Articles Posted in Sales and Use Tax

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Over the past several decades nexus has been at the forefront of the state and local tax world.  Since the Quill ruling in 1992, states have aggressively created ways in which a company can have a sufficient connection to their state.  Once the connection, or “nexus,” is made, a state can require a company to charge collect and remit sales tax to it.  As the economy has changed more to an online model, states continue to play catchup to get their fair share of the taxes.

Perhaps the most popular issue on a national multi-state tax level is whether a company has nexus with a state if they use the Fulfillment by Amazon (FBA) services.  In short, if Amazon houses a company’s inventory in a distribution center, does that inventory create nexus – ie – an obligation for that company to collect and remit taxes to that particular state.  That question has been affirmatively answered in most jurisdictions and companies have been blindsided by huge tax obligations often spanning many years.

For those companies that have been living in fear of large tax assessments, a Multi-State Tax Amnesty was recently released by the Multi-State Tax Commission (MTC).  Effective August 17, 2017 through October 17, 2017, several states will allowed companies who used FBA programs to come forward and comply.  Under the program, if a company complies, the state will forgive back taxes, interest and penalties in exchange for several requirements on a go forward basis.   To date, the participating states are:

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Tennessee has issued a notice stating that tours fall under the definition of “amusement” and are subject to sales and use tax. While amusements typically appear as places of amusement, such as amusement parks, concerts, and other shows, Tennessee also includes tours under that definition.

The first category of tours includes tours by vehicle. Included in this category are trolley tours, river cruises, and bus tours. Pub crawl tours on group bicycles probably fall under this category as well. Meanwhile, the second category of tours that are included under the definition of “amusement” are ghost tours, plant tours, pub crawls, etc.

This clarification is important for a state with a substantial amount of tourism. As the country music capital of the world, Nashville attracts many visitors who participate in these tours. However, the Department acknowledged that it is important to remember that exemptions exists to this rule. For example, tours conducted by a nonprofit, government agency, or for a Tennessee historic property are exempt from tax.

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As it turns out, Colorado really was just the beginning. As of January 1, 2018, Washington will begin requiring remote sellers to either remit sales and use tax or comply with reporting and notice requirements similar to those in Direct Mktg. Ass’n v. Brohl (DMA IV), 814 F.3d 1129 (10th Cir. 2016). Who is subjected to this burden in the land of Nirvana and the Space Needle? Remote sellers with gross receipts in the current or preceding year of at least $10,000 are, which makes Washington state another to skirt around Quill, the SCOTUS case that requires actual, physical presence for a state to have nexus with a taxpayer, with a reporting requirement.

But the legislative change goes further. Not only are retailers who make income from sales within the state required to follow this, but referrers who receive income from referral services within the state are subject to it as well if the total gross income from that is at least $267,000.

With 33 states facing revenue shortfalls in fiscal years 2017 and 2018, there is no doubt a need to increase taxes. However, states can go about this in a wide variety of legal ways. They can expand the tax base by taxing services or currently nontaxable technology. They can even increase the tax rate if they want to. Instead, Washington is imposing these reporting requirements to reach companies with whom they fail to meet the nexus standard to impose collecting and remitting requirements.  This overreaching of the states will likely be challenged. The question is: by whom?

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The United States Constitution expressly forbids ex post facto laws with respect to both the federal and state governments.[i] An ex post facto law is one that retroactively changes the legal status and consequences of a particular action. The easiest way to understand it is in the criminal realm. Today, I ate a yogurt. Two years from now, the government passes a law saying it is a third-degree felony to eat yogurt and makes the law retroactive for a 5-year period. While eating my yogurt today was not against the law, I am still, two years later, guilty of a felony and can be punished accordingly. Fortunately, the government is not too interested in yogurt. Unfortunately, the government is very interested in tax.

In 2014, Michigan passed 2014 PA 282, a retroactive tax law replacing the elective three-factor apportionment formula from the Multistate Tax Compact to which Michigan adhered with a new single-factor apportionment formula. This may have been just another disappointment to Taxpayers, who are regularly disappointed by the creative and nefarious ways in which states try to drum up revenue. But with a retroactive application to 2008, it was just plain devastating.

It is no surprise that the state supreme court upheld the state’s interest in collecting more tax. The case challenging this law was in fact 50 consolidated cases in Gillette Commercial Operations North America & Subsidiaries et al. v. Dep’t of Treasury, No. 325258 (Mich. Ct. App. Sept. 29, 2015). The question now is: will the Supreme Court hear the case? The Department of treasury argues that the Supreme Court can’t. Rather than a retroactive law, the state argues that 2014 PA 282 is simply a clarification of the preexisting law. Therefore, under the state statutory-construction law, the Michigan state court had adequate and independent state law ground to uphold 2014 PA 282 and the Supreme Court of the United States does not have the jurisdiction to overturn it.

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Earlier in 2017, Premier Netcomm Solutions LLC (“Premier”) lost on reconsideration in New Jersey tax court.  The case dealt with the taxability of software as a service (“SaaS”) dating back to an audit from 2004 through 2005.  After initially beating for state, the court overturned a prior decision on reconsideration, which ultimately upheld New Jersey’s tax assessment.

Premier seems to be a classic IT provider in that it provides services such as network supports, internet access, consulting and design of IT and telephone projects, trouble shooting, remote training, data back-up, and network monitoring for businesses.  In the original decision, the court sided with Premier that its sales were not subject to sales tax.  The court concluded that prior to 2005, sales of services related to prewritten software were not taxable. In so doing the court invalidated New Jerseys tax assessment against Premier.

Unhappy with the decision, New Jersey’s Division of Taxation sought reconsideration, which is very difficult to prevail on.  The Court seemed to grant reconsideration because the original case erred fundamentally on its analysis.  Primarily, the court originally believed the law did not tax such services until its 2005 amendment.  However, the amendment was really based on New Jersey’s membership into the Streamline Sales and Use Tax Agreement (“SSUTA”) in 2005, which required it to adopt a uniform definition.  Therefore, based on a 2004 Bulletin, the court reconsidered the case and ruled that the services were and have been subject to tax since 2004.

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Over the past several years software as a service (“SaaS”) has been a booming industry.  Pioneers in the cloud computing industry, like Salesforce, have developed web based applications that offer a wide range of services to the user.  Driven by competitors such as Microsoft, Adobe, Sap, ADP, Oracle, IBM, Intuit and Google, the SaaS industry has become a $204 billion industry and grown by more than 16% last year.

Traditionally, from a sales tax perspective, states tax the sale of tangible personal property but not services.  While many states adhere to that mantra, several states have moved towards taxing software despite being intangible in nature.  Still, it can be difficult to determine whether SaaS is more like a software, which may be taxable, or if it feels more like a service provided, which is not taxable in many states.

States have been consistently inconsistent across the country in determining whether to tax SaaS.  States often have similar statutes and reach completely different conclusions in their quest to analyze SaaS.  Further, many situations occur in which a state can treat two seemingly similar SaaS companies differently within their own state.  In an attempt to comply, companies often struggle with charging the appropriate sales tax in the correct state and/or their state income tax obligations, with respect to SaaS.

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Tennessee is the latest of states to jump on the economic nexus bandwagon.  In an effort to sidestep the physical presence the proposed rule would require out-of-state dealers that engage in the regular or systematic solicitation of consumers in Tennessee through any means and make sales exceeding $500,000 to Tennessee consumers during the calendar year would be considered to have substantial nexus with the state. One substantial nexus is established, the dealers would be required to register with the state and collect and remit sales and use tax.

Similar to recent rulemaking in Alabama, Tennessee does not believe its position offends the Commerce Clause. The proposed rule, may go into effect on or about November 8, 2016. It is worthy to note the rule is subject to committee review in both house of the Tennessee legislature and legislative approval is needed before a rule can become permanent.

Tennessee is not the only state attempting to combat Quill. Similarly, Alabama and South Dakota are litigating whether their economic nexus standards are sufficient to satisfy the Commerce Clause substantial nexus requirement. Earlier this year, South Dakota adopted the economic nexus for sales and use tax purposes. South Dakota is currently a plaintiff and defendant in two separate cases addressing the constitutionality of the substantial nexus law.

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If states could impose tax on every company that makes a sale within its borders, they would. Luckily, the Commerce Clause of the Constitution requires something known as “nexus,” or a connection, between a company and state in order for that company to be subject to state and local taxes. The standards for nexus can be ambiguous, particularly in recent years as a result of the radical changes to traditional business models that have occurred with the internet.

While nexus may seem easy to determine using the physical presence test, the definition of physical presence has in fact been something that courts across the country have struggled with since the beginning. That struggle has only become increasingly complicated with the internet and virtual marketplaces that no longer require a company to open a brick and mortar shop everywhere it wants to sell its products.

Recently, Washington state has found nexus with a company that made wholesale sales through infomercials. This particular company sent employees to Washington to participate in trade shows and other promotional events. However, they did not have a physical business location within the state.

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Hawaii was the most recent in a line of states to take a stance in the long tax battle between online travel companies, such as Priceline, Expedia and Orbitz, and states over what is commonly referred to as “tourist development taxes,” or “bed taxes.”  Over the last couple of years, states have fallen on both sides of the issue of whether hotel rooms are taxable at the price a hotel receives for a room or the price that an online travel company sells a room.  The Hawaii case, Travelocity.com, L.P. v. Hawaii Director of Taxation, involves two taxes, the first of which is called a “GET” or “general excise tax,” and the second of which is called a “TAT” or “transient accommodations tax.”

The 2015 court decision has been clarified this month in an announcement by the state that online travel companies were in fact liable for the “GET,” along with any penalties for late payment, on their portion of the sale price for hotel rooms located in Hawaii. However, online travel companies are not liable for the “TAT.” This is similar to states like Florida, in which the amount the online travel company receives for the rental of a room within Florida is not subject to local tourist taxes.

The state reasoned that the portion of the sale that online travel companies receive is in fact for “occupancy rights” that are used in their entirety within the state of Hawaii when the sale is for a room within the state. Under that reasoning, the state determined that the revenue made by the online travel companies is subject to Hawaii state tax.

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Florida’s hotel reservation industry recently received an important victory relating to Tourist Development Tax (“TDT”).  TDT is a tax imposed on the privilege of renting, leasing or letting “for consideration any living quarters or accommodations in any hotel . . ., or condominium for a term of six months or less.”  § 125.0104(3)(a)1., Fla. Stat.  Notably, the TDT is due on the consideration paid for occupancy in the county. § 125.0104(3)(a)1., Fla. Stat.

In 2015, the Florida Supreme Court held that the “consideration paid for occupancy” is limited to the actual rental amount paid for occupancy of the room and not to mark-up charges and service charges associated with the reservations.  See Alachua County v. Expedia, Inc., 175 So. 3d 370 (Fla. 2015).

The issue in Sarasota Surf & Racquet Club Condominium Assn., Inc. v. Sarasota County, et al., Case No. 2015 CA 002612 NC (Fla. 12th Cir, July 11, 2016) was whether reservation and cleaning fees charged by a condominium association to guests during the reservation process were subject to TDT.  The County argued that the fees were part of the total consideration paid for occupancy and therefore subject to TDT.  The association argued that, pursuant to Expedia, only the rental amount was subject to TDT, not the reservation and cleaning fees charged in connection with the reservation.