Sales Tax Affiliate and Click-Through Nexus: After the Amazon...

Sales Tax Affiliate and Click-Through Nexus:

After the Amazon Ruling Mastering the New Demands of Sales Tax Compliance for Multi-State Companies

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THURSDAY, JANUARY 30, 2014

Presenting a live 110-minute teleconference with interactive Q&A

Pat Derdenger, Tax Partner, Steptoe & Johnson, Phoenix

Arthur Rosen, Partner, McDermott Will & Emery, New York

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Sales Tax Affiliate and Click-Through Nexus: After the Amazon Ruling

Jan. 30, 2014

Pat Derdenger, Steptoe & Johnson

[email protected]

Arthur Rosen, McDermott Will & Emery

[email protected]

Today’s Program

Recent Developments and Background

[Arthur Rosen]

Practical Compliance Concerns

[Pat Derdenger]

Slide 8 – Slide 57

Slide 58 – Slide 84

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

RECENT DEVELOPMENTS AND BACKGROUND

Arthur Rosen, McDermott Will & Emery

Agenda

I. Recent Developments

II. Background

III. Income Tax Implications

IV. Other Aspects of State Actions

A. Amazon Tax Collection Deals

B. VDA Offers

C. Other Concerns

9

Agenda


II. Background




B. VDA Offers

C. Other Concerns

10

Recent Developments – Click-Through Nexus

• Click-Through Nexus Laws

Legend

Nexus without statute

Legislation under

consideration

Nexus legislation passed

Legislation considered but

not passed or passed then

vetoed

Other (incl. notification

requirement)

Oregon

MD

CT CT

NH NH

VT

Pennsylvania

W. VA

Michigan

Miss. Alabama

Oregon

Nevada

Utah

Minnesota

Iowa

Indiana Ohio

Del.

N.

J.

CT

Mass.

Vt.

PA

New York

W. Va.

Missouri

Louisiana

Wisconsin

Illinois*

Michigan

Miss. Alabama Georgia

Florida

TN S. Carolina

N. Carolina

Virginia Kentucky

Wyoming

Colorado

North Dakota

South Dakota

Nebraska

Kansas

Oklahoma

Texas

Arizona New Mexico

California

Idaho

Montana Maine

R.I.

Arkansas

Hawaii Alaska

D.C.

M.D.

Washington

No state sales or use tax *The Illinois Supreme Court has recently struck down

the state’s click-through nexus law.

11


State Effective Date Affiliate Threshold Statute

Arkansas (rebuttable presumption) Oct. 24, 2011 More than $10,000 Ark. Code Ann. § 26-52-117

California (rebuttable presumption)

Sept. 15, 2012. More than $10,000 and (and more than

$1,000,000 in annual in-state sales whether a

result of click-through referrals or otherwise)

Cal. Rev. & Tax. § 6203(c)(5)

Connecticut (irrebuttable presumption) July 1, 2011 More than $2,000 Conn. Gen. Stat. § 12-407(a)(12)(L)

Georgia (rebuttable presumption) Oct. 1, 2012 More than $50,000

Ga. Stat. Ann. § 48-8-2(8)(M)

Illinois (irrebuttable presumption) July 1, 2011 More than $10,000 35 ILCS §§ 105/2 and 110/2

Kansas (rebuttable presumption) Oct. 1, 2013 More than $10,000 Kan. Stat § 79-3702(h)(2)(C)

Maine (rebuttable presumption) Oct. 9, 2013 More than $10,000 Me. Rev. Stat. Ann. § 1754-B(1-A)(C)

Minnesota (rebuttable presumption) July 1, 2013 More than $10,000 Minn. Stat. § 297A.66, Subd. 4a

Missouri (rebuttable presumption) Aug. 28, 2013 More than $10,000 Mo. Rev. Stat. § 144.605(2)(e)

New York (rebuttable presumption) June 1, 2008 More than $10,000 N.Y. Tax Law § 1101(b)(8)(vi)

North Carolina (rebuttable presumption) Aug. 7, 2009 More than $10,000 N.C. Gen. Stat. § 105-164.8

Rhode Island (rebuttable presumption) July 1, 2009 More than $5,000 R.I. Gen. Laws § 44-18-15

Vermont (rebuttable presumption) When adopted in

15 other states.

More than $10,000 Vt. Stat. Ann. tit. 32, § 9701(9)(I)

(H.B. 436)

• The Pennsylvania DOR requires remote sellers to collect sales and use tax. Pa. Sales and Use Tax Bulletin 2011-01 (Dec. 1, 2011)

12


I. Amazon.com, LLC v. New York State Department of Taxation and Finance, 20

N.Y.3d 586 (N.Y. 2013)

A. The New York Court of Appeals upheld the New York Amazon Law as facially

constitutional.

B. The Court found that although physical presence is generally necessary for

sales tax nexus, it need not be substantial, and can be met if economic

activities are performed in the state by a seller on behalf of the taxpayer.

C. “Active, in-state solicitation that produces a significant amount of revenue

qualifies as ‘demonstrably more than a slightest presence . . . . The bottom

line is that if a vendor is paying New York residents to actively solicit business

in this State, there is no reason why that vendor should not shoulder the

appropriate tax burden.’”

D. The United States Supreme Court denied certiorari on December 2, 2013.

13


I. Performance Marketing Ass’n v. Hamer, No. 114496 (Ill. S. Ct. Oct. 18, 2013).

A. “In short, under the Act, performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached. However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reaches the same dollar threshold, will not trigger an Illinois use tax collection obligation.

B. “The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the ITFA.”

C. Commerce clause challenge not reached.

14

Recent Developments – Use Tax Notice Requirements

I. Colorado

A. Colo. Rev. Stat.

39-21-112(3.5)(d)

II. Kentucky

A. Ky. Rev. Stat. Ann.

139.450

III. Oklahoma

A. 68 Okla. Stat.

1406.1

IV. South Carolina

A. S.C. Code Ann.

12-36-2691(E), -2692

V. South Dakota

A. S.D. Codified Laws

10-63-2

15


I. Colorado

A. Retailers that do not collect Colorado sales and use tax are required to send

notification to all of their Colorado purchasers by January 31 of each year showing

the total amount paid by the purchaser for Colorado purchases made from the

retailer in the previous calendar year. The notification must state that Colorado

requires a sales or use tax return to be filed and sales or use tax paid on certain

Colorado purchases made by the purchaser from the retailer.

B. Such retailers must also file an annual statement for each purchaser with the

Colorado Department of Revenue showing the total amount paid for Colorado

purchases of such purchasers during the preceding calendar year.

C. Failure to send the notification or file the annual statement will result in a penalty

of $10 for each such failure, unless the retailer shows reasonable cause for such

failure.

16


I. Kentucky

A. Retailers not required to collect Kentucky sales and use tax that make total gross sales of $100,000 or more to

Kentucky residents or businesses located in Kentucky must notify the purchaser that the purchaser is required to

report and pay the Kentucky use tax directly to the Department of Revenue.

II. Oklahoma

A. Retailers not required to collect Oklahoma sales and use tax must provide notification to its customers that use

tax is imposed and must be paid by the purchaser, unless otherwise exempt, on the storage, use, or other

consumption of the tangible personal property in this state.

III. South Carolina

A. Certain people owning distribution facilities and making specified capital investments in the state who make

sales through their websites must notify a purchaser in a confirmation email that the purchaser may owe South

Carolina use tax on the total sales price of the transaction and include in the email an Internet link to the South

Carolina Department of Revenue’s website that allows the purchaser to pay the use tax.

B. Such people must also notify South Carolina purchasers of their potential use tax obligations on their invoices.

C. Such people must also, by February first of each year, provide to each purchaser to whom tangible goods were

delivered in the state a statement of the total sales made to the purchaser during the preceding calendar year.

IV. South Dakota

A. Retailers not required to collect South Dakota sales and use tax must give notice that use tax is due on

nonexempt purchases of tangible personal property, services, or products transferred electronically and must be

paid by the South Dakota purchaser.

17


I. Direct Marketing Ass’n v. Brohl, Dkt. No. 12-01175 (10th Cir. Aug. 20, 2013)

A. In May 2012, Colorado appealed a ruling by the U.S. District Court for the

District of Colorado striking down as unconstitutional a reporting requirement

imposed on out-of-state vendors that do not collect and remit state sales and

use taxes.

B. The federal appellate court declined to rule on the merits of the Association’s

Commerce Clause claims against Colorado, saying the Tax Injunction Act

deprived the district court of jurisdiction to enjoin the state’s tax collection

efforts.

C. The DMA will file in Colorado state court.

18

Recent Developments – Federal Legislation

I. Marketplace Fairness Act [S. 743] [113th Congress]

A. Introduced: April 16, 2013.

B. Passed by the Senate: May 6, 2013.

C. Referred to the House Committee on the Judiciary Subcommittee on Regulatory Reform, Commercial And Antitrust Law : June 14, 2013.

D. This bill provides a state two options for gaining the Congressional authorization to require remote sellers to collect sales tax:

1. SSUTA member states have to provide 90 days notice that they will exercise authority under the Act;

2. Non-SSUTA members may exercise authority by complying with the minimum simplification requirements under the Act by enacting legislation that (1) specifies the taxes to which the authority applies; and (2) identifies products and services that will be excluded from the authority.

E. The MFA only applies to remote sales and remote sellers.

19

Recent Developments – Federal Legislation

I. Marketplace Fairness Act [S. 743] [113th Congress]

A. Chairman Goodlatte’s Principles:

1. Tax Relief – Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.

2. Tech Neutrality – Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.

3. No Regulation Without Representation – Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.

4. Simplicity – Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.

5. Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.

6. States' Rights – States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.

7. Privacy Rights – Sensitive customer data must be protected.

20

Slide Intentionally Left Blank

Agenda


II. Background




B. VDA Offers

C. Other Concerns

22

Nexus Analytical Framework Nexus with the

Transaction

Due Process

Part of Unitary Business

Commerce

Clause

Substantial

Nexus

Nexus with the Person

Due Process

Minimum Nexus

Minimum Contacts/Purposeful

Availment

Commerce

Clause

Substantial

Nexus

Sales and Use Taxes

Physical

Presence

Other Taxes

???

23

Due Process Clause

I. Due Process Clause & Taxpayer’s Right—U.S.

Const. amend. XIV,

1 A. “[N]or shall any State deprive any person of life, liberty, or property, without due

process of law”

B. Similar to the U.S. Const. amend. V

24

Due Process Clause Nexus with the Transaction

I. Allied Signal v. Dir., Div. of Tax., 504 U.S. 768 (1992) A. “. . . there must be a connection to the activity itself [nexus with the

transaction], rather than a connection only to the actor the State seeks to tax [nexus with the person] . . . . The constitutional question in a case such as Quill Corp. is whether the State has the authority to tax the corporation at all [nexus with the person].”

II. MeadWestvaco Corp. v. Illinois Dep’t of Revenue, 553 U.S. 16 (2008) A. “. . . apportionment [can] permissibly be applied to a multistate business

lacking the ‘physical unity’ of wires or rails but exhibiting the ‘same unity in the use of the entire property for the specific purpose,’ with ‘the same elements of value arising from such use.’”

B. “The conclusion that the asset served an operational function was merely instrumental to the constitutionally relevant conclusion that the asset was a unitary part of the business being conducted in the taxing State rather than a discrete asset to which the State had no claim.”

25

Due Process Clause Nexus with the Person

I. Burger King v. Rudzewicz, 471 U.S. 462

(1985) A. “The connection to a state that is necessary to support in

personam jurisdiction is purposeful direction of activities into

state.”

II. Quill Corp. v. North Dakota, 504 U.S.

298 (1992) A. “The connection to a state that is needed to support tax

jurisdiction is comparable to that need to support general in

personam jurisdiction.”

26


I. World-Wide Volkswagen Corp. v.

Woodson, 444 U.S. 286 (1980) A. The requisite contacts with a state must come as a result of

defendant’s (i.e., taxpayer’s) own activities.

27


I. Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011) A. “[Defendant’s] attenuated connections to the state fall far short of the “the

continuous and systematic general business contacts” necessary to empower [the state] to entertain suit against them on claims unrelated to anything that connects them to the state.”

II. J. McIntyre Machinery, Ltd. v. Nicastro, 131 S.Ct. 2780 (2011) A. “As a general rule, the exercise of judicial power is not lawful unless the

defendant ‘purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’ Hanson v. Denckla, 357 U.S. 235, 253 (1958). … [T]he general rule is applicable in this products-liability case, and the so-called ‘stream-of-commerce” doctrine cannot displace it.”

III. Daimler AG v. Bauman, Dkt. No. 11-965 (U.S. Jan 14, 2014) A. “[O]nly a limited set of affiliations with a forum will render a defendant

amenable to all-purpose jurisdiction there. . . . Accordingly, the inquiry under Goodyear is not whether a foreign corporation’s in-forum contacts can be said to be in some sense ‘continuous and systematic,’ it is whether that corporation’s ‘affiliations with the State are so ‘continuous and systematic’ as to render [it] essentially at home in the forum State.’”

28


I. Gordon v. Holder, 632 F.3d 722 (D.C. Cir. Feb. 18, 2011), remanded to

2011 U.S. Dist. LEXIS 139201 (D.D.C. Dec. 5, 2011)

A. “Although Quill did not deal with excise taxes, there remains an

open question whether a national authorization of disparate state

levies on e-commerce renders concerns about presence and burden

obsolete.”

II. See also Red Earth LLC v. U.S., 728 F.Supp.2d 238 (W.D.N.Y. 2010), aff’d

657 F.3d 128 (2d Cir. 2011)

29

Commerce Clause Nexus Overview

I. U.S. Const., art. I,

8, cl. 3 A. “The Congress shall have the power . . . to regulate commerce . . . among the

several states.”

B. Has a direct and an implied aspect

1. Direct aspect comes from the language: “Congress shall

have the power”

2. Implied aspect (the “Negative/Dormant Commerce

Clause”) derives from a judicial interpretation that the CC

“of its own force” limits state taxes where Congress has

been silent.

30

Commerce Clause Nexus with the Transaction

I. Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977) A. The Court’s contemporary standard

B. Tax on interstate commerce valid if:

1. Tax applied to an activity having a substantial nexus with the

taxing state;

2. Is fairly apportioned;

3. Does not discriminate against interstate commerce; and,

4. Is fairly related to the services provided by the state.

31

Commerce Clause Nexus with the Transaction

I. Goldberg v. Sweet, 488 U.S. 252 (1989) A. “We doubt that States through which the telephone call's

electronic signals merely pass have a sufficient nexus to tax that

call. . . . We believe that only two States have a nexus substantial

enough to tax a consumer's purchase of an interstate telephone

call.”

32

Commerce Clause Nexus with the Person

I. Quill Corp. v. North Dakota, 504 U.S.

298 (1992) A. For a state to have taxing jurisdiction over a person under dormant

Commerce Clause principles, the person must have substantial

nexus with the state, which for sales and use tax purposes, equates

with physical presence in the state.

33

Attributional Nexus

I. When can another entity’s in-state activities create nexus for an out-of-state entity?

34

Attributional Nexus

I. Representative approach

A. Bloomingdale’s By Mail, Ltd. v. Commonwealth, 567 A.2d 773 (Pa. Commw. Ct. 1989)

B. SFA Folio Collections, Inc. v. Bannon, 585 A.2d 666 (Conn. 1991)

II. Alter ego approach

A. Pearle Health Serv., Inc. v. Taylor, 799 S.W.2d 655 (Tenn. 1990)

III. Unitary/affiliate approach

A. Comptroller v. Armco Export Sales Corp., 572 A.2d 562 (Md. App. 1990)

B. SYL, Inc. Comptroller of the Treasury, 825 A.2d 399 (Md. Ct. App. 2003)

C. California Assembly Bill 155

D. Alabama Admin. Code 810-6-2-.90.01 (effective Aug. 24, 2012)

35

Attributional Nexus Representative Approach

I. Scripto Inc. v. Carson, 362 U.S. 207 (1960) A. “True, the ‘salesmen’ are not regular employees of appellant devoting

full time to its service, but we conclude that such a fine distinction is without constitutional significance. The formal shift in the contractual tagging of the salesman as ‘independent’ neither results in changing his local function of solicitation . . .”

II. Tyler Pipe Indus., Inc. v. Washington Dep’t of Rev., 482 U.S. 232 (1987) A. The “crucial factor governing nexus” is whether the activities

performed by the independent contractor on behalf of the out-of-state company are “significantly associated with the taxpayer’s ability to establish and maintain a market in [the] state for the sales.”

36

Attributional Nexus – Representative Approach

• N.M. Taxation & Rev. Dep’t v. BarnesandNoble.com LLC, Docket No.

33,627 (N.M. S. Ct. 2013)

― Taxpayer, an online retailer with no physical presence in New

Mexico, had substantial nexus with the state through the

taxpayer’s sister corporation, which did have a physical presence

in the state.

― The sister corporation: (1) Displayed the taxpayer’s website in its

in-state retail stores, (2) shared the same trademark, and

therefore brand loyalty, with the taxpayer, and (3) engaged in

cross-marketing activities for the taxpayer’s benefit, all of which

maintained the taxpayer’s market in New Mexico.

• See also Haw. Letter Ruling 2012-10 (July 10, 2012) (The

establishment of a shopping rewards program and return policy with

an affiliated retailer that maintains physical locations within Hawaii

creates sufficient nexus for the general excise tax)

37

Attributional Nexus – Unitary/Affiliate Approach

• Comptr. of the Treas. v. W.L. Gore, Nos. 1696, 1697 (Md. Ct. Spec. App., Jan.

24, 2013)

― The Maryland Court of Special Appeals ruled that two subsidiaries of Gore,

one holding its intangible assets and one holding its financial assets, had

royalty and loan interest income apportionable to Maryland based upon a

unitary relationship with the parent company, which generated income in

Maryland. Nexus sufficient to justify taxation arises from the economic

reality that a parent's business in the taxing state produces a subsidiary's

income. The subsidiaries’ income was entirely the product of expenses

that the parent deducted in Maryland, so the subsidiaries’ income was

earned in Maryland.

38

Agenda


II. Background




B. VDA Offers

C. Other Concerns

40

Economic Nexus

I. Is physical presence necessary to create taxable nexus for taxes other than sales and use taxes?

II. Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

A. “Although we have not, in our review of other types of taxes, articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes, that silence does not imply repudiation of the Bellas Hess rule.”

41

Economic Nexus

I. Geoffrey, Inc. v. South Carolina Tax Comm‘r., 437 S.E.2d 13 (1993), cert. denied, 510 U.S. 992 (1993)

A. “…by licensing intangibles for use in this state and deriving income from their use here, Geoffrey has a ‘substantial nexus’ with South Carolina [for purposes of the state’s income tax].”

II. Other Intangible Property Companies Cases

A. Geoffrey, Inc. v. Comm’r of Rev., 899 N.E.2d 87 (Mass. 2009), cert. denied, 129 S. Ct. 2853 (2009)

B. Geoffrey, Inc. v. Oklahoma Tax Comm’n, 132 P.3d 632 (Okla. Ct. App. 2005)

C. A & F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004), cert. denied, 126 S. Ct. 353 (2005)

D. Lanco, Inc. v. Dir., Div. of Tax., 908 A.2d 176 (N.J. 2006), cert. denied, 127 S. Ct. 2974 (2007)

42

Economic Nexus

I. Tax Comm’r v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.V. 2006), cert. denied, 551 U.S. 1141 (2007)

A. An out-of-state bank that issued credit cards to West Virginia customers had income tax nexus based on its “significant economic presence” in the state.

II. Capital One Bank v. Comm’r of Rev., 899 N.E.2d 76 (Mass. 2009), cert. denied, 129 S. Ct. 2827 (2009)

A. “While the concept of ‘substantial nexus’ is more elastic than ‘physical presence,’ it plainly means a greater presence, both qualitatively and quantitatively, than the minimum connection between a State and a taxpayer that would satisfy a due process inquiry.”

B. Capital One’s credit card business, generating millions of dollars in income, established substantial nexus with Massachusetts despite a lack of physical presence.

43

Economic Nexus

I. Quantitative Statutes

A. MTC Factor Presence ($500K in sales)

B. Cal. Rev. & Tax Code

23101 ($500K in sales)

C. Mich. Comp. Laws Ann.

206.621(1) ($350K in sales)

D. Ohio Rev. Code Ann.

5751.01 ($500K in sales)

E. Wash. Rev. Code Ann.

82.04.067 ($250K in sales)

II. Constitutional Challenges

A. The Ohio Tax Commissioner ruled that an out-of-state mail order company had substantial nexus with Ohio for purposes of the commercial activity tax because its gross receipts in the state satisfied the bright line presence standard (over $500,000 in receipts). In re L.L. Bean, Inc., (Ohio Dep’t of Taxation, Final Determination, August 10, 2010).

44

Economic Nexus

I. Qualitative Statutes

A. Connecticut

1. Conn. Gen. Stat.

12-216a (“Any company that derives income

from sources within this state and that has a substantial economic

presence within this state, evidenced by a purposeful direction of

business toward this state”)

2. $500,000 quantitative threshold adopted by informal

publication. Connecticut Informational Publication No. 2010(29.1)

(Dec. 28, 2010)

B. New Hampshire

1. N.H. Rev. Stat. Ann.

77-A:1(XII) (“substantial economic

presence”)

C. Wisconsin

1. Wisc. Stat.

71.22(1r) (“regularly selling products or services of

any kind or nature to customers in [Wisconsin]”)

45

Economic Nexus

I. Scripto Inc. v. Carson, 362 U.S. 207 (1960) A. “True, the ‘salesmen’ are not regular employees of appellant

devoting full time to its service, but we conclude that such a fine distinction is without constitutional significance. The formal shift in the contractual tagging of the salesman as ‘independent’ neither results in changing his local function of solicitation . . .”

II. Tyler Pipe Indus., Inc. v. Washington Dep’t of Rev., 482 U.S. 232 (1987) A. The “crucial factor governing nexus” is whether the activities

performed by the independent contractor on behalf of the out-of-state company are “significantly associated with the taxpayer’s ability to establish and maintain a market in [the] state for the sales.”

46

Agenda


II. Background




B. VDA Offers

C. Other Concerns

48

Amazon Tax Collection Deals - Examples

I. Arizona A. On Oct. 26, Amazon revealed it reached agreement with

Arizona to start collecting taxes on sales of physical goods beginning Feb. 1, 2013, and on sales of digital goods and services beginning July 1, 2013.

II. Texas A. Amazon announced on Jan. 30, 2013 that it would open

three fulfillment centers in Texas as part of its sales tax collection agreement with the state.

III. Florida A. On June 13, 2013, Amazon.com agreed to establish new warehouse facilities in Florida. The

proposed expansion is estimated to create 3,000 full time jobs and result in $300 million in investment in Florida over the next three years. Amazon will begin to collect sales tax from Florida customers, as required under Florida law, upon completion of the facilities.

IV. Massachusetts A. On December 11, 2012, Massachusetts reaches an agreement with Amazon.com that the company

will start collecting and remitting the state’s sales tax beginning in November 2013.

49

VDA Offers

I. Voluntary Disclosure Agreements provide taxpayers with the opportunity to disclose tax compliance errors to the states without subjecting themselves to penalties and other enforcement actions.

II. Generally are non-statutory “settlements”

A. But see N.Y. Tax Law

1700

1. “Under the voluntary disclosure and compliance program, upon execution of a voluntary disclosure and compliance agreement by the eligible taxpayer and the commissioner, the commissioner shall waive any applicable penalties (including the additional rate of interest prescribed under section eleven hundred forty-five of this chapter) for the following: (1) Failure to pay any such tax liability; (2) Failure to file a return or report with respect to any such tax liability; and (3) Failure to pay estimated tax. In addition, no criminal action or proceeding shall be brought against an eligible taxpayer relating to the tax liability covered by the agreement.”

2. “To participate in the voluntary disclosure and compliance program, an eligible taxpayer must apply by submitting a disclosure statement in the form and manner prescribed by the commissioner. The disclosure statement shall contain all the information the commissioner reasonably deems necessary to effectively administer the program.”

50

Other Concerns

I. Racketeer Influenced and Corrupt Organizations Act (“RICO”) Suits

A. United States v. Porcelli, 865 F.2d 1352 (2d Cir. 1989)

1. Porcelli failed to collect retail sales tax on the gasoline sold at his Gaseteria

gas stations, filed approximately one hundred fraudulent New York State sales

tax returns between 1979 and 1982, and, as a result, deprived New York of

nearly $5 million in sales taxes.

2. “We think that the prosecution of a state sales tax evader for a RICO violation

pushes that law to its outer limits, especially when that tax evasion was not

made criminal by the state itself at the time that the fraudulent returns were

filed. We nevertheless affirm the convictions . . . by virtue of the

extraordinarily broad sweep of RICO . . . .”

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Other Concerns

I. Racketeer Influenced and Corrupt Organizations Act (“RICO”) Suits

A. Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006)

1. “[W]e conclude Ideal cannot maintain its claim based on [RICO]. . . . Ideal’s

theory is that Joseph and Vincent Anza harmed it by defrauding the New York

tax authority and using the proceeds from the fraud to offer lower prices

designed to attract more customers. The RICO violation alleged by Ideal is

that the Anzas conducted National’s affairs through a pattern of mail fraud

and wire fraud. The direct victim of this conduct was the State of New York,

not Ideal. . . . The cause of Ideal’s asserted harms, however, is a set of

actions (offering lower prices) entirely distinct from the alleged RICO

violation (defrauding the State).”

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Other Concerns

I. False Claims Act Suits

A. What are they?

B. Derived from Federal False Claims Act

1. “Whistleblower” Relator gets rich reward for disclosing fraud on government

2. Typically an employee with inside knowledge

3. Allege a fraudulent failure to collect and remit tax

4. State can intervene and prosecute or let Relator proceed; benefit split

between Relator and State with Relator obtaining up to 30% in many cases.

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Other Concerns


A. Substantial Risks to Taxpayers:

1. Treble damages = to three times tax

2. Penalties for each “false” filing

3. Obligation to pay attorneys’ fees, costs and expenses in case of loss or

settlement

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Other Concerns


A. How widespread?

1. 29 states, New York City, Chicago, Allegheny County, PA

2. 9 prohibit tax actions (CA, HI, MA, NM, NC, TN, VA, DC and NY City)

3. 3 (IL, IN, RI) bar income tax actions

4. Remaining states have no tax bar

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Other Concerns


A. Difficulties for Taxpayers:

1. Pro – “whistleblower” sentiment

2. Fact intense, so hard to dismiss

3. May not involve State Revenue Departments; State AGs lack tax knowledge,

may seek to benefit from settlement rather than seek dismissal

4. Complex intersection of false claims and tax

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Other Concerns


A. Results:

1. Barrage of Illinois litigation in two waves, aimed at sales tax on ecommerce

and tax on shipping and handling charges

2. New York action v. Sprint-Nextel Corp.

3. Other state attorneys general (TN, NV) have opposed the litigation

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PRACTICAL COMPLIANCE CONSIDERATIONS

Pat Derdenger, Steptoe & Johnson

Sales Tax Affiliate Nexus

“Practical and Compliance Concerns”

By Pat Derdenger, Partner

Ben Gardner, Associate

Steptoe & Johnson LLP

[email protected]; [email protected]

(602) 257-5209

Practical Concerns: Avoiding Nexus Pitfalls –

Employees, Agents, Property and Affiliates

Employee within a state. – Employees located in a state are sufficient to establish nexus. General

Trading Co.

Independent contractors. – The presence of even non-exclusive independent contractors

that solicit sales in the state is sufficient nexus. Scripto, Inc. v. Carson.

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In-state deliveries by the vendor. – Illinois supreme court in Browns’ Furniture held that 15-18

deliveries per month from Missouri into Illinois was sufficient nexus.

Personalized delivery service. – An out-of-state vendor’s use of a third-party carrier to deliver products

into a state established nexus, where the carrier advertised for the remote vendor on its trucks, collected payments, set-up products, did minor repairs or picked up products for repair at the vendor’s out-of-state location. Furnitureland South.

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Trade show attendance. – Rules vary by state.

– Not sufficient nexus. Florida Dep’t of Revenue v. Share Int’l, Inc.

– Conn. Gen. Stat. § 12-407(a)(15)(D) – no nexus if no sales are made at the show and the vendor is present at shows less than 14 days per year.

– Cal. Rev. & Tax Code § 6203(e) – no nexus if vendor attends shows less than 15 days per year and show activities generate less than $100,000 in California sales, but tax is due on sales made at the show.

– Iowa Pol. LTR 01300047 (2001) – more than one day’s attendance is sufficient nexus.

– Preifert Mfg. Co. (Wash. Bd. of Tax App.) – ranching equipment vendor had nexus by making occasional trips to state to meet with retailers and by attending horse shows.

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Ownership of property in the state. – Must exceed an opaque de minimis threshold. See Quill (presence of

floppy discs in-state was not enough).

– Rental of personal property within the state is sufficient. Wabash Power Equipment Co. v. Lindsay.

– Sufficient nexus existed in part due to taxpayer’s ownership of a warehouse and apartment in state. In re Krystallos, Inc.

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In state “agent.” – The “agent” does not need to be a common law agent or an exclusive

agent, but must help the vendor establish and maintain a market in the taxing state. Scripto, Inc.

– The operative inquiry – does the in-state party help the remote vendor establish and maintain a market for its products in the taxing state. Tyler Pipe.

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In state warranty service. – Multistate Tax Comm’n bulletin for computer mail order

companies – in-state warranty repair services by independent contractor establishes nexus.

– Dell Catalog Sales cases • Nexus – Louisiana (2006); New Mexico (2008).

• No Nexus – Connecticut (2003).

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In state affiliates. – Courts have generally held that affiliation alone does not

establish nexus. SFA Folio Collections (Conn.); SFA Folio Collections (Ohio); Current Inc. (Cal.). • But states keep trying to pass affiliate nexus laws.

– Borders Online (Cal.) – Out-of-state, online retailer had nexus because its in-state, bricks & mortar affiliate accepted returns for the online retailer and encouraged customers to shop online.

– BarnesandNoble.com, LLC (N.M.) – Nexus created through in-state affiliate book store who displayed the out-of-state vendor’s website in its stores, shared the same trademark (brand loyalty), and engaged in cross-marketing activities that benefited the vendor, all of which helped the online vendor establish and maintain a market in the state.

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– Possible Solutions

• Be aware of where the company has employees, agents, property

and affiliates and consider the nexus implications in advance.

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Practical Concerns: Location of Web Servers

Does use of a web server establish nexus?

– Rulings on Servers:

• New Mexico Taxation and Revenue Dep’t, Ruling No. 401-97-6

(11/20/1997) – If a taxpayer “owns or leases the server . . . and the

server is in New Mexico, that in itself would create nexus for [the

taxpayer] with New Mexico”

– However, simply having a website on a computer server located in New

Mexico, but owned by a third party, is not nexus. N.M. Stat. § 7-9-3.3

» S.B. 207 was introduced in 2012 to repeal this exclusion, but the bill

died in committee.

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• Va. Dep’t of Taxation, Pub. Doc. Ruling No. 05-128 (08/02/05) –

“out-of-state seller whose only presence in Virginia is a computer

server [owned by another business] used to create or maintain an

Internet website does not have nexus for sales and use tax

purpose”

– But, if the dealer owns or rents the server and it is located in Va.,

the dealer may have nexus. See Va. Dep’t of Taxation, Pub.

Doc. Ruling No. 04-38 (07/28/2004)

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• Ill. Dep’t of Rev., General Information Letter No. ST 01-0088-GIL

(05/09/01) – “retailer’s use of a server located in Illinois, in and of

itself, is generally not sufficient to establish nexus for sales of

tangible personal property made through the internet”

– The retailer did not own or lease the server.

– Rather, it paid a fee to a web-hosting company for use of the

server (also used by others).

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• Texas Comptroller of Public Accounts, Policy Letter Ruling No.

201103016L (03/24/2011)

– “If the entirety of your presence and business activity in Texas is limited

to: 1) having ONLY a website on a third-party server in Texas (upon

which the third-party provides all the functionality) and 2) delivering

physical products into the state via third-party common carrier, you are

not considered to be engaged in business in Texas.”

– The ruling indicated that the outcome might be different if the out-of-

state vendor stored digital inventory, such as software programs for

sale, on the server in Texas.

– Texas enacted HB 1841 in 2011, which codifies this ruling.

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– Solutions

• Taxation may turn on whether you own or lease the server, or

contract with a third-party for a server service

• To be safe, use servers that are located in states in which you

already have physical presence – i.e. home state

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Practical Concerns: Business Entity Naming Policies

MTC Proposed Model Affiliate Sales Tax Nexus Statute (April 28, 2005) - An out-of-state vendor has substantial nexus for use tax collection if:

1. Out-of-state vendor and in-state business are “related parties”

2. Out-of-state vendor and in-state business use identical or similar name, trade name, trademark or goodwill to develop, promote or maintain sales, or in-state business provides services to or that benefit the out-of-state vendor’s in-state sales

3. Out-of-state vendor must have at least $100,000 of sales in previous year

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– Several states have adopted statutes similar to the MTC Proposed

Statute, for example:

• Alabama – Ala. Code § 40-23-190(a)(2)

• Idaho - Idaho Code § 63-3615A(1)(b)

• New Jersey - N.J. Rev. Stat. § 54:32B-2(i)(2)(b)

– Comptroller v. Furnitureland South, Inc., No. C-97-37872-OC, Md.

Cir. Ct., Aug. 18, 1999. - Nexus found in part through use of similar

logos between in-state and out-of-state parties

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– Solution

• Don’t use the same or a similar name for your in-state and out-of-

state affiliates or internet and bricks and mortar affiliates.

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Practical Concerns: Location of Distribution and

Fulfillment Activities

– States may find Nexus established through an affiliate engaging in

distribution and fulfillment activities on your behalf

• Lyon Metal Products, Inc. v. State Bd. of Equalization, 58 Cal. App. 4th

906 (Cal. Ct. App. 1997) – Nexus established in CA where goods were

stored in a warehouse in CA and delivered from there to customers

• Williams and Co., Inc. v. Dailey, 303 S.E.2d 737 (W. Va. 1983) – Nexus

established in part due to presence of taxpayer’s warehouse in state.

• Some states have adopted or considered legislation specifying that

maintaining a warehouse or distribution center in the state (even when

held by a related entity) establishes nexus, for example:

– Texas (S.1, 2011), Oklahoma (HB 2359, 2010), Virginia (SB 597,2012), Georgia

(SB 386, 2012), Kansas (SB 83, 2013), Maine (HB 251, 2013), Ohio (HB 59,

2013), W. Va. (HB 2754, 2013).

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– States may find Nexus established through an affiliate engaging in

distribution and fulfillment activities on your behalf

• Other states have created temporary safe harbors for distribution centers.

– S. Carolina (S.B. 36, 2011) – distribution centers do not create physical presence until January 1, 2016 if: (1) a new facility is placed in service between January 1, 2011 and December 31, 2012; (2) the facility creates at least 2,000 new jobs; and (3) the remote vendor makes (or causes to be made) a $125 million capital investment in the facility.

– Tennessee (H.B. 2370, 2012) – distribution centers do not create physical presence until January 1, 2014 (or the effective date of federal legislation) if: (1) a new facility is placed in service between January 1, 2011 and January 1, 2014; (2) the facility creates at least 3,500 new jobs; (3) the facility maintains 3,500 jobs until January 1, 2016; and (4) the remote vendor makes (or causes to be made) a $350 million investment in the facility.

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– Solution

• Locate distribution and fulfillment activities in states in which you

already have physical presence and nexus.

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Practical Concerns: Voluntary Disclosure Agreements

– VDA programs give taxpayer who have not filed tax returns in

one or more states to disclose the tax compliance error and

negotiate a settlement of any back taxes.

– Incentives:

• Penalties: States generally agree to waive penalties and other

types of enforcement actions (but usually not interest).

• Look-back period: States generally agree to limit the look-back

period (generally the past 3-6 years, depending on the state).

• Anonymity: In many states, taxpayer can come forward

anonymously through a representative and maintain anonymity

until a settlement agreement has been reached.

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– Two approaches:

• State by state approach.

• Multistate Tax Commission’s Multi-state Voluntary Disclosure

Program.

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– State by state approach.

• The taxpayer or its representative contacts each state directly.

• Good approach when there are a small number of states at issue.

• Procedures, eligibility and terms vary by state.

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– MTC Multi-state Voluntary Disclosure Program.

• The MTC acts as an intermediary and single point of contact for working

out voluntary disclosure agreements with one or more states.

• Eligibility: Taxpayer must not have had any contact with a state regarding the tax

type for which voluntary disclosure is sought, such as.

» Filing a return for the tax type.

» Paying a tax.

» Receiving an inquiry from the state regarding the tax type.

• Most states participate in the MTC’s program.

– Exceptions: New Mexico, Illinois, Delaware, Nevada, Ohio, and New

York.

– California SBOE participates (i.e. sales tax), but the FTB does not (i.e.

income/franchise tax).

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– Observation:

• Consider pursuing a VDA if it is clear that you have nexus in a state but

have not filed returns or paid tax.

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