tei –seattle chapter...sep 19, 2017 · eversheds sutherland direct marketing association v....

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TEI – Seattle Chapter

The Assault on Quill and Marketplaces

September 19, 2017

Jeff Friedman

Partner

Michele Borens

Partner

Eversheds Sutherland

− Nexus Overview

− Assault on Quill• Remote Sellers

• Marketplace Providers

− Federal Legislation

Agenda


Nexus Overview


Nexus Overview

─ In order for a state to impose a sales and use tax collection obligation on an out-of-state seller, the US Supreme Court has held that a physical presence in the state is required. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

─ The physical presence must be more than de minimis.

─ What constitutes “physical presence”?• More than slightest presence:

• Employees working in the state

• Employees performing activities in the state

• Lease or ownership of tangible property• Lease or ownership of real property

─ Quill is still good law.

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Nexus Overview

─ The U.S. Supreme Court’s decision in Quill has been one of states’ major impediments to the states ability to collect sales tax from remote sellers.

─ Since Quill, states have applied various approaches to limit or circumvent Quill’s physical presence requirement:• E.g., Expanded Nexus Categories

• Agency Nexus

• Affiliate Nexus

• Intangible Nexus

• Click-Through Nexus

• Economic Nexus

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Nexus Overview

─ States have become increasingly frustrated with the physical presence limitations of Quill.

─ Federal legislation has not been enacted.

─ Not all consumers comply with use tax reporting/payment rules.

─ There are still many sellers that do not have physical presence in all states.

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Assault on Quill – Remote Sellers


Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2015)

Assault on Quill

─ Direct Marketing Association (DMA) asked a federal district court for an injunction to prevent enforcement of Colorado’s notice and reporting obligations for out-of-state retailers—claiming they discriminated against out-of-state sellers and violated Quill.

─ In 2012, the federal district court in Colorado declared the law unconstitutional and issued a permanent injunction.

─ In 2013, the 10th Circuit Court of Appeals reversed the injunction and held that the Tax Injunction Act (TIA) bars federal jurisdiction.

─ In 2015, the US Supreme Court held that the notice and reporting requirements do not violate TIA.

─ In 2016, the 10th Circuit Court of Appeals held that the notice and reporting requirements did not violate the Commerce Clause.

─ On December 12, 2016, the US Supreme Court denied review.

─ On February 22, 2017, the parties settled the matter, allowing the state to enforce the reporting requirements beginning July 1, 2017.

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Justice Kennedy’s Concurrence

Assault on Quill

─ In DMA, Justice Anthony Kennedy went out of his way to invite reconsideration of Quill.• “Given these 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, Quillnow harms States to a degree far greater than could have been anticipated earlier….It should be left in place only if a powerful showing can be made that its rationale is still correct.”

─ In response, states have taken legislative efforts to force remote vendors to collect sales tax.

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South Dakota v. Wayfair, Inc., et al., No. 28160-a-GAS (S.D. Sept. 13, 2017)

Assault on Quill

─ On March 22, 2016, South Dakota enacted S.B. 106, which asserts nexus against remote sellers with $100,000 gross revenue from annual sales in the state or 200 separate transactions involving delivery into the state, effective May 1, 2016.• The law allowed expedited court proceedings to address the law’s constitutionality

and precluded enforcement until the law’s constitutionality was resolved.

─ South Dakota then filed a declaratory judgment action against remote sellers with no physical presence in the state.

─ On March 6, 2017, the South Dakota Sixth Judicial Circuit Court ruled in favor of the remote sellers because the sellers lack physical presence in South Dakota, under Quill. The court held that S.B. 106 fails to satisfy Quill’s physical presence requirement and its application of the Commerce Clause.

─ On September 13, 2017, the South Dakota Supreme Court upheld the lower court’s holding that S.B. 106 is unconstitutional under Quilland stated that “[h]owever persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled.”• The court saw “no distinction between the collection obligations invalidated in

Quill and those imposed by S.B. 106.”10


Remote Sellers – Other Statutory and Regulatory Challenges

Assault on Quill

─ Alabama’s Regulatory Challenge• Rule 810-6-2-.90.03 asserts nexus against remote sellers with at

least $250,000 in annual sales in the state.

• Newegg Inc. v. Ala. Dep’t of Revenue, No. S 16-613 (Ala. Tax Tribunal)

─ Tennessee’s Regulatory Challenge• Tenn. Comp. Regs. 1320-05-010.129 requires out-of-state sellers

without a physical presence to collect and remit sales tax if they have over $500,000 of sales into Tennessee.

• Am. Catalog Mailers Ass’n v. Gerlach, No. 7-0307-IV (Tenn. Ch. Ct)

• On April 10, 2017, a Tennessee Chancery Court ordered that the Tennessee Department of Revenue is temporarily prohibited from enforcing the regulation.

• The court also provides that retailers who may be subject to the regulation may voluntarily comply while the regulation is being challenged.

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Assault on Quill

─ Wyoming’s Statutory Challenge• Enacted H.B. 19 on March 1, 2017.• H.B. 19 requires out-of-state businesses with no physical presence in

the state to collect and remit sales tax if they make over 200 sales per year into Wyoming or their in-state annual sales exceed $100,000.

• Am. Catalog Mailers Ass’n & NetChoice v. Dan Noble, No. 188-137(Wy. 1st Jud. Ct., complaint filed June 28, 2017)

• The state declined to voluntarily suspend enforcement while the law is being challenged.

─ Indiana’s Statutory Challenge• Enacted H.B 1129 on April 28, 2017.• Effective July 1, 2017, amended Ind. Code Sec. 6-2.5-2-1 provides

that retail merchants with no physical presence in the state collect and remit sales tax if they make over 200 sales per year into Indiana or their in-state annual sales exceed $100,000.

• Am. Catalog Mailers Ass’n v. Krupp, No. 49D01-1706-PL-025964 (Ind. Sup. Ct., complaint filed June 30, 2017)

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Assault on Quill

─ Vermont: Enacted H.B. 873 on May 25, 2016

─ North Dakota: Enacted S.B. 2298 on April 10, 2017

─ Maine: Enacted S.P. 483 on June 21, 2017

─ Ohio: Enacted H.B. 49 on June 30, 2017

─ Washington: Enacted H.B. 2163 on July 7, 2017

─ Rhode Island: Enacted H.B. 5175 on August 3, 2017

─ Massachusetts: Final version of 830 CMR 64H.1.7 issued on September 13, 2017• Proposed regulation is similar to Dir. 17-1, Mass. Dep’t of

Revenue (Apr. 4, 2017, revoked June 28, 2017) and to the proposed regulation issued on July 28, 2017.

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Massachusetts – Final Version of 830 CMR 64H.1.7

Assault on Quill

─ The regulation requires an Internet vendor with a principal place of business outside of Massachusetts to register, collect, and remit sales and use tax if the vendor has more than $500,000 in Internet sales into the state and 100 or more sales into the state during the previous 12 months.

─ The regulation distinguishes mail order vendors at issue in Quill and states the following activities constitute an in-state physical presence:

1) Property interests in and/or the use of in-state software (e.g., apps) and ancillary data (e.g., cookies) distributed to or stored on in-state customers’ computers or devices;

2) Contracts and/or relationships with content distribution networks resulting in use of in-state servers and other hardware and/or related in-state services; and/or

3) Contracts and/or relationships with marketplace facilitators, and/or delivery companies resulting in in-state services.

─ Expected to be finalized and effective on September 22, 2017.14


Assault on Quill – Marketplace Providers


Marketplace Providers – Overview

Assault on Quill

─ The Internet has allowed for sellers and purchasers to connect more easily.

─ Online marketplaces offer smaller third-party sellers a ready-made platform that affords them access to potential purchasers.• Generally, online marketplace providers serve as a forum through

which third-party sellers and purchasers can connect.

• Marketplaces operate differently, but generally the concept is that third-party sellers are offering their products for sale to customers.

• Third-party sellers are generally treated as the “seller” of the goods and services and therefore are responsible for sales and use tax collection.

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Marketplace Providers – Overview

Assault on Quill

─ States have not been able to capture sales and use tax on sales transactions conducted on online marketplaces from out-of-state third-party sellers that do not have an in-state physical presence.

─ Even if a third-party seller has a collection and remittance obligation, compliance and enforcement is challenging, especially for smaller sellers.

─ States have targeted online marketplace providers because enforcing collection and remittance obligations on providers is less difficult.

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Marketplace Providers – Overview (Is There Nexus?)

Assault on Quill

─ Representational Nexus• An out-of-state seller will have nexus by attribution of a third

party's in-state activities when:• The third-party is acting “on behalf of” the out-of-state seller; and

• The third-party's activities are “significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales.” See Tyler Pipe Indus. v. Wash. St. Dep't of Revenue, 483 U.S. 232 (1987); Scripto, Inc. v. Carson, 362 U.S. 207 (1960).

─ Online Travel Companies • E.g., Expedia, Inc. v. City of Columbus, 681 S.E.2d 122 (Ga.

2009) (“Expedia, of its own accord, has contracted with hotels to collect taxes belonging to the City and, having done so, it has rendered itself accountable to the City's tax authorities for remission of taxes it has actually collected.”).

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Marketplace Providers – Minnesota

Assault on Quill

─ On May 30, 2017, Minnesota enacted H.F. 1.

─ Requires sales/use tax collection obligation on “marketplace providers” that have more than $10,000 in sales into the state unless the retailer selling on the marketplace is already registered to collect Minnesota sales tax.

─ Effective on July 1, 2019, or sooner if Quill is overturned.

─ A “marketplace provider” is “any person who facilitates a retail sale by a retailer” by:(a)Listing or advertising the retailer’s products or services on its

website; and

(b)Collecting payments from the retailer’s customers and transmitting those payments to the retailer.

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Marketplace Facilitators – Washington

Assault on Quill

─ On July 7, 2017, Washington enacted H.B. 2163.

─ Requires “marketplace facilitators” whose sales to Washington consumers are $10,000 or more to either: (1)Collect sales/use tax on sales to Washington consumers; or

(2)Comply with specific use tax notice and reporting requirements.

─ Effective on January 1, 2018.

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Marketplace Facilitators – Washington (cont’d)

Assault on Quill

─ A “marketplace facilitator” is a person that contracts with a seller to facilitate the sale of the seller’s products into Washington through a physical or electronic marketplace and engages, directly or indirectly, in certain specified activities.• E.g., transmitting or communicating the offer or acceptance

between the buyer and seller

• E.g., owning or operating the infrastructure or technology that brings buyers and sellers together)

─ The marketplace facilitator must also engage in at least one of the specified activities related to the seller’s products.• Payment processing, fulfillment or storage services, listing

products for sale, setting prices, branding sales as those of its own, taking orders, advertising, or providing customer service or accepting or assisting with returns or exchanges

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Retail Sale Facilitators – Rhode Island

Assault on Quill

─ On August 3, 2017, Rhode Island enacted H.B. 5175

─ “Retail sale facilitators” who have over 200 separate transactions per year into Rhode Island or have more than $100,000 in in-state annual sales are required to provide informational reporting.

─ Out-of-state retailers that make sales within the state through a retail sales facilitator are required to collect sales tax if the retailer meets the above sales thresholds.

─ Reporting requirements begin on January 15, 2018.

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Administrative Guidance

Assault on Quill

─ Arizona: Ruling provides that a business that operates an online marketplace and makes online sales on behalf of third-party merchants is a retailer conducting taxable sales. Arizona Transaction Privilege Tax Ruling No. 16-3 (Sept. 20, 2016).

─ California: Publication 109, Internet Sales (Cal. Bd. of Equalization Oct. 2016) provides that a marketplace operator providing fulfillment services is a retailer if it has possession of the property at the time of the sale and it can transfer ownership to the purchaser without further action by the marketplace seller.

─ Utah: The Utah State Tax Commission ruled that an online marketplace provider was not required to collect and remit sales tax on sales of products to Utah customers that were facilitated using the provider’s website. The provider was not making sales because it never held title to the products and did not make an “exchange” with respect to the products because the it never held any interest in the products. Private Letter Ruling 16-003 (Ut. State Tax Comm’n June 21, 2016).

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MTC Initiative for Online Marketplace Sellers

─ The MTC offers a special limited-time online marketplace seller voluntary disclosure initiative in approximately 24 participating states.

─ Eligible taxpayers are online marketplace sellers using a marketplace provider to facilitate retail sales into a participating state.

─ The initiative runs from August 17, 2017 through October 17, 2017.

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Application Concerns

Assault on Quill

─ Do marketplace providers have access to necessary information?

─ How do marketplace providers coordinate its efforts with third-party sellers?

─ Who is in the better position to collect and remit taxes?

─ What are the contractual realities between marketplace providers and third-party sellers?

─ Increased class action risks from over collection?

─ Constitutional concerns and application of Tyler Pipe?

25


Federal Legislation


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

Federal Legislation

─ Seeks to impose a federally established physical presence nexus threshold that would limit states from imposing various state and local taxes on out-of-state businesses. • “Tax” includes to “impose on a business or its non-resident

owners, directly or indirectly through mechanisms such as combined reporting or consolidated returns, a net income tax or any other business activity tax…”

─ Would codify Quill and preempt state laws from employing other nexus theories (e.g., economic nexus, click-through nexus, marketplace nexus, affiliate nexus, amount of sales, etc.).

─ If enacted, the law would apply to calendar quarters beginning on or after January 1, 2018.

27

Eversheds Sutherland 28

eversheds-sutherland.com© 2017 Eversheds Sutherland (US) LLP

All rights reserved.

This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.

Contact us

Jeff Friedman

Partner Eversheds Sutherland (US) [email protected]

Michele Borens

Partner Eversheds Sutherland (US) [email protected]

tei –seattle chapter...sep 19, 2017 · eversheds sutherland direct marketing association v....

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