April 8, 2020

SALT Webinar Series:The State of Nexus

PresentersNorth America SALT Subpractice Group

Lindsay LaCavaPartner │ New York

+1 212 626 4416lindsay.lacava@bakermckenzie.com

Stephen W. LongPartner │ Dallas

+1 214 978 3086stephen.long@bakermckenzie.com

Nicole FordAssociate │ New York

+1 212 626 4457nicole.ford@bakermckenzie.com

Agenda

1 The Wayfair Decision

2 Transaction Thresholds

3 Marketplace Facilitator Statutes

4 Public Law 86-272

1

The Wayfair World

Timeline: National Bellas Hess to Wayfair

5

The Wayfair Decision

In a 5-4 Decision, Justice Kennedy (joined by Thomas, Gorsuch, Ginsburg, Alito) held that:

• Quill and National Bellas Hess are overruled.

• The physical presence rule is unsound, is an incorrect interpretation of the Commerce Clause, and restricts the states’ authority to “collect taxes and perform critical public functions.”

Majority concluded that the following features of South Dakota’s law minimized the burdens on interstate commerce:

• Included a transactional safe harbor ($100,000 sales / 200 transactions).

• Did not apply retroactively.

• South Dakota was a full member of the Streamlined Sales and Use Tax Agreement (SSUTA).

Query: Are all three attributes required?

Current State of Affairs

Since Wayfair was decided, two trends have emerged:

• Economic Nexus Thresholds

• States have adopted economic nexus thresholds similar to the one adopted by South Dakota.

• Marketplace Facilitators

• States have started shifting the tax collection and remittance obligation to marketplace platforms.

2

Post-Wayfair World: Transaction Thresholds

State Implementation Details: Challenges with Thresholds

• Determining the measurement period (prior/current year sales or preceding 12 months).

• Does tax collection apply to the first $100,000, or only after nexus is established?

• Impact of sales fluctuation on nexus determination.

• Issues with “taxable sales” vs. all sales to determine nexus threshold.

• Wholesale sales.

• Exempt sales (product, use, or entity based).

• Issues surrounding transaction counts.

• By invoice.

• By item.

• Local issues.

• (e.g. Colorado and Louisiana).

• Application of thresholds for income tax purposes.

• (e.g., Pennsylvania and Texas).

Economic Nexus Cases Already Coming through the SystemNext three slides – Same facts different results!

Revenue Ruling 2018-06ST (Ind. Dep’t of Rev. Jan. 7, 2019).

• The Indiana Department of Revenue addressed the filing requirements of a taxpayer making remote sales of prepackaged brownies and cookies to customers in Indiana.

• The taxpayer made sales via its website and through a third-party marketplace.

• Since October 1, 2018, a remote seller with no physical presence has been required to collect and remit sales tax if, in the preceding or current calendar year, it has gross revenue exceeding $100,000 or 200 or more separate transactions from sales delivered in Indiana.

• The Department concluded that the taxpayer’s products were exempt bakery items because they were sold without utensils in an unheated state.

• Since sales of exempt items counted towards the economic nexus threshold, the Department concluded that the taxpayer had a registration requirement if it met or exceeded the thresholds.

• Because the taxpayer’s sales were exempt, the taxpayer would likely need to file monthly “zero” returns, or assuming the taxpayer’s tax liability was less than $1,000, annual “zero” returns.

Economic Nexus Cases Already Coming through the SystemIn the Matter of Fairytale Brownie’s, Inc. (Iowa Dep’t of Rev. Dec. 7, 2018).

• The Iowa Department of Revenue addressed whether a taxpayer making remote sales of brownies and cookies to customers in Iowa was required to collect and remit Iowa sales tax.

• Sales were made via the taxpayer’s website and through a third-party marketplace.

• Under Iowa law, effective January 1, 2019, a remote seller with no physical presence in the state is required to collect and remit sales tax if, in the immediately preceding or current calendar year, it has gross revenue exceeding $100,000 from Iowa sales or 200 or more separate transactions with Iowa customers.

• The Department concluded that the brownies and cookies were exempt under Iowa law.

• However, when baked goods were sold in a “keepsake” box, the Department ruled that despite the one non-itemized price for the box and the baked goods, the sale did not constitute a bundled transaction.

• Purchasers could discern the price of the box itself by comparing it with the price of the same or similar food products sold without the box and the taxpayer would need to collect tax on the price of the keepsake box.

• The taxpayer would be required to obtain an Iowa sales tax permit and collect and remit sales tax if (1) the taxpayer exceeded the economic nexus thresholds, and (2) the taxpayer made taxable sales.

Economic Nexus Cases Already Coming through the SystemPrivate Letter Ruling No. W1911005 (Wis. Dep’t of Rev. Dec. 10, 2018).

• The Wisconsin Department of Revenue ruled that a taxpayer making remote sales of prepackaged brownies and cookies to customers in Wisconsin was not required to register with the state, despite meeting the state’s economic nexus threshold.

• The taxpayer made sales via its website and through a third-party marketplace.

• Under Wisconsin law, effective October 1, 2018, a remote seller is required to collect and remit sales tax if, in the previous or current taxable year, it has annual gross sales into the state exceeding $100,000 or has 200 or more separate sales transactions into the state.

• The Department concluded that the taxpayer’s products were exempt “food” items because they were neither a “candy” product nor a “prepared food” product.

• The brownies and cookies contained flour and were bakery goods sold without eating utensils in an unheated state.

• The Department ruled that because taxpayer’s sales were exempt from Wisconsin sales and use tax, the taxpayer was not required to register with the state.

• The Department noted that despite the Wayfair decision, the taxpayer had no sales or use tax obligation in Wisconsin because it was making only nontaxable sales.

Application of Wayfair to Inbound Sellers

• Relevance of Japan Line and Complete Auto post-Wayfair.

• Wayfair majority noted that a “case by case” approach is preferred to a bright line test and noted that “other” commerce clause jurisprudence could render laws like South Dakota’s unconstitutional.

• The Consider Pike v. Bruce Church, Inc.; 397 US 137 (1970).

• Referenced in Wayfair.

• States may not pass laws that interfere with interstate commerce if such laws place an undue burden onbusinesses .

• Could impositions by thousands of jurisdictions be an undue burden?

• Consider threshold of $100,000 – results in an average of $7,000 in tax.

• Do the states have the ability to enforce an assessment?

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3

Post-Wayfair World: Marketplace Facilitator Laws

Marketplace Facilitator Laws• Although definitions across states vary considerably, marketplaces are generally defined as physical or

electronic forums in which third-party vendors offer their products or services for sale to customers.

• The party operating the marketplace is typically referred to as a “marketplace facilitator” or “marketplace provider.”

• The party whose goods or services are being sold through the marketplace is typically referred to as the “marketplace seller.”

• The marketplace facilitator may also provide other services to the marketplace sellers, such as processing orders or payments between the customers and marketplace sellers or providing warehousing or distribution services.

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Who Are Marketplace Facilitators?

• States have typically adopted two requirements to be defined as a Marketplace Facilitator:

(1) Marketplace Facilitator must in some way “facilitate” by doing one activity from amongst a statutory list.

• Typically this includes, but is not limited to: transmitting offer/acceptance; owning the marketplace infrastructure; providing a virtual currency; listing products for sale; advertising and promotion of marketplace products; setting prices; taking orders; or providing customer assistance.

(2) Marketplace Facilitator usually, but not always, must also collect payment from the customer, either directly or indirectly through agreement with a third-party payment processor.

• State definitions of a marketplace provider or facilitator often are set up as lists of various activities and to qualify, a marketplace must engage in one act in each listed set of activities.

• Examples of how the definition of marketplace facilitators vary among the states.

• E.g., Massachusetts directed to consider whether it should apply to companies that are solely payment processors.

Online Marketplace Facilitator Collection Requirements

Washington

Oregon

Idaho

Montana

Wyoming

California

Nevada

Utah

Colorado

Arizona New Mexico

Texas

Louisiana

AlabamaGeorgia

Florida

ArkansasOklahoma

Kansas

Nebraska

Illinois

Missouri

Iowa

South Dakota

North DakotaMinnesota

Wisconsin

Michigan

IndianaOhio

Kentucky

Tennessee SouthCarolina

NorthCarolina

Virginia

Pennsylvania

Mississip

pi

Vermont

New York

Maine

New Jersey

District of Columbia

MarylandDelaware

Rhode Island

New Hampshire

Massachusetts

Connecticut

States with statutes or administrative guidance addressing online marketplace sales

4

Post-Wayfair World: Public Law 86-272

An Overview of Public Law 86-272

• Under P.L. 86-272, states are prevented from taxing out-of-state corporations on income derived from business activities within the state if their activities are limited to “mere solicitation of orders” for the sale of tangible personal property and the orders are approved and filled from outside the state.

• Public Law 86-272 provides:

• “No state, or political subdivision thereof, shall have power to impose, . . . a net income tax on the income derived within such state by any person from intrastate commerce if the only business activities within such state by or on behalf of such a person during the taxable year are either, or both, of the following…

• (1) The solicitation of orders by such person, or his representative, in such State for sales of tangible personal property which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state.

• (2) The solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such a person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).”

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MTC Uniformity Projects—Public Law 86-272 Work Group

Work Group began holding regular calls earlier this year to discuss whether the MTC’s P.L. 86-272 statement should be updated to address internet sales and internet sellers.

Work Group has held a series of calls during which various scenarios have been discussed.

• For example:

• Seller maintains a website offering various goods and services for sale.

• Seller maintains a website offering only items of TPP. The products are complicated to use and purchases often need post-sale assistance. Seller provides assistance in the following ways: toll-free numbers; electronic chat sessions; information posted on website; via email, etc.

• The conversations on the calls have been lively regarding whether the scenarios being discussed would impact a taxpayer’s PL 86-272 protection.

• General consensus on the calls by the state participants is that internet sellers are going beyond the protections of PL 86-272.

On April 26, the work group updated the Uniformity Committee and described the work group’s analysis as a “work in progress.”

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Questions

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