Online Sales Taxes and E-Fairness

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1 Georgia Chamber of Commerce s 2011 Tax Forum November 3, 2011 Stephen Kranz Sutherland Asbill & Brennan LLP Washington, D.C. Warren Townsend Wal-Mart Stores, Inc. Bentonville, AR Online Sales Taxes and E-Fairness

2 Main Street Fairness Act Introduced on July 29, 2011 by Senator Durbin of Illinois Member States of the Streamlined Sales Tax Agreement may require remote sellers to collect sales tax Remote sellers are sellers that do not have adequate physical presence to establish nexus under the law existing on the day before the date of the enactment of this act. Requires 10 states with at least 20% of the population of the US be members Required the Governing Board to implement various requirements: System certification, online multistate registration, standard electronic form for exemptions, advisory councils, promulgation or rules for audits and dispute resolutions & provisions for staffing and funding Governing Board The Governing Board determines whether states qualify as members. Taxpayers may bring suit against the Board in the Court of Federal Claims challenging the Board s certification of a member state.

3 Main Street Fairness Act (cont d) The Act requires that the Streamlined Agreement meet several requirements before members may require collection: Centralized multi-state registration system Uniform definitions of products and definitions for potential product-based exemptions that can be selected by member states, and uniform rules for bad debts Uniform sourcing rules Uniform procedures for certifying software to determine taxability, and a taxability matrix for each state Uniform rules for rounding, tax returns, remittance, and electronic filing and remittance methods State-level administration of all taxes Elimination of Caps and thresholds on rates & exemptions based on value Audit procedures, including provisions for requesting a single multi-state audit Vendor compensation for collection Privacy protections Small seller exemption (note that no minimum threshold is given in the statute) Uniform rules for sales tax holidays Uniform rules for credits and exemptions

4 Marketplace Equity Act of 2011 Introduced by Rep. Womack of Arkansas on October 13, 2011 Any state that meets the simplicity requirements outlined below, either individually or through an agreement, may require sellers to collect and remit sales and use taxes with respect to remote sales. Remote sales are defined as sales by sellers who do not have adequate physical presence to establish nexus under the law existing on the day before the date of the enactment of this act. A state must pass legislation enacting the following requirements in order to collect from remote sellers: Small seller exception for sellers making sales of $1,000,000 or less annually in the U.S. and $100,000 or less annually in the state Single sales & use tax return and single revenue authority to file the return with Taxable products and services and exemptions must be uniform throughout the state, and exemptions must be uniform for in-state and remote sellers The tax rate must be either: (1) single state-wide blended rate that includes state & local rates; (2) single maximum rate exclusive of local rates; or (3) applicable destination rate, including applicable state and local rates, but only if adequate software is provided to ease compliance The state must publish notice that the law has been enacted, and may not require collection until 6 months after the notice has been posted

5 Alexander/Enzi Legislation Sen. Lamar Alexander of Tennessee and Sen. Michael Enzi of Wyoming have stated that they will introduce a third bill. A draft of the bill is similar to the Marketplace Equity Act of 2011 with some alterations The small seller exemption is $500,000 in gross national receipts. No state threshold is included. The Alexander/Enzi bill would explicitly authorize members of the Streamlined Sales Tax Agreement to collect, and non- SST members are authorized if they meet certain simplification requirements.

6 Alexander/Enzi Legislation Simplification requirements for non-sst member states: A single State-level administration of sales taxes for all local jurisdictions A single audit for the State and all local jurisdictions within the State A single sales and use tax return to be filed with the Statelevel agency A uniform tax base among the State and local jurisdictions within the State Provisions for Consolidated Providers to collect and remit on behalf of sellers, with sellers held harmless

7 Sales Tax Reporting Laws Reporting legislation was enacted in Colorado, South Dakota, South Carolina, Oklahoma and Vermont. Similar legislation has been under consideration in California & Tennessee and has been discussed in many other states. The MTC has discussed drafting model reporting legislation.

8 Sales Tax Reporting Law Colorado The Direct Marketing Association v. Roxy Huber, Civil Case No. 10-cv REB-CBS, Order Granting Motion for Preliminary Injunction (U.S. Dist. Ct. Colorado, January 26, 2011) U.S. District Court granted the Direct Marketing Association s (DMA) motion for a preliminary injunction. Colorado was enjoined from enforcing the reporting provisions. The Court determined that the reporting provisions could be discriminatory because the burden only fell on out-of-state retailers, not in-state retailers. The Court determined that the burden of the provisions could run afoul of Quill.

9 Affiliate Nexus - General The sole presence of a subsidiary in a state does not ordinarily establish nexus over the out-of-state parent for state tax purposes (e.g. Current) However, states are becoming more aggressive in pursuing nexus based on the physical presence or activities of affiliate entities, employees, or other representatives in the state. Outside of the activities defined in Tyler Pipe and Scripto, states are enacting legislation that imposes nexus based on affiliate activity unrelated to taxable sales. A number of states have had affiliate nexus statutes for some time, including Florida, Georgia, New Jersey, New York, Utah, and Virginia. The affiliate nexus concept can apply to both sales and income tax nexus.

10 Affiliate Nexus Litigation Texas Amazon.com, Inc. et al v. Texas Comptroller of Public Accounts, No. D-1-GN , Filed January 14, 2011 Amazon has received an assessment for unpaid sales taxes in Texas. Amazon asked for documentation and workpapers from the Department, and the Department declined to produce some of the documents citing attorney-client privilege. Amazon subsequently filed a lawsuit seeking to obtain the documentation. The Department based its assessment on the presence in the state of a distribution center operated by a subsidiary of Amazon.com, Inc. and has indicated in the press that this distribution center created nexus for the entity that sells products to Texas customers.

11 Click-Through Nexus Legislation WA AK OR CA** NV ID AZ UT MT WY CO NM ND SD NE KS OK MN WI IA IL MO AR MS MI PA OH IN WV VA KY NC TN SC AL GA NY ME NH VT* MA CT NJ RI MD DE DC HI TX LA *Vermont only in effect if 15 other states enact FL **California s was stayed until 2012, subject to passage of a federal bill As of October 12, 2011 Click-Through Nexus Statute Enacted Click-Through Nexus Legislation Under Consideration Click-Through Nexus Statute Rejected in 2010/2011 Click-Through Nexus Authority Asserted Without Specific Legislation 1 1 BNA, Survey of State Tax Departments (2010).

12 Click-Through Nexus New York Amazon.com LLC v. New York State Dep t of Taxation and Finance, et al. and Overstock.com, Inc. v. New York State Dep t of Taxation and Finance, et al., 0210 NY Slip Opinion (1st Dept. App. 11/4/10) Amazon.com and Overstock.com filed suit challenging New York s sales tax nexus statute. Internet retailers asserted that statute was facially unconstitutional and unconstitutional as applied. Trial court dismissed complaints, and Internet retailers appealed. Appellate court rejected the facial unconstitutional arguments, and remanded the as applied challenges. Amazon.com filed an appeal of this decision on Dec. 6.