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Nexus

The New “Click-Through”?: New York Budget Proposal Requires Marketplace Providers to Collect Tax

by McDermott Will & Emery and Stephen P. Kranz | Jan 22, 2015 | Constitutional Issues, Nationwide Importance, New York, Nexus, Sales Tax, Transaction Taxes

On January 21, Governor Cuomo delivered his State of the State address, along with proposing the new budget. The budget has a number of new tax proposals. One of those proposals would have a significant impact on e-commerce companies. Part X of the budget proposal amends the sales tax statutes to require marketplace providers to collect and remit sales tax on sales to New York customers. A marketplace provider is a person who, pursuant to an agreement with a seller, “facilitates a sale, occupancy, or admission” by the seller. A person can be a marketplace provider if they facilitate the sale, or are an affiliate of a person facilitating the sale. For purposes of this definition, affiliate companies are companies that have common ownership of 5 percent.

“Facilitates a sale, occupancy, or admission” means:

(1) such person, or an affiliated person, collects the receipts, rent or amusement charge paid by a customer, occupant or patron to a marketplace seller; and

(2) such person performs either of the following activities:

(A) provides the forum in which, or by means of which, the sale takes place or the offer of occupancy or admission is accepted, including a shop, store or booth, or an internet website, catalog or a similar forum; or

(B) arranges for the exchange of information or messages between the customer, occupant or patron, as the case may be, and the marketplace seller.

A marketplace provider meeting these requirements would be required to collect as if the marketplace provider were the vendor.

Under current law, a seller is required to collect and remit tax on sales made to New York customers. Under the budget proposal, a seller would no longer be required to collect if the marketplace provider provides a collection certificate to the seller. (The Division of Taxation is required to develop procedures to administer the certificate). If a marketplace provider does not provide a collection certificate, but does use language approved by the Division of Taxation and Finance in a publicly-available agreement, that will have the same effect as the provision of a collection certificate.

The imposition under the proposal is directly on the marketplace provider. There does not appear to currently be any provision that would allow a seller in a marketplace to collect instead of the marketplace provider, if the seller so desired.

Marketplace providers are relieved of liability if the information provided to them by the seller is incorrect. However, there is no provision in the bill requiring the marketplace sellers to provide any information to the marketplace provider.

The law does not change existing nexus or ‘doing business’ requirements. It appears that a marketplace provider would be required to collect only if the marketplace provider has nexus with New York under the Commerce Clause.

This proposal would have a significant effect on e-commerce companies, and could have an impact reminiscent of the impact of the click-through statutes. Companies that sell through a [...]

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Texas Comptroller Defies the Laws of Physics

by Arthur R. Rosen | Dec 22, 2014 | Constitutional Issues, Nexus, Sales Tax, Texas

In this article, the authors examine a recent Texas administrative law judge’s opinion that says an out-of state company has nexus with Texas through downloaded software that it licenses to Texas customers. They argue that the state comptroller’s adoption of the decision allows sales and use tax liability to be based on economic nexus instead of physical nexus and is therefore unconstitutional.

Read the full article.

Lame-Duck Congress Mulls Laws to Ease State Tax Headaches

by Arthur R. Rosen | Dec 8, 2014 | Constitutional Issues, Income Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

As it heads into the final weeks of its session, Congress is considering various bills that would restrict or expand states’ taxing authority. Almost every business in the country would be affected by at least some of these bills. While some of these bills have progressed further than others, any could become law—particularly if bundled into legislation that Congress must, as a practical and political matter, pass before the session ends. Businesses thus have an opportunity to ask their Senators and Representatives to take action to rein in some of the problems with state and local taxes.

Read the full article on CFO.com.

New Jersey Issues Ominously Vague Guidance on New Click-Through Nexus Law

by Catherine A. Battin | Aug 11, 2014 | New Jersey, Nexus, Sales Tax, Transaction Taxes

The New Jersey Division of Taxation issued a Notice last week that is hardly reassuring to remote sellers. The Notice basically paraphrases the new click-through statute, noting that the statutory definition of “seller” was amended to create a rebuttable presumption that an out-of-state seller, who makes taxable sales of goods or services, is soliciting business and has nexus in New Jersey if it (1) enters into an agreement with a representative located in New Jersey for compensation in exchange for referring customers via a link on its website and (2) has sales from those referrals to customers in New Jersey in excess of $10,000 for the four prior quarterly periods.

The Notice provides no guidance for sellers on how they can prove that their New Jersey independent contractors or representatives did not engage in any solicitation on their behalf in New Jersey. The Notice states that the out-of-state seller may provide proof that the representative did not engage in solicitation, but it does not include any details on what type of proof will be acceptable to the Division.

More troubling is that the Notice does not provide specific relief to arrangements where affiliates are paid on a cost-per-click basis (compensation based solely on the number of clicks rather than a commission on sales resulting from clicks). States such as California, New York and Pennsylvania have said that such arrangements are indicative of advertising rather than solicitation. The one example given in New Jersey’s Notice describes a commissioned click-through arrangement; the Notice is silent as to cost-per-click advertising.

It is unclear whether New Jersey will issue additional guidance, but given that the Notice does not provide relief for remote sellers with cost-per-click arrangements, they should not simply rely on California’s and New York’s guidance in the interim. Instead, they should obtain documentation from all their New Jersey independent contractors and representatives that they are not soliciting business in New Jersey on their behalf, even if they are only compensated on a cost-per-click basis.

Illinois Appellate Court’s Expansive Interpretation of a Taxing Ordinance Swallows a Sale for Resale Exemption

by Arthur R. Rosen | Jul 30, 2014 | Constitutional Issues, Illinois, Local Tax, Nexus, Sales Tax, Tax Base

The First District of the Illinois Appellate Court, in Ford Motor Company v. Chicago Department of Revenue, 2014 IL App (1st) 130597 (June 27, 2014), recently held that Ford Motor Company (Ford) owes City of Chicago vehicle fuel tax on 100 percent of the fuel it purchased and dispensed into the tanks of cars it manufactured in Chicago, even though Ford offered proof that 98 percent of the fuel was resold to car dealerships around that nation.

The court relied on the language of the taxing ordinance, which imposes tax on the “privilege of purchasing or using, in the City of Chicago, vehicle fuel purchased in a sale at retail.” The court, focusing only on the first portion of that provision, found Ford “used” the fuel in Chicago, on the basis that “use” is defined to include “dispensing fuel into a vehicle’s fuel tank,” an activity Ford did when it transferred fuel from its storage tanks into the tanks of the cars it manufactured.

For the “sale at retail” element, defined as “any sale to a person for that person’s use or consumption and not for resale to another,” the court rejected Ford’s argument that it resold 98 percent of its purchased fuel to dealerships on the basis that Ford had introduced insufficient proof. The court disregarded Ford’s sample invoice that included a line item charge for 10 gallons of fuel because a supporting affidavit from Ford did not confirm that the invoiced amount was the amount actually in the tank of that specific car at the time of delivery. The court then, somewhat presumptively, inferred that the invoiced amount must be the amount that Ford initially dispensed into the car, before consuming some fuel during delivery, so that “the amount invoiced was to reimburse Ford Motor Company for fuel that it purchased and used to produce and prepare its new cars for delivery. …” Additionally, the court considered Ford’s failure to rebut the City’s evidence that no Ford dealership in Chicago had remitted fuel tax consistent with the conclusion that Ford was not reselling fuel; the court did not cite any authority for the proposition that subsequent tax collection is a necessary element of the statutory “resale” provision.

Ford also raised constitutional concerns that were not considered very seriously by the court. For example, was there sufficient nexus between the City and Ford’s use of the fuel placed into cars it transferred to dealerships? Moreover, the court did not consider the conceptual tax issue of pyramiding, as the ultimate vehicle purchaser will presumably pay tax (in almost all locations in the country) on the full price paid for the vehicle, which will cover the cost of the fuel. In any event, by focusing on the “use” and not the “resale” aspect of the taxing ordinance, the court fails to consider that the ordinance may not apply to Ford at all.

If At First You Don’t Succeed, Try, Try Again: Illinois General Assembly Sends Revised Version of Click-Through Nexus Law to the Governor for Signature

by Arthur R. Rosen and Mary Kay McCalla Martire | Jul 30, 2014 | Constitutional Issues, Illinois, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

In 2011, Illinois became one of the first states to follow New York’s lead by enacting “click-through nexus” legislation. The Illinois law created nexus for any out-of-state retailer that contracted with a person in Illinois who displayed a link on his, her or its website that had the ability to connect an Internet user to the remote retailer’s website, when those referrals generated over $10,000 per year in sales. Pub. Act 96-1544, §§5, 10 (eff. Mar. 10, 2011) (codified at 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1) (West 2010). On October 13, 2013, the Illinois Supreme Court held that the click-through nexus law violated the Internet Tax Freedom Act (ITFA) by imposing a discriminatory tax on electronic commerce. Performance Marketing Ass’n v. Hamer, 2013 IL 114496. The court held that the statute unlawfully discriminated against Internet retailers by imposing a use tax collection obligation based only on Internet referrals but not on print or over-the-air broadcasting referrals. The court did not reach the question whether the law also violated the Commerce Clause of the United States Constitution (although the trial court had also rejected the law on this basis).

In its recently completed Spring 2014 legislative session, the Illinois General Assembly approved an amendment to the click-through law that was designed to correct the deficiencies found by the Illinois Supreme Court. SB0352 (the Bill). The Bill expands the definition of a “retailer maintaining a place of business in this State” under the Illinois Use Tax and Service Occupation Tax Acts (Acts) to include retailers who contract with Illinois persons who refer potential customers to the retailer by providing a promotional code or other mechanism that allows the retailer to track purchases referred by the person (referring activities). The referring activities can include an Internet link, a promotional code distributed through hand-delivered or mailed material or promotional codes distributed by persons through broadcast media. The Bill goes on to provide that retailers can rebut the presumption of nexus created by the use of promotional codes or other tracking mechanisms by submitting proof that the referring activities are not sufficient to meet the nexus standards of the United States Constitution. Presumably, under the principles of Scripto and Tyler, if a remote seller can demonstrate that the Illinois referrals are not “significantly associated” with its ability to “establish or maintain” the Illinois market, the presumption will be rebutted.

As amended, the Bill appears to address the ITFA concerns expressed by the Illinois Supreme Court by not singling out internet-type referrals. It also attempts to resolve any due process constitutional concerns by providing an opportunity for retailers to rebut the presumption of nexus created by their use of referring activities. The Bill was sent to the Illinois governor for signature on June 27. The Bill will take immediate effect upon becoming law.

At present, four other states (Georgia, Kansas, Maine and Missouri) have click-through nexus laws that expressly extend the presumption of nexus to non-Internet based referring activities. [...]

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Was It Wirth It? The Pennsylvania Supreme Court Sets a Low Bar for Minimum Contacts

by Diann Smith and Stephen P. Kranz | Jul 28, 2014 | Constitutional Issues, Income Tax, Nexus, Pennsylvania

In Wirth v. Commonwealth, the Supreme Court of Pennsylvania held that Pennsylvania personal income tax applied to non-resident limited partners whose only connection with the state was the ownership of a small interest in a partnership that owned Pennsylvania property. This ruling has weakened the effectiveness of the Due Process Clause as a defense against Pennsylvania taxation.

In 1984 and 1985, the non-resident appellants purchased interests in a Connecticut limited partnership organized solely for the purchase and management of a skyscraper located in Pittsburgh. The appellants each owned between one-quarter of a unit to one unit of the partnership. One unit equated to a 0.151281 percent interest. The opinion does not indicate whether any of the numerous non-appellant partners owned significantly larger shares. Further, all of the appellants were only passive investors and did not take “an active role in managing the [p]roperty.” After 20 years of losses, the lender foreclosed on the property. The appellants lost their entire investments, but the partnership reported a gain on its tax filings consisting of the unpaid balance of the nonrecourse note’s principal and the accrued interest, totaling $2,628,491,551. As a result, the Pennsylvania Department of Revenue assessed personal income tax against the appellants, plus interest and penalties.

The appellants argued that the Commerce and Due Process Clauses prohibited the imposition of the Pennsylvania personal income tax on them. The court did not determine whether the Commerce Clause bars the imposition of the personal income tax on these non-residents because the appellants waived this defense by not sufficiently distinguishing between the Commerce Clause and Due Process Clause arguments.

The court did reach a decision on whether the Due Process Clause would bar relief and held that the limited interest in the partnership amounted to minimum contacts with Pennsylvania. The court agreed with the Department, which argued that the appellants’ interests, while limited, were “hardly passive” because of the large amount of money invested by each appellant, the extensive lifespan of the partnership and the partnership’s ownership of the Pennsylvania skyscraper. (Interestingly, this statement from the court’s opinion echoes the Department’s brief; however, the Department instead describes the appellants’ actions as passive “on a technical level” and describes the appellants’ involvement with the partnership as “hardly trivial.” The Department’s statement works to clear up confusion as to how an interest that is, by definition, passive could not be passive, but does raise the question as to why the court would opt to affirmatively state that the appellants’ involvement was “hardly passive.”) The court was also particularly concerned by the fact that had the appellants not had minimum contacts with Pennsylvania, any income earned by the appellants would escape Pennsylvania tax.

Practice Note: This case does not mean that other non-resident limited partners should accept Pennsylvania taxation. Because the appellants did not adequately argue the Commerce Clause issues, this line of argument remains viable. Further, the court’s concern with the possibility that income related to Pennsylvania property could escape Pennsylvania tax should be a question [...]

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New York Releases Corporate Tax Reform FAQs

by McDermott Will & Emery | Jul 25, 2014 | Incentives, Income Tax, New York, Nexus, Tax Base

Earlier this year, New York enacted sweeping corporate tax reform, generally effective for tax years beginning on or after January 1, 2015, including a new economic nexus standard, changes to New York’s combined reporting regime, changes to the tax base and traditional New York income classifications, changes to the receipts factor computation, and changes to the net operating loss calculation and certain tax credits and incentives. (For a more detailed discussion of these changes, see our Special Report.

While this corporate reform is quite comprehensive, a number of open issues remain so taxpayers and practitioners have been eagerly awaiting additional guidance from the Department of Taxation and Finance. As a first step in providing that much-needed guidance, the Department has released its first set of responses to frequently asked questions on a new “Corporate Tax Reform FAQs” section of its website. Most notably, the responses clarify that the non-unitary presumption based on less than 20 percent stock ownership for purposes of determining exempt investment income is a rebuttable presumption. The responses also clarify that the business capital base includes items of capital that generate exempt income. Other topics addressed include economic nexus, credits, the Metropolitan Transportation Business Tax (MTA surcharge) and net operating losses.

The Department plans to update the Corporate Tax Reform FAQs on an ongoing basis as it continues to receive questions from taxpayers and practitioners, which can be submitted on the Department’s website. We will be submitting questions and comments and can do so on behalf of companies that do not want to be identified. The Department is also in the process of revising its current regulations (which are expected to be released before the end of 2015) and plans to issue two technical memoranda in the interim, one discussing qualified New York manufacturers and one discussing the new expense attribution rules. Stay tuned for updates regarding this additional guidance.

Tax Reform in New York: Implications for Corporate America

by Arthur R. Rosen | Jul 17, 2014 | Allocation/Apportionment, Constitutional Issues, Income Tax, New York, Nexus, Tax Base

The corporate tax reform portion of the New York State 2014–15 Budget Bill resulted in major changes for virtually all corporations—even many that are not currently New York taxpayers. In this video (produced by SmartPros), McDermott partners Arthur Rosen, Maria Eberle, Lindsay LaCava and Leah Robinson will discuss the implications of New York State’s sweeping corporate tax reform, including changes to the Article 9-A traditional nexus standards, the combined reporting provisions, the composition of the tax bases and computation of tax, the apportionment provisions and the net operating loss calculation.

For more information on these issues, please click here for our Special Report, “Inside the New York Budget Bill: Corporate Tax Reform Enacted.”

Allied Domecq: Nexus-Combined Reporting

by Diann Smith and Stephen P. Kranz | Jul 16, 2014 | Constitutional Issues, Income Tax, Massachusetts, Nexus

In Allied Domecq Spirits & Wines USA, Inc. v. Commissioner of Revenue, the Massachusetts Court of Appeals held that the parent company of a Massachusetts taxpayer could not be included in the taxpayer’s Massachusetts nexus-combined returns because the parent’s nexus with Massachusetts was a sham. Regardless of the validity of the parent’s presence in the state, an argument exists that the nexus limitation on filing combined returns as it existed during the tax years discriminated against interstate commerce in violation of the Commerce Clause.

The parent company, ADNAC, was incorporated in Delaware and headquartered in Canada. ADNAC carried substantial losses. Beginning in August 1996, ADNAC engaged in activities to create a Massachusetts presence, such as reimbursing an affiliate with Massachusetts nexus for the salaries of insurance and tax employees and renting Massachusetts office space from the affiliate to house the employees. Further, ADNAC’s Massachusetts’ affiliate transferred three internal audit department employees working in Massachusetts to ADNAC. For the years in question, 1996 – 2004, Massachusetts required corporations to have in-state nexus in order to file combined reports and share losses with affiliated entities. Mass. Gen. Laws ch. 63, § 32B. As a result of these transactions, the taxpayer believed ADNAC had established nexus with Massachusetts and included ADNAC in its Massachusetts combined returns.

The Massachusetts Court of Appeals held that, because of the sham transaction doctrine, ADNAC did not have nexus with Massachusetts for tax purposes and could not file on a combined basis in the state. The court ruled, in part, that the transactions involving insurance and tax employees were shams because two memos developed by the taxpayer’s tax department described the plan as a “state tax planning project,” indicated the favorable tax consequences of the transaction, and stated that the plan would have “no impact to the management results.” The court viewed these communications as the taxpayer admitting that the transactions involving tax and insurance employees were conceived of entirely for tax planning purposes and for no business purpose. While the court could not point to any documents stating a tax purpose behind the movement of the internal audit department employees to Massachusetts, the court decided that because no contemporaneous records indicated a business motivation, the court would grant the use of the sham transaction doctrine.

Practice Note: The taxpayer did not argue that Massachusetts’ requirement of in-state nexus to file on a combined basis discriminated against interstate commerce and violated the Commerce Clause. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Allied Domecq is similar to USX Corporation v. Revenue Cabinet, Kentucky, in which a Kentucky Circuit Court declared that a provision of Kentucky’s capital stock tax that limited to domestic corporations the ability to file on a combined basis or exclude investments in subsidiaries from its tax base discriminated against interstate commerce. USX Corp. v. Revenue Cabinet, No. 91-CI-01864 (Ky. Cir. Ct. 1992); see also Hellerstein & Hellerstein, State Taxation 4.14[3][j] (Thomson Reuters/Tax & Accounting, 3rd ed. 2001 & Supp. 2014-1). The court held [...]

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