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House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 24, 2017 | Audits, Constitutional Issues, Income Tax, Local Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

The No Regulation Without Representation Act of 2017 (NRWRA) is scheduled for a hearing before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Tuesday, July 25 at 10:00 am EDT in 2141 Rayburn House Office Building. The bill was introduced by Congressman Jim Sensenbrenner (R-WI) last month with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in more detail below, the bill would codify the Bellas Hess “physical presence” requirement upheld by the US Supreme Court in Quill and make that requirement applicable to sales, use and other similar transactional taxes, notice and reporting requirements, net income taxes and other business activity taxes. Extending the concept to an area far beyond state taxation, the bill would also require the same physical presence for a state or locality to regulate the out-of-state production, manufacturing or post-sale disposal of any good or service sold to locations within its jurisdictional borders.

In the last Congress, the Business Activity Tax Simplification Act of 2015 (BATSA) would have codified a physical presence requirement in the context of business activity taxes (e.g., net income and gross receipts taxes). However, the scope of NRWRA’s limitations on interstate regulation and tax differs from the standard set forth in BATSA. Specifically, under BATSA, assigning an employee to a state constitutes physical presence, whereas under NRWRA a company does not have physical presence until it employs more than two employees in the state (or a single employee if he or she is in the state and provides design, installation or repair services or “substantially assists” in establishing or maintaining a market). Under NRWRA, activities related to the potential or actual purchase of goods or services in the state or locality are not a physical presence if the final decision to purchase is made outside of the jurisdiction. (more…)

BREAKING NEWS: Expanded “Physical Presence” Codification Bill Introduced in House

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 13, 2017 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

On, June 12, 2017, the No Regulation Without Representation Act of 2017 was introduced by Congressman Jim Sensenbrenner (R-WI) with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in detail below, the scope and applicability of the “physical presence” requirement in the 2017 bill is significantly broader than the first iteration of the bill that was introduced last year. Not only does the bill expand the physical presence rule to all taxes, it expands the rule to all regulations.

2016 Bill

In July 2016, Congressman Sensenbrenner introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives. The bill provided that states and localities could 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. “Similar tax” meant a tax that is imposed on the sale or use of a product or service.

Under the 2016 bill, persons would have a physical presence only if the person: (1) owns or leases real or tangible personal property (other than software) 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. The bill provided that “physical presence” did not include the following: (1) click-through referral agreements with in-state persons who receive commissions for referring customers to the seller; (2) presence for less than 15 days in a taxable year; (3) product delivery provided by a common carrier; or (4) internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

The bill did not define the term “seller,” but did provide that “seller” did not include a: (1) marketplace provider (specifically defined); (2) referrer (specifically defined); (3) carrier, in which the seller does not have an ownership interest, providing transportation or delivery of tangible personal property; or (4) credit card issuer, transaction billing processor or other financial intermediary. Under the 2016 bill, persons not considered “sellers” (e.g., marketplace providers) were protected as well because the bill provided that a state may not impose a collection or reporting obligation or assess tax on “any person other than a purchaser or seller having a physical presence in the State.”

2017 Bill

The scope of the 2017 bill is significantly broader than the bill introduced in 2016 and would require a person to have “physical presence” in a state before the state can “tax or regulate [the] person’s activity in interstate commerce.” (emphasis added) The new bill applies the “physical presence” requirement to sales and [...]

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BREAKING NEWS: Discussion Draft of Online Sales Simplification Act of 2016 Released

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Aug 25, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Today, the Chairman of the House Judiciary Committee, Rep. Goodlatte from Virginia, released the long-anticipated discussion draft of the Online Sales Simplification Act of 2016. Highlights of the bill include:

The bill implements the Chairman’s much-discussed ‘hybrid-origin’ approach.

The bill removes the Quill physical presence requirements for sales tax collection obligations under certain circumstances.

States may impose sales tax on remote sales IF the state is the origin state and it participates in a statutory clearinghouse AND the tax uses the origin state base and the destination state rate for participating states (the origin state rate is used if the destination state does not participate in the clearinghouse).

A remote seller will only have to remit the tax to its origin state for all remote sales.

A destination state may only have one statewide rate for remote sales.

Only the origin state may audit a seller for remote sales.

States that do not participate in the clearinghouse have significant restrictions on the ability to extract the tax from the remote seller.

Below is a more in-depth discussion of the intricacies of the bill.

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Breaking News: Physical Presence Requirement Bill Introduced in Congress

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 15, 2016 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

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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Should I Register in South Dakota?

by McDermott Will & Emery and Stephen P. Kranz | Apr 21, 2016 | Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, South Dakota, Transaction Taxes

Introduction

On March 22, 2016, South Dakota Governor Dennis Daugaard signed into law Senate Bill 106, which requires any person making more than $100,000 of South Dakota sales or more than 200 separate South Dakota sales transactions to collect and remit sales tax. The requirement applies to sales made on or after May 1, 2016.

The law clearly violates the physical-presence requirement under Quill, and that’s precisely what the legislature intended. The law is intended to force a challenge to the physical presence rule as soon as possible.

The South Dakota Department of Revenue (Department) has begun taking steps to enforce the law. We are aware that remote sellers recently received letters from the Department giving the sellers a deadline of April 25, 2016 to either register with the state and commit to collection, or notify the Department that the seller does not meet the law’s gross receipts/sales transactions thresholds. If the seller does neither of these things, South Dakota will assume that the seller does not intend to comply and that South Dakota may initiate legal action against the seller under the new law.

Remote sellers who have received these letters, as well as any other remote sellers who have exposure under the new law, are probably looking for answers to one question: Should we register and begin collecting? There are two important issues to discuss in determining whether to comply: (1) retroactivity and (2) refunds. (more…)

Remote Transactions Parity Act Introduced in the U.S. House

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jun 15, 2015 | Audits, Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Today, Representative Jason Chaffetz introduced H.R. 2775, the Remote Transactions Parity Act of 2015 (RTPA), in the United States House of Representatives (House).

The RTPA addresses the Internet sales tax issue using the structure of the Marketplace Fairness Act (MFA), which passed the Senate in 2013 and was re-introduced earlier this year. Although the RTPA retains many of the features of the MFA, it adds protections for remote sellers and certified software providers.

MFA Authorization Framework Retained

Like the MFA, the RTPA creates two paths for states to impose sales and use taxes on remote sellers. Through the first path, states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA) are authorized to impose sales and use tax collection requirements on remote sellers. Under the second path, a state that is not a member state under the SSTUA would also be authorized to collect and remit sales and use taxes on remote transactions if it implements certain simplification requirements and protections for remote sellers and certified software providers. Many of these are carried over from the MFA, notably: (1) destination sourcing for interstate transactions; (2) a single entity for administration of sales and use tax; (3) a single audit of remote sellers per state; (4) a single return per state; (5) uniform tax base for all state and local sales taxes within the state; and (6) relief for errors, including remote sellers being relieved of errors made by a certified software provider or the state itself, and certified software providers being relieved of errors made by a remote seller or the state itself. Like the MFA, the RTPA would be effective one year from enactment, but not during the period from October through December in the year following enactment.

Changes

The RTPA contains several notable differences from the MFA, discussed below.

Small Seller Exception

Under the MFA, there is a fixed exception for small sellers and states are not authorized to impose a sales and use tax on small sellers, defined as remote sellers making sales of $1 million or less.

Under the RTPA, the small seller exception starts off larger, and subsequently phased out. In the first year, the exception applies for sellers making sales of $10 million or less. In the second and third year, the threshold is $5 million and $1 million, respectively. The exception goes away in the fourth year. Furthermore, under the RTPA sellers utilizing an electronic marketplace are not considered small sellers and are not entitled to the exception, no matter the year.

Protections to Sellers and Certified Software Providers

The RTPA provides additional protections for remote sellers and certified software providers. The RTPA contains a mechanism to make sure that a state is not authorized to impose a sales and use tax collection requirement on remote sellers until it has certified multiple software providers, and those providers are certified in all other states seeking to impose authorization requirements. This is to ensure that a remote seller can [...]

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