Colorado Sales and Use Tax Notice & Reporting Requirements

Colorado’s sales and use tax notice and reporting requirements for remote retailers…Still Alive! Previously, the District Court granted DMA’s motion for summary judgement and granted an injunction against the Department of Revenue from enforcing such requirement.  However, on February 22 the U.S. Court of Appeals for the Tenth Circuit held that the requirements do not violate the Commerce Clause.  In other words, (depending on any further litigation/appeals) Colorado can reinvigorate its efforts to force certain out-of-state retailers selling to in-state customers to:

1) notify Colorado customers that they are obligated to self-report and remit use tax on their purchases;

2) to provide Colorado customers with an annual report, detailing a customer’s purchases in the previous year;

3) notify the customer that the retailer was required to report the customer’s name and amount of purchases to the Department; and

4) report to the Department, the name, billing address, shipping address and total amount of purchases made by Colorado customers.

While Colorado has led the charge, many others states may jump on the reporting requirement band wagon.

Read Sutherland’s full legal alert outlining the background on Colorado’s Use Tax Reporting Requirements, District Court Ruling, Tenth Circuit Ruling, and the possibility of Future Congressional Intervention here.

North Carolina Tax Structure Update

Over the last several years, North Carolina has been incrementally revising its tax structure.  On September 18, 2015, Governor Pat McCrory signed House Bill 97 (H.B. 97), which contained several additional changes to North Carolina tax law.  Two noteworthy provisions relate to the apportionment formula, and they include:

  1. The phase in of single sales factor apportionment. The phase in occurs over three years beginning in 2016, replacing the existing double-weighted sales factor apportionment for both income and franchise tax.
  2. Requirement to file an informational report, showing the company’s 2014 sales factor as if it were computed using market based sourcing rules.  This requirement only affects corporate multistate taxpayers with apportionable income greater than $10 million, and North Carolina apportionment percentage less than 100%.

The Corporation must include, with its 2015 filing, Form CD-400 MS, Market-Based Sourcing Information Report.  The 2014 sales factor is required to be computed based on the market-based provisions outlined in H.B. 97. A potential non-filing penalty of $5,000 may be assessed for failure to file the informational report.  The collected information will assist North Carolina is deciding whether to transition from cost-of–performance sourcing to market based sourcing.

More information can be found on the North Carolina Department of Revenue website.

California Multistate Tax Compact Election

On December 31, 2015, a California Supreme Court decision ended a 6 year long debate regarding the State’s Multistate Tax Compact (“Compact”) election (Gillette Company v. Franchise Tax Bd., No. S206587, Dec. 31, 2015).  While Gillette has indicated it will appeal to the United States Supreme Court, the professional community is mixed on whether the Court will grant certiorari.  The full California Supreme Court ruling can be found here: http://www.courts.ca.gov/opinions/documents/S206587.PDF

By way of background, the Multistate Tax Compact was originally drafted as a model law in 1966 by a widely representative group of state officials, including tax administrators, attorneys general, state legislators and a Special Committee of the Council of State Governments.  The Compact became effective, under its terms, on August 4, 1967. The Compact is an advisory compact, in that actions taken under its authority have only an advisory or recommendatory effect on its member states. California enacted and became a member of the Compact in 1974.

Prior to 1993, California law required the use of an evenly weighted three-factor apportionment formula (same as per the Compact). In 1993, the California Legislature decided to replace the three-factor formula with a double-weighted sales-factor formula.

In 2010, The Gillette Company (and others) sued and argued that California’s enactment of the double-weighted sales-factor apportionment formula did not override or repeal the Compact’s formula and that they were permitted to elect to use the Compact formula.  They asked for $34 million in refund claims for prior taxable years, basing its calculations on an evenly weighted three-factor apportionment formula.

The trial court dismissed Gillette’s suit for refund, stating that the Compact’s apportionment formula was repealed. In October 2012, (after some interesting procedural matters occurring in the months prior) the California Court of Appeal reaffirmed its prior opinion while clarifying that California’s requirement to use the double-weighted sales factor was an “unconstitutional impairment of contract” during the tax years at issue to the extent it sought to override and disable California’s obligation under the Compact.

Now, the California Supreme Court has reversed the Court of Appeals.  With its unanimous decision, the Court held that the Compact is not a binding contract among its members and California was not bound by its provisions.

Similar cases have been brought forth and are at various stages of appeal in Michigan, Minnesota, Oregon and Texas.  

 

MN Department of Revenue Charitable Fundraising Flowchart

The MN Department of Revenue recently created a flowchart for non-profits answering the question: Do I need to charge sales tax on my fundraising sales?  The newly created decision tree will help determine whether to charge and collect sales tax during a charitable fundraising activity.  View the MN DOR Flowchart.

Alabama Attacks Physical Nexus Presence Standard

Just as several times before in United State Supreme Court jurisprudence, a brief and simple statement can garner a great deal of analysis and debate.  Recently, as part of his concurring opinion in Direct Marketing Association v. Brohl, Justice Kennedy commented that the Court’s 1992 Quill v. North Dakota, 504 U.S. 298 decision is ripe for reevaluation.  As evidenced by its newest Rule (Ala. Admin. Code 810-6-2-.90.03), it appears Alabama has grown impatient. The Rule, in short, disregards Quill’s physical presence nexus standard for sales and use tax purposes.  Effective for transactions occurring after 1/1/2016, the new Rule will require out-of-state sellers to register, collect and remit sales tax if:

  1. The seller’s retail sales of tangible personal property sold into Alabama exceed $250,000 per year based on the previous calendar year’s sales; and
  2. The seller conducts one or more of the activities described in Ala. Code § 40-23-68 (which sets out a series of wide reaching in-state activities involving ownership of property, the presence of representatives, the qualification/authorization to do business, direct advertising, or franchising/licensing activities).

The above Rule establishes an economic nexus presence standard for sales tax.  Clearly, Alabama is attacking Quill’s physical nexus presence standard head on (even though Quill is still, technically, good law)!  Only time will tell how this will play out in the courts.  In the meantime, out-of-state sellers should evaluate their Alabama-destined sales, be prepared to comply with the Rule, and consider filing protective refund claims.

The Rule can be found here: https%3A%2F%2Frevenue.alabama.gov%2Frules%2F810-6-2-.90.03.pdf&usg=AFQjCNE0uDNQY6K4e2Fi8ODHGB0Fpj-6yQ

California’s Harley-Davidson Decision Rides over Nexus Lines

On May 28 2015, The California Court of Appeals issued a decision in Harley-Davidson, Inc. v. Franchise Tax Board, 187 Cal.Rptr.3d 672; and it was ultimately about much more than the validity of an election within California’s combined-reporting regime. It also tackled issues and, perhaps most importantly, blurred lines surrounding the Commerce Clause’s substantial nexus requirement. In Harley-Davidson, the court concluded that two corporations with no California physical presence had substantial nexus with California due to non-sales-related activities conducted by an in-state agent. The court applied an “integral and crucial” standard for purposes of determining whether the activities conducted by an in-state agent satisfy Commerce Clause nexus requirements.

The corporations at issue were established as bankruptcy-remote special purpose entities (SPEs) and were engaged in securing loans for their parent and affiliated corporations that conducted business in California. As a preliminary matter, the court found that an entity with a California presence was an agent of the SPEs. The court then concluded that the activities conducted by the in-state agent created California nexus for the SPEs that satisfied both Due Process and Commerce Clause requirements.

The Due Process Clause requires some “minimum connection” between the state and the person it seeks to tax, and is concerned with the fairness of the governmental activity. Accordingly, a Due Process Clause analysis focuses on “notice” and “fair warning,” and the Due Process nexus requirement will be satisfied if an out-of-state company has purposefully directed its activities at the taxing state. In Harley-Davidson, the SPEs purpose was to generate liquidity for the in-state entity in a cost-effective manner so that it could make loans to Harley-Davidson dealers, including dealers in California. Additionally, the SPEs’ loan pools contained more loans from California than from any other state, and the in-state entity oversaw collection activities, including repossessions and sales of motorcycles, at California locations on behalf of the SPEs. As a result, the court concluded that “traditional notions of fair play and substantial justice” were satisfied.

The Commerce Clause requires a “substantial nexus” between the person being taxed and the state. The Supreme Court of the United States has addressed this substantial nexus requirement, holding that a seller must have a physical presence in the taxing state to satisfy the substantial nexus requirement for sales-and-use tax purposes. In Tyler Pipe Industries v. Washington State Department of Revenue, 483 U.S. 232 (1987), the Supreme Court stated that, “the crucial factor governing [Commerce Clause] nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” While Harley-Davidson argued that the activities of the in-state agent could not create nexus for the SPEs, as such activities were not sales-related activities, the California court rejected this argument stating that “this argument fails from the outset, however, because the third-party’s in state conduct need not be sales-related; it need only be an integral and crucial aspect of the businesses” (internal citations omitted). The court observed that participating in actions to repossess motorcycles “maintain[ed] the value of the security interests underlying the securitization pools” and was “integral and crucial” to the SPE’s securitization business, thus, creating nexus for the SPEs.

Since Tyler Pipe, no case has expanded the “purposeful availment” or “substantial nexus” standards to encompass attribution of activities not relating to an out-of-state company’s ability to establish and maintain an in-state market. Although, some have argued that Tyler Pipe has left this door open. In contrast, other activities that do not directly generate income—such as purchases from in-state suppliers—have been found to be non-nexus creating.  The court’s decision in Harley-Davidson blurs the “market-enhancement” bright line by asserting that a broader range of activities conducted by in-state “agents” could satisfy Commerce Clause requirements if the activities are deemed “integral and crucial” to an out-of-state entity’s business. Interestingly, the court cites to a California Supreme Court decision, involving two foreign insurance companies and nexus under the Due Process Clause, to presumably support its Commerce Clause conclusion.

Since “integral and crucial” is a fairly amorphous standard, would an out-of-state business that retains a California law firm or a California management consulting firm to provide general advice (i.e., not specifically related to California) become subject to California taxation? After conversations with Franchise Tax Board (Board) employees, we understand the Board is encouraged that this decision reflects a broader view of the activities of an in-state person that can be attributed to an out-of-state business for nexus purposes. While this seems to be the superficial conclusion in Harley-Davidson, a closer review of the court’s rationale reveals that the court may have been confusing the “representative” and “alter ego” sub-categories of attributional nexus—or possibly, confusing unitary facts (which relate merely to apportionment concepts) with jurisdictional requirements. Perhaps the factors on which the court relied should have resulted in merely the conclusion that the two SPEs are properly includable in a combined California return, and not that such SPEs are taxpayers themselves.