Articles Posted in Sales and Use Tax

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In 2012, a case shook the tax world for Florida’s wholesale tobacco distributors. Specifically, a case called Micjo was decided in favor of tobacco distributors at Florida’s appellate court level. Micjo taught us that if a taxpayer disagrees with a department’s tax decision, then it should fight for its money that is not due. Since the Micjo ruling, we have been filing refunds for many other tobacco distributors and fighting tax assessments based on the appellate case. After filing several Micjo refund cases, we discovered another Micjo case in Oregon. If the taxpayer is successful then it would put another chink in the armor of the state tobacco taxing agencies.
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As the internet becomes essential to our everyday lives, states are consistently inconsistent in their attempt to tax cloud computing systems. Cloud computing is “the practice of using a network of remote servers hosted on the Internet to store, manage, and process data, rather than a local server or a personal computer.” Essentially, the term “Cloud” is a metaphor for the internet. Cloud computing allows the user to access data over the internet without storing data on a hard drive. In fact, most internet users rely on these cloud computing systems as an essential tool in their everyday lives.

How should a cloud computing provider determine whether their object is subject to sales tax? A simple two-part test may allow a cloud computing provider a proper vantage point on whether they are subject to sales tax. First, apply a test. Second, ask whether the product is a software or a service? Think of this test as a simple flow chart.
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In just another case where the Department of Business and Profession Regulation (“DBPR”) attempts to be larger than the law, a Recommended Order was issued on May 29th, 2015, stopping DBPR in its tracks. In Thompson Cigars, Case No: 14-3471, Judge Alexander agreed with the taxpayer, that DBPR’s inspection authority is not as broad as it thought it was. However shocking it may be to DBPR, Judge Alexander agreed with the taxpayer on both counts raised in this case. The Administrative Complaint, filed by DBPR, alleges that Thompson Cigars, Respondent: (a) failed to produce records of tobacco products sold to persons or business entities in the State of Idaho, and (b) failed to submit a sworn application reflecting that two individuals, not previously disclosed, had a direct or indirect financial interest in the business.
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It never ceases to amaze me, the wide variety of companies that state agencies attempt to extort money from. I mean, how could a portable toilet company possibly have a sales tax problem? Most states impose a sales tax on the sale or rental of tangible personal property, but do not tax services. From the perspective of a toilet industry, if a venue rents a toilet, it is clearly a rental of tangible personal property subject to tax. If the same venue pays a fee to clean the toilets, then it sounds like a nontaxable service. But what happens when the venue rents the toilet and purchases the cleaning service along with it? In this part tangible personal property rental, part service transaction (known to the sales and use tax attorney as a “mixed transaction”), is only part of the transaction taxable or is the entire charge subject to sales tax? Many states take the incredibly helpful “it depends” approach, and look to an even more helpful “object of the transaction” test. In reality, it truly seems like state agencies and courts reach a conclusion first and fill in the reasons later.
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Direct Marketing Association has continued its fight for consumer privacy with Colorado. In September, 2014, I wrote about how DMA has taken its challenge up to the Supreme Court of the United States. DMA filed its opening DMA Brief.pdfin the Supreme Court of the United States on September 9, 2014 and argued that the case should be allowed to be heard in federal court. A summary can be found DMA Summary.pdf. The Supreme Court heard the case in its recent term and announced its opinion on March 3, 2015. From a state and local tax perspective, the case has broad and interesting constitutional issues.

At its heart, Colorado thought it would effective to enact a law that affected “non-collecting retailer.” In Colorado’s eyes, if a company made sales in Colorado over $100,000, then it was subject to a host of regulation, including: provide notices to Colorado purchasers, send annual purchase summaries to the customers and send the report to Colorado. This all had to be done despite the fact the company had no nexus, or connection, with Colorado. DMA, agroup of businesses and organizations that markets products using advertisements, thought this was incredibly onerous and unfair, so it challenged the Colorado law in federal court. At trial, the DMA convinced the trial court that this law was impermissible because it convinced a judge that the law discriminated against, and placed an undue burden on interstate commerce.
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For the past few years, I have been writing a number of blogs and articles recently discussing the Department of Business and Professional Regulation here in Florida and its potentially unfair audit tactics. Many of you have seen cigar wrappers, or the more scientifically described “blunt wraps,” at convenience stores and gas stations throughout the state and country. Are those items tobacco products subject to Florida’s other tobacco products tax? On January 9, 2015, our first case went to hearing on the taxability of blunt wraps in Brandy’s – Amen Complaint.pdf
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Although nexus sounds like a terrible disease, it is just a fancy word meaning a connection or link. If a company has enough of a connection or link to a state, then the state can impose its power of the company. With nexus, a state can impose its laws on the business including sales tax laws. From a sales tax perspective it can require the business to charge, collect, and remit state taxes such as sales tax. In 1992, Quill v. North Dakota was decided, which announced that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words if your business has an office, a warehouse, some inventory, or a person (employee and yes, an independent contractor) then it likely has nexus under the physical presence test in Quill.

For life in the 1990’s this was big news to businesses who engaged in innovative marketing. Businesses that were on the cutting edge that sent things like mail order catalogs and floppy disks to solicit customers were being harassed by states alleging they had nexus. Today, with the internet as the backbone to the modern economy, states are trying the same tactics by creating laws to get more companies under its rule.

In 2008, New York led the innovative charge for click through nexus legislation. Also known as the “Amazon law,” due to its perceived targeting of Amazon, New York created a law that if a New York residents website generated over a certain number of sales in a 12 month period for a particular company, then there was a presumption that such company had nexus in New York. Amazon and Overstock took exception with this law, but ultimately lost at New York’s highest court. Unfortunately, the Supreme Court of the United States declined to hear the case.
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Now more than ever Amazon has been a one stop shop for many consumers. Not only can you buy just about anything you can think of on the Amazon website, but you can also receive lightning fast delivery of whatever you buy. Over the past few years, Amazon has taken their company to the next level. Now, in addition to selling items, Amazon provides a fulfillment service to online retailers.

As Amazon puts it, their fulfillment business “helps you grow your online business by giving you access to Amazon’s world-class fulfillment resources and expertise.” Simply put, the online retailer sends their products to Amazon. Amazon stores the item at one of its distribution centers. Once the item is purchased, Amazon packs and ships your product to the customer. In addition, Amazon provides customer support. While it certainly charges a fee for its services, Amazon boasts that retailers’ sales significantly increase. However, from a state and local tax perspective, this can create a ticking time bomb for the online retailer.
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On March 28, 2013, Overstock and Amazon lost their challenge of a state tax on online sales in New York’s highest court. Further, the the Supreme Court of United States declined hearing the case, because the court determined that such a law did not violate the federal Commerce Clause. Following the Amazon decision, we expected the states to follow New York’s lead and enact its own click-through-nexus laws.

In 2011, Illinois did just that. Specifically, Illinois has a nexus law that required any company with a place of business in Illinois to collect and remit tax to Illinois. In 2011, Illinois enacted its so-called “Click Through” nexus law, which required a business to collect and remit tax if it has contact with a person or business in Illinois who referred customers to the business’s website for a commission. In this case, the trade group believed the law to be unfair, so it challenged it in court. After enacting its version of the “Click Through” Nexus law in Illinois, the Illinois courts struck it down.

With the “Click Through” Nexus debate rounding third, Illinois threw the state and local tax (“SALT”) community a curve ball with its ruling in Performance Marketing Association v. Hamer. Specifically, the court determined that such a law did violate the federal Commerce Clause and the Internet Tax Freedom Act. Many wondered if Illinois would just draft a new law to attempt to capture online-retailers, similar to the way New York did.

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This month, May 2014, Amazon was welcomed with open arms to the sunshine state. Florida should be happy by its theoretical increase as Amazon will begin charging, collecting and remitting tax in Florida. Sparking the collection agreement was the fact that Amazon has built two large distribution centers in Florida, which gives it the fatal sales tax nexus. For customers, this means that they will be charged the 6% state sales tax rate plus the local sales surtax rate, which can run between 0% and 1.5%.

As stated above, Amazon is building two fulfillment centers in Florida, creating more than 3,000 jobs. The locations will be on Florida’s west coast. Specifically, the centers will be just outside of Lakeland (East of Tampa and South of Orlando) and Ruskin (South East side of Hillsborough County). The project should also be a boom for the local economy and allow all Florida customers to get Amazon’s products much faster as we patiently await personal drone delivery.

Despite numerous rumors, Amazon’s new duty to collect Florida tax does not create a new tax. Rather, if you purchase a taxable item online (in any state) and tax is not charged, then you have a duty to remit the use tax yourself. That being said, I regularly speak at sales tax seminars and the audience typically laughs when I ask how many people actually participate in this routine. For example, in Florida, a consumer can report and pay Florida use tax on a Form DR-15MO (shown below), which can be found on the Florida Department of Revenue’s web site. However, I would be curious to hear how many Florida residents have ever seen this form let alone filed one.

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