INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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Breaking News: Physical Presence Requirement Bill Introduced in Congress

by , and | Jul 15, 2016 | , , , , ,

Yesterday, Congressman Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives (House).  The bill would codify the physical presence requirement established by the US Supreme Court in Quill.  The bill would specifically define physical presence, creating a de minimis threshold, and would significantly affect existing state efforts to expand the definition of physical presence and overturn Quill.

Not only would the bill preempt the ‘nexus expansion’ laws, such as click-through nexus provisions, affiliate nexus provisions, reporting requirements and marketplace collection bills, but it would likely halt the South Dakota and Alabama (and other state litigation) specifically designed to overturn Quill.  It would also move all future litigation on this issue to federal courts.

The bill would be effective as of January 1, 2017.  The bill was referred to the House Committee on the Judiciary, which Rep. Sensenbrenner is a sitting member of (and former Chairman).

Summary

The bill defines “seller”, and provides that states and localities may not: (1) obligate a person to collect a sales, use or similar tax; (2) obligate a person to report sales; (3) assess a tax on a person; or (4) treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

Persons have a physical presence only if during the calendar year the person: (1) owns or leases real or tangible personal property in the state; (2) has one or more employees, agents or independent contractors in the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or (3) maintains an office in-state with three or more employees for any purpose.

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Breaking News: Federal Court Finds Delaware’s Unclaimed Property Enforcement “Shocks the Conscience”

by , and | Jun 29, 2016 | , , , , ,

On June 28, 2016, the much-anticipated memorandum opinion of the US District Court for the District of Delaware in Temple-Inland, Inc. v. Cook et al., No. 14-654-GMS was released on the parties’ cross-motions for summary judgment, finding Delaware’s extrapolation methodology and audit techniques collectively violate substantive due process.  According to Judge Gregory M. Sleet, “[t]o put the matter gently, [Delaware has] engaged in a game of ‘gotcha’ that shocks the conscience.”  The opinion also specifically called third-party auditor Kelmar Associates LLC’s formula used for estimation into question, noting that the use of a holder’s calendar sales as the denominator in the ratio used to estimate liability raises questions given the lack of connection between abandoned property and the economy.  In sum, this opinion is a “must read” for any unclaimed property advisor or holder going through a Delaware audit and is likely to have a drastic impact on both on-going and future unclaimed property audits.  Holders should contact their unclaimed property advisors immediately to begin discussing how to proceed based on this groundbreaking development.

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Breaking News: Tennessee Submits Proposed Economic Nexus Regulation for Publication

by , and | Jun 16, 2016 | , , , , ,

Earlier today, the Tennessee Department of Revenue (DOR) submitted a new sales and use tax regulation for publication titled “Out-of-State Dealers” (Rule 1320-06-01-.129) that would administratively create an economic nexus threshold. With the submission, Tennessee becomes the most recent addition to the growing list of states seeking to directly attack the Quill physical presence standard.  As detailed in our prior blog, both Alabama and South Dakota are already litigating whether their economic nexus standards are sufficient to satisfy the dormant commerce clause substantial nexus requirement.  Additionally, at least 11 different bills in eight different states have been introduced in state legislatures so far in 2016.  With states continuing to attack Quill from all angles, remote sellers are scrambling to keep up with the increasingly volatile nexus landscape. (more…)



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Alabama Issues Remote Sellers Use Tax Assessments, Newegg Inc. Appeals

by , and | Jun 15, 2016 | , , , , , ,

Ever since Alabama’s new economic nexus regulation went into effect, litigation over its constitutionality has been expected given that Alabama Commissioner Julie Magee and Governor Bentley said as much when announcing it (Rule 810-6-2-.90.03, effective January 1, 2016).  It appears that they finally got their wish. On June 8, 2016, Newegg Inc. (Newegg) filed a Notice of Appeal in the Alabama Tax Tribunal challenging the Alabama Department of Revenue (DOR) Notice of Final Assessment of Sellers Use Tax (Assessment) that was entered on May 12, 2016. The Assessment is for seller’s use tax, interest and penalties for the months of January and February 2016 (the Assessment Period), which represent the first two months the new regulation was in effect.

The Alabama litigation comes on the heels of the litigation in South Dakota, which also involves Newegg and other retailers. Although the critical issue in both is whether economic nexus is constitutional, given that the Alabama imposition is through a regulation and not a statute, the arguments in each state’s litigation may not be parallel.

DOR Explanation of the Assessment

The DOR asserts that under the new regulation Newegg has a “substantial economic presence” in Alabama.  According to Newegg, the DOR “has offered no basis for its determination” that the regulation’s requirements were satisfied during the Assessment Period. Specifically, Newegg notes that the DOR “conclusion appears to be based solely upon the fact that Newegg had ‘significant sales into Alabama,’ i.e., more than $250,000 of retail sales to Alabama customers.”

Newegg’s Grounds for Appeal

Newegg requests that the Tax Tribunal cancel the Assessment, citing the following grounds as the primary basis:

  1. The application of the new regulation to Newegg (and the Assessment) are unconstitutional because Newegg did not (and does not) have the necessary physical presence required to satisfy the “substantial nexus” standard for sales and use taxes under the Commerce Clause, as described by the US Supreme Court in Quill.
  2. The new regulation is invalid because retailers must “lack an Alabama physical presence” for it to apply. Therefore, it conflicts with both the Alabama sales and use tax statutes and the US Constitution, each of which requires a physical presence in the state by (or on behalf of) the retailer.
  3. The application of the new regulation to an internet retailer with no physical presence in Alabama is inconsistent with the authorizing seller’s use tax statute. Specifically, none of the provisions of the sales and use tax statutes (or any other provision in the Alabama Code) authorize the DOR to impose seller’s use tax collection obligations on internet retailers with no physical presence in the state.

The State of Nexus in Other States

The Alabama litigation represents the third prominent nexus case that involves Newegg.  Not only is the company involved in South Dakota (see our prior coverage of the South Dakota lawsuits here), but it is also one of the three taxpayers involved in the Ohio Commercial Activity Tax (CAT) litigation (
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Unclaimed Property Hunger Games: States Seek Supreme Court Review in ‘Official Check’ Dispute

by , and | Jun 10, 2016 | , , , , , , , , , , , , , , , , , , , , , , , ,

Background

As detailed in our blog last month, MoneyGram Payment Systems, Inc. (MoneyGram) is stuck in between a rock and a hard place as states continue to duel with Delaware over the proper classification of (and priority rules applicable to) MoneyGram’s escheat liability for uncashed “official checks.”  The dispute hinges on whether the official checks are properly classified as third-party bank checks (as Delaware directed MoneyGram to remit them as) or are more similar to “money orders” (as alleged by Pennsylvania, Wisconsin and numerous other states participating in a recent audit of the official checks by third-party auditor TSG). If classified as third-party bank checks, the official checks would be subject to the federal common law priority rules set forth in Texas v. New Jersey, 379 U.S. 674 (1965) and escheat to MoneyGram’s state of incorporation (Delaware) since the company’s books and records do not indicate the apparent owner’s last known address under the first priority rule. However, if the official checks are classified as more akin to money orders under the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Act), as determined by TSG and demanded by Pennsylvania, Wisconsin and the other states, they would be subject to the special statutory priority rules enacted by Congress in response the Supreme Court of the United States’ Pennsylvania v. New York decision and escheat to the state where they were purchased. See 12 U.S.C. § 2503(1) (providing that where any sum is payable on a money order on which a business association is directly liable, the state in which the money order was purchased shall be entitled exclusively to escheat or take custody of the sum payable on such instrument).

In addition to the suit filed by the Pennsylvania Treasury Department seeking more than $10 million from Delaware covered in our prior blog, the Wisconsin Department of Revenue recently filed a similar complaint in federal district court in Wisconsin, alleging Delaware owes the state in excess of $13 million. Other states participating in the TSG audit (such as Arkansas, Colorado and Texas) also recently made demands to MoneyGram and Delaware.

It is interesting to note that in 2015, Minnesota (MoneyGram’s former state of incorporation) turned over in excess of $200,000 to Pennsylvania upon its demand for amounts previously remitted to Minnesota for MoneyGram official checks. Apparently not only do the states in which the transaction occurred disagree with but even a former state of incorporation took the majority path.   (more…)



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SALT Implications of Proposed Section 385 Debt/Equity Regulations

by | May 18, 2016 | , , , , ,

On April 4, 2016, without warning, the US Department of the Treasury proposed a new set of comprehensive regulations under section 385. There had been no advance indication that regulations were even under consideration. Although the Treasury indicated that the proposed regulations were issued in the context of addressing corporate inversions, their application went well beyond the inversion space and they apply to inter-corporate debt regardless of whether it occurs in an international context. The following is a discussion of the state and local tax consequences of the proposed regulations; for a detailed discussion of the proposed regulations themselves, see this previous article.

Read the full article.



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Unclaimed Property Litigation Update – Spring 2016

by , and | May 16, 2016 | , , , ,

Litigation over unclaimed property rules and obligations continues to accelerate. The first quarter of 2016 brought developments in several cases, including a much-watched contest over merchandise credits and a new battle between the states over which state gets the money.

California Merchandise Credits Not Subject to Remittance as Unclaimed Property; Implicit Application of Derivative Rights Doctrine Prevails

On March 4, 2016, a California superior court held in Bed Bath & Beyond, Inc. v John Chiang that unredeemed merchandise return certificates (certificates) issued by Bed Bath & Beyond (BB&B) to tis California customers are exempt “gift certificates” under the California Unclaimed Property Law—and not “intangible personal property” under the California catch-all provision. Like many retail stores, BB&B provides the certificates as credits to customers who return items without a receipt. While the certificates may be redeemed for merchandise at BB&B or one of its affiliates, they cannot be redeemed for cash. BB&B took the position that it mistakenly reported and remitted the unclaimed certificates from 2004 to 2012 and filed a refund claim with the California State Controller’s Office (Controller) in 2013 for the full amount remitted during that time period (amounting to over $1.8 million). The Controller denied the claim, and BB&B proceeded to sue John Chiang, both individually and in his official capacity as former California state controller. The relief sought by BB&B was the full refund request, plus interest. (more…)



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Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

by , and | May 6, 2016 | , , , , ,

Last Friday, the Alabama Court of Civil Appeals handed the Department of Revenue (Department) a significant loss in their continued attempt to tax non-enumerated services and tangible property provided in conjunction with those services under the sales tax.  See State Dep’t of Revenue v. Omni Studio, LLC, No. 2140889 (Ala. Civ. App. Apr. 29, 2016).  Specifically, the appellate court affirmed the taxpayer’s motion for summary judgment granted by the trial court, which set aside the Department’s assessment on the basis that photographs provided by a photography studio are merely incidental to the nontaxable photography services provided by the studio.  While the prospective effect of the holding in the photography context is unclear due to recent amendments to the photography regulation (effective January 4, 2016), the case is significant in that it strengthens the “incidental to service” (or “true object”) precedent in Alabama and should be seen as a rebuke to the Department for ignoring judicial precedent in favor of their own administrative practices and guidance.

This decision is important in analyzing the taxability of mixed/bundled sales to Alabamans (i.e., where services and some degree of tangible personal property are provided as part of the same transaction).  As with any decision, taxpayers should consider potential refund claims. (more…)



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No Surprises in Ohio CAT Nexus Oral Argument

by and | May 4, 2016 | , , , , , ,

Oral argument before the Ohio Supreme Court took place on May 3 in the three cases challenging Ohio’s Commercial Activity Tax (CAT) nexus standard.  Crutchfield, Inc. v. Testa, Case No. 2015-0386; Mason Cos. Inc. v. Testa, Case No. 2015-0794; Newegg, Inc. v. Testa, Case No. 2015-0483.  Ohio imposes its CAT on a business that has more than $500,000 in annual gross receipts in the state, even if the business has no physical presence in the state.  These three taxpayers have challenged this standard as violating the Commerce Clause substantial nexus test.

The oral argument in the cases proceeded as expected.  The majority of the time for both parties was taken up by questions from the bench.  Several judges quizzed the taxpayers’ counsel about the assertion that no business was conducted in Ohio.  The judges focused on activities such as products being received by customers in Ohio and software being placed on customers’ computers in Ohio to facilitate ordering or to track customer activity in Ohio.  The taxpayers’ counsel vigorously disagreed with this construction of the facts – noting that whatever happened in Ohio, all of the taxpayers’ actions occurred elsewhere.  He stated that the activities called out by the judges were no different than receiving and reviewing a catalog in the state.

The taxpayers’ counsel repeatedly cited to Tyler Pipe as the controlling law in this case – noting that before a state could impose a tax on a business, that business had to do something in the taxing state (or have something done on its behalf) that helped it establish and maintain a market in the state.  According to the taxpayers’ counsel, it was not enough that a market exists in the taxing state; the taxpayer had to be doing something in the taxing state.  He asserted that the taxpayer conducted no business activities in the state and thus Tyler Pipe prevented the state from imposing the CAT on them.  This became the taxpayers’ mantra throughout the argument. (more…)



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