Multistate Tax Symposium State tax reboot The age of ......•The Due Process Clause: −States that...

The 2019 National Multistate Tax SymposiumState tax reboot—The age of Multistate

February 6-8, 2019

Today’s Commerce Clause and tomorrow’s Multistate tax controversiesJordan M. Goodman, Horwood Marcus & Berk Chtd.Richard D. Pomp, Esq., University of ConnecticutJack Trachtenberg, Deloitte Tax, LLP

February 6-8, 2019

3The National Multistate Tax Symposium: February 6-8, 2019Copyright © 2019 Deloitte Development LLC. All rights reserved.

• Constitutional Framework

−Commerce Clause

−Due Process Clause

• Supreme Court Decisions

−Complete Auto

−Quill

−Wayfair

• Post Wayfair Considerations

−Substantial Nexus

−Impact on Remote Sellers

−Non-Sales and Use Tax Ramifications

−Challenges Post Wayfair

−Other Considerations

• Questions?

Agenda

4

Constitutional Framework: Commerce Clause & Due Process


• Commerce Clause:

− Commerce clause authorizes Congress to "regulate commerce with foreign nations, and among the several States."

− The Commerce Clause prohibits states from enacting laws that might unduly burden or inhibit the free flow of commerce between the states.

• The Due Process Clause:

− States that no state shall "deprive any person of life, liberty, or property, without due process of law.”

− The Supreme Court has interpreted this to prohibit a state from taxing businesses unless there is a "minimal connection" between the business and the state in which it operates.

Constitutional Framework

6

Supreme Court Cases: Complete Auto, Quill, & Wayfair


• In Complete Auto the Supreme Court articulated a four-part test to determine if a state tax violates the Commerce Clause:

• Substantial Nexus: A sufficient connection between the taxpayer and the state.

• Fair Apportionment: State cannot tax more than its fair share of taxpayer’s income

• No discrimination: State cannot treat out-of-state and in-state taxpayers differently

• Related to services: Tax must be fairly related to services provided to the taxpayer by the state.

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)


• In Quill, the Supreme Court considered application of a North Dakota tax statute requiring an out-of-state vendor to collect use tax on sales made within state.

• The court in Quill overruled its determination in National Bellas Hess, 386 US 753 (1967) holding that physical presence was an element of the Due Process Clause, reaffirming that physical presence is necessary to satisfy “substantial nexus” under the Commerce Clause.

Quill Corp. v. North Dakota, 504 US 298 (1992)


What Are Sales And Use Tax Nexus Creating Activities?

Previously nexus can be created in various ways:

• In–state employees

• Sporadic employee visits

• Attending trade shows and seminars

• In–state deliveries made by one’s own truck

• Physical presence of property even temporality

• Incidental ownership of property

• Voluntary registration or incorporation

States wanted to change ‘physical presence standard’ and started to pursue remote sellers in various ways:

• Affiliate or agency nexus; volunteers, agents, independent contractors

• Click–through nexus (e.g. NY)

• Internet nexus through “cookie” or electronic nexus presence

• Notification and reporting statutes for remote sellers with steep penalties for non-compliance (e.g. CO)


• On March 22, 2016, Governor Dennis Daugaard signed Senate Bill 106 (S.B. 106) amending S.D. Codified Laws § 10–45 and 10–52, effective May 1, 2016, to require the collection of South Dakota sales tax on sales into South Dakota if, in the previous or current calendar year:

− The seller’s sales into South Dakota higher than $100,000, or

− The seller had two hundred or more separate transactions into South Dakota.

• The Supreme Court upheld the statute, overturning National Bellas Hess and Quill.

• Court determined that Quill was an unsound and incorrect interpretation of the Commerce Clause.

• In its decision, the court noted that physical presence was not a necessary interpretation of the “substantial nexus” requirement, and that such requirement deprives a factual analysis of the purposes and effects of the state’s nexus law, which creates rather than resolves market distortions.

South Dakota v. Wayfair, Inc., Dkt. No. 17-494 (U.S. Supr. Ct. June 21, 2018)


• Did this decision make sense?

• Why did the Court decide to overturn Quill on this case?

• What are the main two or three items that are of concern with respect to this decision?

− Focus on sourcing of sales

− Sales made in the U.S. from foreign countries

• Is this a Sales Tax or a Use Tax?

− As Justice Sotomayor stated in oral argument, “isn't the problem not Quill but the fact that you don't have a mechanism to collect from consumers? It's not the merchants who are paying the sales tax; it's the consumer. They're collecting it for you.”

− What are the ramifications for someone that is forced to collect and makes an error? What about the local government collections?

Why Wayfair?

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Post Wayfair Considerations


• The Court in Complete Auto stated that “[t]here must be ‘substantial nexus’ with the taxing State.”

− Professor Pomp: “The Myth of Substantial Nexus”

• Commerce Clause substantial nexus requirements similar to the due process “some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax.”

• Did the Court in Wayfair determine that the Due Process Clause and the Commerce Clause have basically the exact same guideline for nexus purposes?

• Has the standard for nexus moved from physical presence to “purposeful availment” or “minimum contacts”?

What is Substantial Nexus Post Wayfair?


• What is the impact on businesses engaged in remote selling?

• Do remote sellers now have a duty to collect and remit sales tax in every state?

• Does this only impact Remote Sellers? If not, what compliance obligations are now required for service providers? For sellers of tangible personal property?

What Impact Will Wayfair Have on Remote Sellers?


• Although Wayfair directly affects sales and use tax, to the extent the decision established that physical presence is not necessary to create a “substantial nexus,” it may also impact nexus positions for state income and gross receipts taxes as well.

• Income Tax:

− State income tax nexus considerations now may likely be informed by the use of Factor-Presence Nexus Statutes and “market-based” rules for sourcing sales to a respective state.

− ASC 740 financial accounting and reporting

• ASC 450:

◦ Financial Reporting Analysis: Approximately 34 states have potential Economic Nexus standards for transaction taxes. While the facts at issue in Wayfair involved a statute with prospective application, potential retroactive application and enforcement to the effective date of a state’s applicable statute remains uncertain.

◦ Notification and Reporting Statutes: Approximately fifteen states have enacted notification statutes which can carry substantial penalties. Such states require remote sellers to provide in-state buyers with information regarding their use tax obligations, as well as provide a report to the state detailing in-state purchases.

How Does Wayfair Impact Other Taxes?


• Gross Receipts Tax:

− Washington Business & Occupation Tax; Ohio Commercial Activity Tax; Texas Margin Tax

How Does Wayfair Impact Other Taxes? (cont’d)


• Substantial Nexus Challenges

− Bright Line Tests (e.g. South Dakota’s $100,000; or 200 or more transactions)

• Due Process Challenges

− Pike v. Bruce Church Inc., 397 U.S. 137 (1970).

− McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011).

− 131 S. Ct. 2846 (2011)

What Challenges May Be Brought Post Wayfair?


• State Nexus Legislation

• PL 86-272

• Retroactivity

• Voluntary Disclosure Agreements

• Nexus Studies

• Congressional Response

• Compliance Costs

Other Considerations

19

Questions?


Contact information

Jack Trachtenberg

Deloitte Tax LLP

[email protected]

Jordan M. Goodman

Horwood Marcus & Berk Chtd.

[email protected]

Richard D. Pomp

University of Connecticut

[email protected]

mailto:[email protected]




This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

As used in this document, “Deloitte” means Deloitte Tax LLP a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte USA LLP, Deloitte LLP and their respective subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

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Multistate Tax Symposium State tax reboot The age of ......•The Due Process Clause: −States that...

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