nome). 33
Economic Nexus: Factor Presence Pre-Wayfair • MTC “Factor Presence Nexus Standard for Business Activity Taxes” • Issued on October 17, 2002 • First time MTC or any other state organization promulgated a factor presence test • Available only for “business activity taxes” • No definition but commonly understood to mean gross receipts taxes and income taxes • Exclusion for state income taxes to the extent entity exempt under Public Law 86-272 34
Origins and Definition • MTC “Factor Presence Nexus Standard for Business Activity Taxes” • Defines “substantial nexus” based on satisfaction of any of property, payroll or sales thresholds in a state. • $50,000 for property or payroll or • $500,000 for sales or • 25% of business’ property, payroll or sales in the state. • Tax Administrator to review thresholds annually based on CPI changes • Definitions of property, payroll and sales in state • Sales in a state include sales of tangible personal property and lease of tangible personal property and real estate located in the state. 35
Origins and Definition (Cont’d) • Definitions of sales in a state for sales of services, intangibles and digital products • Test is less straightforward than for sales of tangible personal property • Creates numerous issues. See Eisenstein and Carey, Where’s Waldo: Sourcing IT and Cloud Services, State Tax Notes, August 1, 2016 • Based on “primary use” by a purchaser known by seller • If seller knows states of multiple use, apportionment based on usage • If seller does not know states of use, then initially based on purchaser’s address from business records and if not available then address given in consummation of sale. • Unclear how to handle: When the billing address is not the purchaser’s address. 36
Origins and Definition (Cont’d) • Special rules re commonly owned enterprises • Aggregation of property, payroll and sales of such entities that have a minimum presence in state of $5,000 of combined property, payroll and sales in state. • If aggregate number exceeds thresholds described on prior slide, the combined entity required to file an information return • If the commonly owned enterprises are part of a unitary business group conducting business in the state, and if the aggregate of all entities within the unitary business group exceeds the thresholds described on prior slide, then each member of the unitary group is deemed to have substantial nexus. 37
Origins and Definition (Cont’d) • MTC Factor presence designed to “represent a simple, certain and equitable standard“ of substantial nexus • It certainly is simple. • Is it certain? • Note OH CAT permits the satisfaction of the factor presence standard or the constitutional test of nexus • Is it fair? • Is it fair for one state to specify a different threshold than another state? • Congress has the power to change the standard under the Commerce Clause based on considerations of a national economy 38
States’ Adoption of Factor Presence Pre -Wayfair • It is more common that state statute limits the tax to those companies engaged in business activities in the states • Exceptions (MTC Factor presence states)(Sales alone): • Income Tax: Alabama; California; Colorado; Connecticut; New Hampshire; Michigan; New York; Tennessee; Wisconsin; and Virginia • Gross Receipts Tax: WA, OH, TN, and NV but not TX • Franchise Taxes: 13 states require payment of tax if “doing business in the state” or company obtains certificate of authority 39
Limitations on a State’s Power to Tax • Limitations • Commerce Clause • Economic nexus standard: “Taxpayer ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” • Discrimination • Undue Burden-Retroactivity • External consistency-fair apportionment prong of Complete Auto 41
COMMERCE CLAUSE: THE WAYFAIR FACTORS FOR LOCAL TAXES • The Court referred to the following factors (the Wayfair Factors) of the SD law as likely avoiding undue burden: • Safe Harbor for small seller to State • Annual sales of $100,000 or 200 transactions • “[N]o obligation to remit the sales tax may be applied retroactively.” Id . at 2099 • SSUTA membership 42
Limitations on the States Power to Tax • Other Limitations • Due Process Clause: • requires “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” • Tax Must Be Authorized by Underlying State Statute • Public Law 86-272 43
The Wayfair Factors: The SSUTA • Benefits of the SSUTA • SSUTA standardizes taxes to reduce compliance costs: • a single, state level administration; • uniform definitions of products and services and other uniform rules (e.g. exemption certificates) • simplified tax rate. • SSUTA provides access to software paid for by the State: “Certified Service Providers” are paid by the State. • Use of the software provides immune from audit liability. 44
The Due Process Clause • Different but similar test as Commerce Clause • Provides protection for geographically agnostic interstate businesses: J. McIntyre Ltd. v. Nicastro (2011); Daimler AG v. Bauman (2014) • “At no time did petitioner engage in any activities in New Jersey that reveal an intent to invoke or benefit from the protection of its laws.” • Selling nationally via the “stream of commerce” is not enough: “These facts may reveal an intent to serve the U.S. market, but they do not show that J. McIntyre purposefully availed itself of the New Jersey market.” 45
Does Wayfair Permit Imposition of Income Taxes Based on Sales Alone • Kentucky and Oklahoma automatic response to sales tax registration per Wayfair was to register the companies for income tax • Should companies be reserving for potential income tax and franchise tax liability based on Wayfair ? • Wells Fargo announcement of increase of its income tax reserves by $481 million as a result of Wayfair . 46
Does Wayfair A ffect P.L. 86-272 Protection? • The short answer to the question is no. • Wayfair is a dormant commerce clause case that relates to the restrictions on a state power’s to impose tax on interstate commerce in the absence of federal legislation. • P.L. 86-272 preempts state tax laws under the supremacy clause of the Constitution. 47
What Protections Are Provided By P.L. 86-272? • P.L. 86-272 provides that a state (or political subdivision) may not “impose . . . a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person” are as follows: the solicitation of orders in such State for sales of tangible personal property if orders are sent outside the state for approval and are fulfilled from outside of the State 48
What Protections Are Provided By P.L. 86-272? • Protected activities also include: • The maintenance in the state by an independent contractor of an office in the state so long as the independent contract is engaged in mere solicitation of the sale of tangible personal property. • An independent contractor is defined as an agent that does work for more than one principal. 49
What Companies And Activities Are Not Protected By P.L. 86-272? • Protection is not provided to companies incorporated in the taxing state. • Protection is not provided for taxes other than taxes based on net income. • Protection is not provided if the activities in the state exceed mere solicitation. Wisconsin Dep’t of Revenue v. William Wrigley, Jr., 505 U.S. 214 (1992); See Statement of Information Concerning Practices of MTC and Signatory States. 50
Is a Company That Sells Services Protected By PL 86-272? • Not if it engages in any activity in the state with regard to the provision of services. • Protection under the statute is limited to solicitation of sales of tangible personal property • A provider of cloud services likely does not engage in activities in a state but a party that installs networks would not be protected 51
Is a Company That Sells Services Automatically Denied PL 86-272 Protection? • The majority of commentators assert that the protection does not extend to companies that sell services even if they don’t engage in activities in the state. Richard Cram, “No Shade for Cloud Computing Income Under P.L. 86- 272” State Tax Notes , Sept. 24, 2018. • Wis. Admin. Code Tax § 2.82(3)(b)(2)(a) - PL 86- 272 does not apply to those businesses that sell services, intangibles or real estate. 52
The Controversy Regarding the Scope of PL 86-272 • This presenter thinks that the majority opinion is wrong. See, Eisenstein and Bessey, "Wayfair and P.L. 86-272 in a Services Economy," State Tax Notes , November 5, 2018 • Note the Multistate Tax Commission Uniformity Committee formed a working group on January 17, 2019 to update its Policy Statement of Signatory States on PL 86-272. 53
The Controversy Regarding the Scope of PL 86-272 • Working Group Draft of July 2019: • PL 86-272 does not protect service providers • Doing business on the Internet in all but certain circumstances constitutes activities on behalf of an out-of-state company, thus eliminating PL 86-272 protection 54
The Argument That Service Providers Are Protected By P.L. 86-272 • The starting point for the argument is that the protection in P.L. 86-272 is not limited to income derived from the sales of tangible personal property, but extends to a state’s tax on “income derived within such State by any person from interstate commerce.” • The reference regarding sales of tangible personal property relates only to the in-state activities • Under the Supremacy Clause the intent of Congress is critical — the language of the statute is essential to determining intent. • The legislative history supports the presenter’s view. 55
Does Doing Business On the Internet Void the P.L. 86-272 Protection? • Wayfair concluded that the virtual contacts with a state of an Internet site created nexus for the Commerce Clause. • Eisenstein and Bessey article: • Standard under the Commerce Clause is not same under P.L. 86-272 because different basis for limitations on state powers. The question is one of legislative intent. • Argument that it voids PL 86-272 protection proves too much: A telephone call responding to a customer’s complaint regarding the quality of tangible personal property is not solicitation and would void PL 86-272 protection. 56
Takeaways • Wayfair’s effect highlights the importance of good tax planning • P.L. 86-272 limits should not be inadvertently tripped • Adopt guidelines • Carefully consider registration to do business in a state. • May be a concession that company is doing business. See Louisiana Private Letter Ruling No. 08-007 • Dilution of the sales factor 57
Status of Challenges to Nexus Laws Matthew Schaefer, Brann & Isaacson mschaefer@brannlaw.com
Nexus Challenges After Wayfair • This is largely a story of “the dog that did not bark.” • Litigation challenging new state enforcement positions has been expected by many but with each new step taken by the states, it has not developed. • Nexus thresholds lower than South Dakota’s (measured per capita or based on market size) have generated no court challenge. • Unreasonable enforcement dates set immediately after the Court issued its decision in Wayfair have resulted no litigation. • States outside of the SSUTA that offer no software and no meaningful vendor compensation, but demand compliance, have gone unchallenged. • States with burdensome local tax systems and no solution for retailers, have faced no challenge. 59
Massachusetts Litigation • The only issue to generate litigation to date is the retroactive imposition of sales/use tax liability for periods prior to Wayfair . • While most states have forsworn the retroactive application of Wayfair , Massachusetts has fully endorsed it and defended its approach. • The MA DOR has issued dozens of sales/use tax assessments for pre- Wayfair periods. • A suit brought by six companies in Massachusetts Superior Court ( Blue Nile ) was dismissed for failure to exhaust administrative remedies. 60
Massachusetts Litigation • One company continues to challenge Massachusetts’ pre- Wayfair enforcement practices in court. • Crutchfield Corp. v. Harding, et al. , pending in the Circuit Court for the County of Albemarle, Virginia. • Crutchfield filed suit in 2017 based a statute adopted in 2004 that grants the Virginia Circuit Court jurisdiction over a declaratory judgment action brought against an out-of-state tax official who asserts the Virginia business is required to collect sales/use tax. • Commissioner moved to dismiss for lack of personal jurisdiction. 61
Massachusetts Litigation • Case was in discovery when Wayfair was decided. • Briefing on the motion to dismiss was completed after Wayfair and the case was recently presented to the Circuit Court on oral argument. • Decision on the jurisdictional issue is now pending. • Merits issues will be joined if the Court denies the motion. 62
Marketplace Litigation • Rather than nexus issues, two prominent cases raise the question of whether a state may treat a marketplace platform as the seller of goods. • Normand v. Wal-Mart.com USA LLC. • Wal-Mart.com is contesting an assessment by a Louisiana parish. Wal-Mart.com lost in lower court. • Now pending before the Louisiana Supreme Court. • Amazon Servs. LLC v. South Carolina Dep’t of Revenue. • Amazon Services argues it is not the seller of items sold on Amazon.com. • Administrative law judge disagreed (decision 9/10/19). 63
Litigation on the Horizon? • Impossible to predict whether disputes of constitutional dimension will arise. • Much depends upon state enforcement practices. • Most businesses prefer to avoid litigation. • There are signs that states are taking an aggressive approach in different ways. • Expansive interpretations of state power vs. narrow conception of federal constraints. • Could come to a head if pushed too far. 64
Other Nexus Developments Impacting Remote Sellers Edward J. (Ted) Bernert, Baker & Hostetler ebernert@bakerlaw.com 65 65
Marketplace Facilitators Numerous jurisdictions (including DC) impose or will impose collection duties on marketplace facilitators: Alabama, Arkansas, Arizona California, Colorado, Connecticut, DC, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Minnesota, Massachusetts, Nebraska, New Jersey, New Mexico, New York, Nevada, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, West Virginia and Wyoming. There are differing effective dates, including some in the future. 66 66
Marketplace Facilitators A marketplace facilitator is a person which owns or operates a marketplace and directly or indirectly processes sales or payments for marketplace sellers. A marketplace can be a physical or electronic place. The marketplace sellers are the merchants contracting with the marketplace facilitator and the marketplace facilitator arranges the sale. The model for the marketplace facilitator is Amazon or eBay but the concept is not limited to the entities normally thought of in this context. There are many similarities among the state statutes but there are important variations. 67 67
Marketplace Facilitators 1. Broad versus narrow model: There are two models, the broad and the narrow. States that have adopted a broad definition of marketplace facilitator include CA, IA, ID, KY, MA, ND, NJ, NV, OH, RI, UT, VA, VT, WA, and WV. States (and DC) that have adopted a narrow definition of marketplace facilitator include AR, AZ, CO, CT, DC, HI, IL, MD, ME, MN, NE, NM, NY, OK, PA, SC, SD, TX, WI, and WY. 68 68
Marketplace Facilitators 1. Broad versus narrow model: (cont.) One important difference between the broad and narrow models is whether the third party must account for the tax irrespective of whether the third party collects the funds. The broad model applies the obligation even when the third party does not have access to the funds. The broad model has been criticized by observers. The states seem to believe that by imposing the requirement broadly, the industry will change its method of doing business to accommodate the state statutes. 69 69
Marketplace Facilitators 2. Not all sales are subject to this regime: Many statutes are limited to the sale of tangible personal property only. A few states (e.g. Ohio) apply the concept to the providing of services. Some statutes also apply to digital products. States differ as to whether only taxable sales are used to determine quantity of sales. 70 70
Marketplace Facilitators 3. Allowing sellers to agree to collect tax. Most state statutes demand that only the marketplace facilitator be responsible for the tax but some states allow the parties to contract away the responsibility to collect and report tax or the state statutes permit the taxing authority to waive the requirement that only the marketplace facilitator account for the tax. Note that the marketplace seller will be responsible for sales made directly (not through the marketplace facilitator) and in some states, sellers must aggregate the sales made by seller through facilitators when determining whether the seller must separately collect in a state. 71 71
Marketplace Facilitators 4. Other issues to be examined: Which entity (facilitator or seller) collects exemption certificates, accounts for bad debts, applies price adjustments, etc.? Which entity is audited? Which entity seeks refunds? Should marketplace facilitators be insulated from class action suits? Note that some statutes have specific carveouts such as for entities involved only in advertising. 72 72
Local Taxes Not addressed in Wayfair The rationale by the Supreme Court in Wayfair expanding the authority of the states to require collection of tax by remote sellers is of doubtful application when considering complex tax systems that permit the localities to separately administer a separate tax scheme such as the systems in place in Colorado and Louisiana. 73 73
Local Taxes • In Colorado, a remote seller must include local tax for those localities whose taxes are collected by the Department of Revenue. But according to Bloomberg Law for September 5, 2019, Kevin Bommer, Executive Director, Colorado Municipal League, confirmed that Colorado home-rule localities are not imposing collection responsibility on remote sellers. • In Louisiana, the Sales and Use Tax Commission for Remote Sellers continues to review the issues raised by Louisiana’s complicated system. Meanwhile, the Louisiana Supreme Court is considering whether the pre- existing concept of “dealer” can include Wal-Mart in transactions involving third party retailers . The State Court of Appeals upheld the obligation against Wal- Mart, which appealed the case. Normand v. Wal-Mart.Com USA, LLC, Docket No. 2019-C-263. 74 74
Local Taxes In Chicago, the Department of Finance has announced that companies that contract with third parties providing services are required to collect certain local taxes including amusement (which includes some streaming services), hotel, lease and parking taxes. In Alaska, which has local but no state sales taxes, there are discussions about instituting a streamlined-type agreement for the localities. 75 75
Local Taxes One open issue is whether a remote seller surpassing the economic threshold for a state then must collect the local tax in every locality in the state. California has provided that being subject to California state nexus requirement then obligates the remote seller to collect for each locality regardless of the volume of sales into the locality. Cal. Rev. & Tax. Code Section 7262(a)(1). 76 76
Foreign Seller Implications The Wayfair Court did not address the issue. In the case of sales into Canada, some of the provinces, e.g. British Columbia, are looking at the U.S. decision in Wayfair as a way to increase revenue so there may be increased scrutiny of sales into Canada. As a theoretical matter, foreign sellers seemingly are subject to the same considerations after Wayfair as domestic sellers. Treaties have little role here because subnational levels of government are at issue not the national governments. Not just sales and use taxes but could also include income and gross receipts taxes. 77 77
Foreign Seller Implications States may perceive an obligation to pursue some foreign sellers to protect domestic sellers. Little evidence currently that states are pursuing foreign sellers unless those sellers have property, an affiliate, or some other presence in the U.S. Use of marketplace facilitators selling within U.S. could trigger collection obligation by the marketplace facilitator. It may be that sellers into the U.S. may need to comply because of relationships in the U.S. including lenders, possible buyers of the business, etc. The ability of the states to enforce assessments would likely be affected by property in the U.S. or because of contractual relationship of the foreign companies with U.S. entities. 78 78
PLANNING STRATEGIES TO MINIMIZE STATE TAX LIABILITY Martin Eisenstein, Brann & Isaacson meisenstein@brannlaw.com
Planning Regarding Factor Presence • Planning to limit exposure vs. planning to maximize tax savings • Planning should make sure Company does not trigger the nexus tripwire and, if it does, to take appropriate action either to mitigate the exposure or begin remitting tax • Depends on type of tax at issue • Depends on nature of items sold • Tangible Personal Property vs. Services • Public Law 86-272 • Sourcing of Services 81
Planning Regarding Factor Presence • Good planning should consider the nexus profile of the company • Should be a nexus audit done under attorney client privilege • Consider states’ position re factor presence • Is this an opportunity to obtain a deal • Consider alternatives • Restructure activity • Discontinue activity • Silent registration based on bright line event • Consider VDAs and amnesty programs (e.g. IL) 82
Planning: Seller of Tangible Personal Property • State Income Tax Issues: Protect your PL 86-272 exemption • Guidelines to limit in-state visits to solicitation of sales of tangible personal property • No in-state : • Installation or Repair • Collection of bills • Approval of credit • Acceptance of orders • Terms and Conditions of Contracts of Sale: All orders subject to acceptance outside state 83
Planning: Seller of Tangible Personal Property • State Income Tax Issues: Protect your PL 86-272 exemption • Inventory for shipment of product • Drop shipping within state? • Restrictions regarding employee or representative’s in -state home office • Business cards and correspondence • Telephone number and listing • Ownership of equipment • Limitation of nature of activities at office 84
Planning: Seller of Tangible Personal Property • Gross Receipts Tax Issues • Protect your constitutional nexus position • Nexus self audit and guidelines regarding: • Third parties and employees operating in the state • Ownership of property in the state • Determine whether to fight: • Assess constitutional arguments: Due Process and Commerce Clause 85
Planning: Seller of Tangible Personal Property • Sales Tax Issues • Protect your constitutional nexus position • Nexus self audit and guidelines as for gross receipts tax cases • Consider FBA and similar services by marketplaces. • Does it establish nexus • Review availability of VDAs in light of nexus profile • Determine sales in state 86
Planning: Seller of Services • General • Similar to seller of tangible personal property, but • May not have PL 86-272 protection • Issues as to sourcing • Protect your constitutional nexus position • As for sales of tangible personal property for gross receipts tax purposes 87
Planning: Seller of Services • Issues as to Sourcing of Services in States that Have Adopted Factor Presence • Need to know the states to source services in order to determine whether the sales factor is satisfied. • See CT, SD and TX laws that tax many services. • Services are sourced to SD if delivered into SD. • How does a seller of cloud services or other services know whether the services are delivered into SD? • Is a seller able to rely on the SSUTA sourcing approach for services? 88
Planning: Seller of Services • Issues as to Sourcing of Services for Sales Tax Factor Presence • Section 310 of SSUTA provides a Waterfall approach: The Tiers • First: Received at vendor’s place of business? • Second: Location of receipt known to the vendor? • Third: If neither of the above, then at the address of the customer known from the vendor’s business records • Fourth: Address given in the transaction • Fifth: Where the service was provided • Recommendation: Service Providers request from their customers location(s) of customer’s use per form 89
Planning: Seller of Services • Issues as to Sourcing of Services for Gross Receipts Factor Presence • Ohio Rev. Code 5751.03(I): sources services to extent of benefit in OH • Rule 5703-29-17(A) repeats the statutory provision that services are sitused based on where the purchaser receives the benefits. • How does seller know where the benefit is received? • Rule 5703-29-17(A) requires the taxpyer to make a good faith effort to situs receipts from services in a reasonable, consistent, and uniform method supported by the taxpayer's business records • Recommendation: As for sales tax, Seller should obtain a certificate of where customer’s users are located and should adopt a form for that purpose. 90
Planning: Seller of Digital Products • General • Similar to seller of tangible personal property, but • Should have PL 86-272 protection, but law evolving as to whether sale of digital goods are sale of tangible personal property • Issues as to sourcing to determine where customers are located • Similar as to services. 91
Planning: Seller of Digital Products • Limit activities to PL 86-272 protected activities • Understand the physical presence footprint of the Company so as to determine constitutional nexus • Providers of services and digital products should have a prewritten form for customers to identify the locations of the users of the services, and the company should source based on the certificate. • If customers do not complete the certificate, then the company should source based on the billing address . 92
Putting It All Together • Compile findings in a matrix on a state by state basis: • List company sales (dollars and transactions) • Describe state law and enforcement • Determine sourcing methodology based on the type of services provided and information to obtain from customers • Identify possible exposures and defenses • Determine a proposed plan of action per state 93
Special Nexus Issues Regarding Services Edward J. (Ted) Bernert, Baker & Hostetler ebernert@bakerlaw.com 94 94
Services Selected nexus-related issues for sellers of service vary by tax Credit for tax paid. ⁻ The state in which the service is performed can subject that service to a sales tax. The fact that the destination state asserts a use tax may nevertheless not result in double taxation because states customarily provide a credit when sales and use tax has already been paid to another state on the transaction. ⁻ If the state where the service is performed charges sales or use tax, then the customer’s state should accept the credit and not impose the use tax a second time. 95 95
Services For gross receipts and corporate income taxes, however, no such credits are available. The real possibility of double taxation arises especially when states use inconsistent methods of sourcing sales. In Corporate Executive Board Co v. Virginia Dept. of Rev. , 822 S.E.2d 918 (Va. 2019), the Virginia Supreme Court upheld a corporate income tax based on the location of services rendered even when the Court knew that the same receipts would be taxed a second time where the customers were located when the “destination” states used a market approach to source sales. 96 96
Basic Principles Increasingly, sourcing sales is based on destination and not based on origin (i.e. where the service is performed). Services are sourced based on the location of the (i) delivery of the service or (ii) receipt of the benefit and not where the services are rendered. Receipt of the delivery of the service may differ from where the benefit is received. 97 97
Evolving Issues 1. Choice of sourcing method. Statutes typically provide a hierarchy of methods used to source the sales. Does the choice of a taxpayer to use a secondary tier of the “cascade” --such as sourcing services consistently based on the address of the customers--trigger a requirement to seek authority from the taxing authority to do so? 98 98
Evolving Issues 1. Choice of sourcing method (cont.) Some auditors take the position that any lower tier sourcing method based on addresses or methods other than “determining” the benefit received requires approval. At least one final determination in Ohio seems to say that even when the methodology chosen by the taxpayer is reasonable, consistent and uniform, the decision whether to accept the alternate method is within the discretion of the Ohio Tax Commissioner. 99 99
Evolving Issues 2. When must the taxpayer seek deviation? If the use of alternative methods is discretionary with the taxing authority, that would suggest a need to request deviation. 100 100
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