The National Multistate Tax Symposium West...• September 2017, South Dakota Supreme Court affirmed...

The National Multistate Tax Symposium WestMove forward with confidence—State implications of tax reform

April 30-May 2, 2018

Expanding nexus challenges in the new economy - Thoughts on WayfairMike Bryan, Deloitte Tax LLPRick Heller, Deloitte Tax LLPKirk Stark, Professor of Law and Policy, UCLA

May 2, 2018

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U.S. Supreme Court Agrees to Hear Wayfair nexus case

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Background

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Introduction & Brief History

• US Supreme Court Nexus Cases

– Bellas Hess, 386 U.S. 753 (1967)

– Quill, 504 U.S. 298 (1992)

• Reaffirms Bellas Hess; physical presence standard.


Expanding Nexus

• With the rise of e-commerce and the shift away from brick-and-mortar retail stores, the states’ sales tax bases have diminished.

• Recently, states have been passing laws that push the boundaries of the concept of “physical presence.”

o “Click-Through” Nexus (~21 states)

o “Affiliate” Nexus (~25 states)

o Economic Nexus (~10 states)

o Cookie nexus (~2 states)


Expanded Nexus

• Click-Through Nexus (~21 states)

o Presumption of nexus, for sales and use tax purposes, when an out-of-state seller enters into an agreement with an in-state online advertiser, in which the advertiser is paid on a commission or per click basis for referring potential customers to the out-of-state seller’s website.

o However, most states, with sufficient documentation, allow an out-of-state seller to rebut this presumption.

• Affiliate Nexus (~25 states)

o Presumption of nexus, for sales and use tax purposes, for out-of-state sellers who are members of an affiliated group of corporations and any parent or subsidiary in the affiliated group has nexus with the state.

• Economic Nexus (~10 states)

o Presumption of nexus, for sales and use tax purposes, for out-of-state sellers who make retail sales of tangible personal property into the state in excess of a monetary threshold or make a certain number of transactions per calendar year.

• Cookie Nexus (OH and MA in 2017)

o Presumption of nexus, for sales and use tax purposes, if software like Internet cookies are located on computers in the state and sales into the state exceed certain thresholds.


Notification and Information Reporting

• Statutes require “non-collecting” retailers to inform customers and the Department of Revenue that the customer may have a use tax obligation for taxable purchases.

• Ultimately upheld as being constitutional when the U.S. Supreme Court denied certiorari in DMAin 2016.

• Approximately 5 states have enacted notification and information reporting legislation.

o Examples: Colorado and Washington

• Penalties for non-reporting can be very large

• Many more states are considering notification and information reporting legislation in 2018.

o Examples: Arkansas, Georgia, Hawaii, Kansas, Nebraska, Pennsylvania, Rhode Island, and Texas.


Justice Kennedy Concurrence in 2015 DMA decision – an Invitation to Challenge Quill?

In the 2015 decision of the U.S. Supreme Court which had remanded the DMA case to the Tenth Circuit (Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1131), Justice Kennedy made statements in his concurrence indicating Quill is ripe for reconsideration and could possibly be overturned:

• “Given…changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.”

o “The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this court to reexamine Quill and Bellas Hess.”

Since then, starting with South Dakota in March 2016, there has been a trend in state legislation establishing sales-based nexus thresholds for sales tax collection.

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Federal Proposals


Three federal bills have been proposed to address this issue:

• The Main Street Fairness Act — MSFA (H.R. 2701/S. 1452)

• The Marketplace Equity Act — MEA (H.R. 3179)

• The Marketplace Fairness Act — MFA (S. 1832)

• Failed effort to get MFA into the Omnibus Spending Act for FY2018

Federal Efforts 2013-2018


Federal No Regulation Without Representation Act of 2016

• In response to state efforts (such as in SD) to enact sales-based sales/use tax nexus provisions, federal legislation was introduced which would require a person to have a physical presence in a state for the state to tax or compel that person to collect sales and use taxes.

• The “No Regulation Without Representation Act of 2016” specifies a de minimis threshold for physical presence. Persons in a state for less than 15 days per tax year or who have products delivered in-state by a third party would not be liable.

• This federal bill defines physical presence as:

owning or leasing real or tangible property in the state;

having employees in the state who are ‘‘specifically soliciting product or service orders from customers in the state’’;

offering any kind of installation, design, or repair services in the state; or

maintaining an office with three or more employees in the state.


Current Federal Proposals

Pressure builds on Congress to act

• Bills introduced in 115th Congress would allow states to require sales/use tax collection by remote retailers that lack physical presence

o Marketplace Fairness Act (S. 976)

o Remote Transactions Parity Act (H.R. 2193)

• Each bill is substantially similar to past versions

• Each bill includes a component that allows states that participate in the Simplified Sales Tax (SST) program to require collection by remote sellers

• In March 2018, movement to include the these sales tax bills in the fiscal 2018 government spending bill

• Attempt to codify Quill:

o No Regulation without Representation Act of 2017 (H.R. 2887)

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Current Landscape


South Dakota Economic Nexus Statute

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:

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

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

S.B. 106 provided the authority for South Dakota to bring a declaratory judgement action to expedite the determination as to the validity of this nexus standard under state and federal law. S.B. 106 also provided an injunction provision to enjoin enforcement of the law pending the declaratory judgment action. This injunction is now in place, and therefore no enforcement of S.B. 106 may occur until the final court decision.


South Dakota Economic Nexus StatuteProcedural History

• April 2016, State and several online retailers/catalog companies filed declaratory judgments in Circuit Court

• March 2017, Circuit Court struck down remote sales tax law; Department of Revenue filed a notice of appeal, setting the stage for review by the state supreme court, and then potentially by the U.S. Supreme Court

• September 2017, South Dakota Supreme Court affirmed the Circuit Court ruling, holding that this law was unconstitutional in violation of the physical presence requirement under Quill

• October 2017, South Dakota filed cert with the U.S. Supreme Court – specifically asking whether the Court should “abrogate Quill’s sales-tax-only physical-presence requirement”

• January 2018, the U.S. Supreme Court granted cert.

• April 17, 2018, Oral arguments heard before the U.S. Supreme Court

• June 2018 – Decision expected before the end of June 2018

Again, an injunction is currently in place that prevents the state from enforcing the law while the constitutionality is challenged


South Dakota v. Wayfair, Inc. et al.

• Suggests the U.S. Supreme Court may be ready to reconsider the decades old “physical presence” nexus standard required in order for a state or locality to impose a use tax collection duty on a remote seller

• Single issue is a direct challenge to the current physical presence requirement as the South Dakota statute requires sellers that exceed $100,000 in sales or 200 or more separate transactions into the State to register and remit taxes

• In granting certiorari, the U.S. Supreme Court may be prepared to provide its view on the relevance of the physical presence sale and use tax nexus standard in a 21st century e-Commerce environment


What You Need to Know

Why Now?

• Suggests the U.S. Supreme Court may be ready to reconsider the decades old “physical presence nexus standard” required in order for a state or locality to impose a use tax collection duty on a remote seller.

• If ultimately overturned, the sales and use tax nexus landscape will dramatically change, and as a result, companies large and small may require significant changes to their internal systems and processes.

• In this respect, a delay in planning for and addressing the outcome of Wayfair may result in additional costs and/or business interruptions considering the potential expedited and compressed solution timelines.

Where Relevant?

• 45 states plus D.C. that impose sales and use or related taxes. May also be relevant in income tax jurisdictions.

Other Issues to Consider

• Will Congress act on the Marketplace Fairness Act or other legislation requiring certain simplification measures to make compliance easier?

• What may the outcome mean for the e-commerce and retail industries? How may companies prepare / develop a strategic plan of action, including addressing past liabilities that could arise if the physical presence standard is overturned retroactively?

• May any states offer amnesty or other incentives to incentivize compliance?


Contact information

Kirk Stark

UCLA

[email protected]

Rick Heller

Deloitte Tax LLP

[email protected]

Mike Bryan

Deloitte Tax LLP

[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.

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The National Multistate Tax Symposium West...• September 2017, South Dakota Supreme Court affirmed...

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