Articles Tagged with Nexus

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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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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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Since Quill in 1992, states only have the power to impose taxes on businesses if they have a “physical presence” in the State. For example, in order for a state to be allowed to require a company to charge sales tax, the company must have a place of business in the State, employees in the State or have a representative in the State. However, as the economy has shifted, more and more States are enacting an “economic nexus” to impose a tax on businesses.

But, what is economic nexus?
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In many states Amazon does not have any physical locations or employees, therefore, Amazon is not required to charge and collect sales tax in many states. States have taken aggressive tactics by arguing that Amazon has affiliates in their state or servers in their state which constitute nexus and require the online retailer to charge and collect tax. Unfortunately, for the states that get pushy with Amazon, Amazon in turn threatens to cancel its affiliate programs which would leave many state residents jobless. What ends up happening is the state gives Amazon immunity from tax collection for a few years and Amazon concedes to nexus after the period. In addition, Amazon also agrees to build a facility that will bring jobs to a state.

On May 16, 2013, the Daily Business Review reported that Governor Rick Scott of Florida rejected a deal to bring Amazon to Florida. The moved shocked many Florida state and local tax professionals as many other states have accepted similar deals to bring Amazon to their state. Further, Amazon did not charge sales tax to Florida residents. While Florida residents are required to pay use tax on online purchases, close to no one remits use tax.

On June 14, 2013, my hometown newspaper, the Palm Beach Post reported the Governor changed his mind. Specifically, between now and 2016, Amazon will move to Florida which will bring thousands of jobs to the state. The project will cost an estimated $300 million. From a state and local tax attorney’s perspective this also means that Amazon will have to start charging tax on its online sales to Floridians. While it was undisclosed one can assume that Amazon will be getting incentives for the construction project. It will be interesting to see where the locations of the new Amazon facilities will be.

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In 2012, West Virginia (home of MBNA) went after ConAgra Foods, Inc. ConAgra is a trademark holding company and wholly owned by a Nebraska subsidiary of CA foods. ConAgra held valuable trademarks and trade names from affiliated and unrelated entities such as Armour, Butterball, Healthy Choice, Kid Cuisine, Morton, and Swift, and licensed them back for a fee. With the recently decided KFC and MBNA on the back burner, West Virginia seemed destined to rule in the state’s favor on a seemingly similar transaction. Surprisingly, the West Virginia Supreme Court went the other direction.

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In 2011 a devastating taxpayer case in the SALT corporate income tax was decided. This slightly different spin on the case was introduced by a famous colonel and his chicken company. The company, known as Kentucky Fried Chicken, was incorporated in Delaware with a headquarters in Kentucky. KFC.jpgKFC licensed its valuable name to franchisors nationwide, including into Iowa. Slightly different than the related trademark license in the Geoffrey cases, KFC licensed its trademark to franchisor’s who independently owned KFC’s. Certainly the use of the KFC trademark in Iowa could not force Kentucky based KFC to pay Iowa income tax could it?

The Supreme Court of Iowa ruled that it could in 2010. Lacking physical presence, the court said KFC was economically present in Iowa because its trademarks were firmly rooted in Iowa. Further, the court opined that such intangibles were functionally equivalent of physical presence. The court concluded “the intangibles in Iowa” provided sufficient nexus. How an intangible trademark could be firmly rooted anywhere or be present in Iowa is beyond me. In its liberal reading of Quill the court stated that physical presence was limited to sales and use tax cases because the burdens of filing income tax are far less than that of a sales and use tax. Following the logic in this case, there is no telling how far states can go to tax foreign trademark holding companies.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, and Florida probate. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.

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Trademark licensing companies have always been a difficult inquiry for courts to analyze from a constitutional perspective in the state and local tax arena. At its very basic level, the trademark licensing company cases involve a holding company (almost always a Delaware company) with no physical assets or employees in the taxing state. The holding company holds a valuable intangible asset, a trademark for example, and charges another company a fee to use that intangible asset to sell goods in a taxing state. The question then arises – does the taxing state have the power to tax the out-of-state holding company based on other company’s use of its trademarks within that state?
Trademark.jpgThe only Supreme Court case that attempts to address this issue is Quill Corp. v. North Dakota, in 1992. In Quill, the Court held that in order for a state to have the power to tax a company within that state, the company must have some “physical presence” within that state. To add another wrinkle, Quill dealt with the ability for a state to force a company to collect its use tax. Does this “physical presence” apply to sales tax? What about corporate income tax?
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Over the past few years many retailers and online companies have turned to shopper’s personal webpages for advertising. In our current online marketplace, individuals can post items, outfits, and recipes to their social media sites. Piggybacking on our growing use of social media in our daily lives, companies have taken advantage of this by paying individuals for tweets, posts, and other social media disseminations that drive customers to a company or online retailer. Using this tactic, social media sites such as Twitter, Facebook, and Pintrest are being transformed into paid promotion generators. Social Media.jpgAn October 2012 article written in the New York Times that can be found here, discusses a Manhattan talent agent. In her free time the shopper posts various fashion items to her social media sites, such as lipsticks on her Pintrest account and her “night life collection” on Beso (which apparently is a shopping website.) If her posts drive customers to the lipstick site or Beso, the companies will reward her by paying her a fee. Some sites, such as Beso pay users around 14 cents for every click the individual sends to Beso. While other retailers, such as Pose, pay only when a product is purchased resulting from the click (usually around 5%). According to the article, the Manhattan talent agent makes about $50/month from promotion fees.

After reading this article, I am sure many readers had the same thought I did – can the fee paid from the retailer to the individual create nexus for sales tax purposes? Actually, I am sure the only people that even thought about this are state and local tax attorneys like me who spend many of their hours reading about sales tax laws. On a serious note, it does present an interesting sales tax law issue as to whether these activities can create nexus to an online retailer who has nothing in the state aside from a shopper who happens to post their products to social media.
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