Challenging state sales tax regimes - Deloitte United States...•Additional retroactive tax issue with sales/use tax is consumer obligation to self-report tax -- imposing retroactive

The 2019 National Multistate Tax SymposiumState tax reboot—The age of Multistate

February 6-8, 2019

Challenging state sales tax regimesWilliam M. Backstrom, Jr., Jones Walker LLPMike Bryan, Deloitte Tax LLPDoug Lindholm, Council on State Taxation (COST)

February 6-8, 2019

3The National Multistate Tax Symposium: February 6-8, 2019Copyright © 2019 Deloitte Development LLC. All rights reserved.

• Wayfair and Its Aftermath: Special Issues

−Threshold Implementation

−Inbound Sellers

−Historical Nexus and Income Taxes

• Do non-SSUTA States Really Have Collection Authority?

• Litigation Considerations

• Modernizing State Sales Tax Systems

• An Example - Louisiana

• After Wayfair: What’s Next?

Agenda

4

Wayfair and its aftermath:Special Issues


Timeline: National Bellas Hess to Wayfair

Source: Council On State Taxation

6

Wayfair: The Decision


• In a 5-4 Decision, Justice Kennedy (joined by Thomas, Gorsuch, Ginsburg, Alito) held that:

−Quill and National Bellas Hess are overruled

−The physical presence rule is unsound, is an incorrect interpretation of the Commerce Clause, and restricts the states’ authority to “collect taxes and perform critical public functions”

• Majority concluded that the following features of South Dakota’s law minimized the burdens on interstate commerce:

−Included a transactional safe harbor

−Did not apply retroactively

−South Dakota was a full member of the Streamlined Sales and Use Tax Agreement (SSUTA)

The Wayfair Decision: June 21, 2018


• Justice Kennedy: “For these reasons, the Court concludes that the physical presence rule of Quill is unsound and incorrect”.

• Justice Kennedy: “Here, the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State.”

• Justice Kennedy: “And respondents are large, national companies that undoubtedly maintain an extensive virtual presence. Thus, the substantial nexus requirement of Complete Auto is satisfied in this case.”

• What is the “economic and virtual” presence test?

What Is Replacing the Physical Presence Test?

9

Wayfair: Threshold Implementation issues


• Issues surrounding measurement period (prior year sales or current year sales)

• Does tax collection apply to the first $100,000, or only after nexus is established?

• Impact of sales fluctuation on nexus determination

• Application of thresholds to local taxing jurisdictions

• Issues surrounding use of “taxable sales” vs. all sales to determine nexus threshold

−Wholesale sales

−Exempt sales (product, use, or entity based)

• Issues surrounding transaction counts

−By invoice

−By item

State Implementation Details: Thresholds

11

Wayfair: Inbound Sellers


• Nothing in Wayfair limits the holding to domestic US businesses

• Controlling case may be Japan Line Ltd. V County of Los Angeles, 441 US 434 (1979)

−Court first applied the four part test articulated in Complete Auto Transit Inc. v Brady 430 US 274 (1977)

−Two additional factors must be considered regarding foreign commerce clause:

◦ The tax may not create the risk of international multiple taxation

◦ The tax must not prevent the US from speaking “with one voice” regarding foreign trade

Application of Wayfair to Inbound Sellers


• Risk of international multiple taxation

−For most states, this is a tax collection requirement, not a tax imposed on the seller

−Requires review of the imposition of export taxes

• Speaking with “one voice” regarding foreign trade

−Argument that the requirement levels the playing field rather than discriminates against foreign commerce

−Counter argument that non-uniform subnational taxes are not “one voice”

• Does the state have the ability to enforce an assessment?

−No treaties at the sub-national level

−Consider affiliated US entities

−Reputational damage

−Doing business with banks, credit ratings



• Relevance of Japan Line and Complete Auto Post-Wayfair

• Wayfair majority noted that a “case by case” approach is preferred to a bright line test and noted that “other” commerce clause jurisprudence could render laws like South Dakota’s unconstitutional

• Consider Pike v. Bruce Church, Inc.; 397 US 137 (1970)

−Referenced in Wayfair

−States may not pass laws that interfere with interstate commerce if such laws place an undue burden on businesses

−Could imposition by thousands of jurisdictions be an undue burden?

−Consider threshold of $100,000—results in an average of $7,000 in tax


15

Wayfair: Nexus Trends and Income Tax Impact


Sales Tax

• Attributional nexus

• Affiliate nexus

• Click through nexus

• Notice and Reporting statutes

• Drop Shipment statutes

−What about economic nexus for state net income taxes and gross receipts taxes?

−Will Congress intervene and impose uniform national nexus and/or simplification requirements?

What Impact on Historical Nexus Trends?


• Because Quill was a sales tax case, many states had enacted economic (i.e., non-physical) nexus standards for income tax purposes. Conversely, some companies may have interpreted a physical requirement to apply to state income taxes as well.

• After Wayfair, there may be no question as to the constitutionality of economic or factor presence nexus standards for both income tax and sales tax purposes.

−ASC 740 financial accounting and reporting

• Further Questions to Consider:

−Without a physical presence requirement will the states:

◦ Enact factor presence nexus provisions and/or other broad nexus rules?

◦ Broaden the definition of doing business without bright-line test?

◦ Challenge historic filing positions based on the Court’s ruling?

Wayfair: Impact on Income Taxes


Potential ASC 740 Considerations may include:

• New separate company filing obligations

• Combined / unitary filings

−New filing obligations based on one member having nexus

−Impact to sales apportionment based on Joyce/Finnigan filing requirement

−NOL and credit utilization within the group

P.L. 86-272 is still valid after Wayfair.

• P.L. 86-272 generally precludes a state from imposing an income tax if the only in-state business activities involve the solicitation of orders for sales of tangible personal property.

• If virtual connections can create nexus, can virtual connections constitute an “in-state” activity that exceeds solicitation such that the protections of P.L. 86-272 are lost?

• Note that by its terms P.L. 86-272 protection operates in interstate commerce, not foreign commerce.

Wayfair: Impact on Income Taxes

19

Do Non-SSUTA States Really Have Collection Authority?


• The Question Remains: “Whether some other principle in the Court’s Commerce Clause doctrine might invalidate [South Dakota’s] Act.”

• Features in South Dakota Designed to Prevent Discrimination or Undue Burdens on Interstate Commerce:

−Safe Harbor

−No Retroactivity

−Adoption of Streamlined Sales & Use Tax Agreement:

◦ Single State Level Administration

◦ Uniform Definitions of Products and Services

◦ Simplified Tax Rate Structures

◦ Other Uniform Rules

Wayfair Dicta


• South Dakota’s transactional safe-harbor of an annual threshold of 200 sales or $100,000 in sales was sufficient

−Should the threshold be the same for California as South Dakota?

−Can states require small businesses making few sales to collect in all cases?

−What counts as sales? Exempt sales? Wholesale sales?

−How do you get to 200? Items or invoice?

−Will there be a “de minimis” exception?

• Will the Due Process Clause become more important in state tax litigation?

Transactional Safe Harbor


• Not really addressed, despite emphasis in oral argument

• South Dakota law foreclosed retroactive application

• What will other states do?

• Additional retroactive tax issue with sales/use tax is consumer obligation to self-report tax -- imposing retroactive tax could result in double taxation (is availability of a refund sufficient) on remote sellers

• Is there any overlap with state retroactive tax legislation cases since the U.S. Supreme Court 1994 decision in U.S. v. Carlton.

Retroactivity


Will More States Join SSUTA?: Streamlined Sales Tax States by Population

Full Member Associate Member Non-MemberNon-Sales Tax Member

6.86 M

1.06 M

AK

HI

ME

RI

VT

NH

MANYCT

PA

NJ

MD

DE

VA

WV

NC

SC

GA

FL

ILOH

IN

MI

WI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CA

D

C

7.41 M

4.87 M

740 K

7.02 M3 M

39.54 M 5.61 M

3.59 M

960 K

690 K

20.98 M

10.43 M

1.43 M

1.72 M

12.8 M 6.67 M

3.15 M

2.91 M

4.68 M

1.34 M

6.05 M

9.96 M

5.58 M

2.98 M

6.11 M

1.05 M

1.92 M3 M

1.34 M

9 M

2.09 M

19.85 M

10.27 M

760 K

11.66 M

4.45 M

3.93 M

4.14 M

12.81 M

5.02 M

870 K

6.72 M

28.3 M

3.1 M

1.82 M

5.8 M

580 K

620 K

8.47 M

Source: U.S. Census Bureau

2.5% of population

2% of population

33.7% of population

62.3% of population

24

Litigation Considerations


Simplified example – consider for challenge/litigation:

• Smaller, discrete business (each entity is a separate vendor, so think new venture selling remotely a new type of widget (TPP)).

• Low volume (201-250 separate transactions for delivery into the State).

• Low $ sales ($101,000 to $150,000 in sales into the State).

Note existing State considerations unaffected by Wayfair

• Physical or agency nexus

• Attributional nexus

• Sham/disregard nexus

Post-Wayfair Litigation Considerations


Due Process Considerations

• Has the entity purposefully availed itself of the substantial privilege of carrying on business in the taxing jurisdiction?

−Where are the activities specifically directed?

−Whose activities are relevant?

−Nexus with both the entity and the activity?

−More than the slightest presence?

• Is the imposition applied in a fair way with sufficient notice (i.e., not retroactive)?



Commerce Clause Considerations

• Does the imposition of the tax or tax collection obligation discriminate against or place an undue burden on interstate commerce?

−If discriminatory, does the taxing jurisdiction have a legitimate purpose that cannot be adequately served by reasonable non-discriminatory alternatives?

−If non-discriminatory, is the burden on interstate commerce substantial in relation to the benefits received by the taxing jurisdiction?

• Can the tax be imposed by more than one State on the entire transaction?

• What factors may be overly burdensome?



Commerce Clause Considerations (cont’d)

• Retroactivity?

−Non-uniformity (e.g., State not a party to the Streamlined Sales and Use Tax Agreement)?

−Insufficient safe harbor rules?

−Difficult safe harbor rules (e.g., $100,000 in sales in the current year? How do you know which sale is the one?)

• Is the imposition of the tax or tax collection obligation reasonably related to the protections and benefits provided by the taxing jurisdiction?

−Specific benefits and protections received by the entity or more generally applicable protections? Has a local fire department ever extinguished a fire on an intangible?

• Different factors or considerations for income tax vs. sales and use tax?

−Different nexus tests based on how the entity acts with respect to the taxing state?

−Different burdens tests based on how the tax operates?


29

Modernizing (and improving) State Sales Tax Systems


• General sales taxes account for over 32 percent of all state taxes – and along with personal income taxes – are the largest sources of state tax revenues.

• The U.S. state and local sales tax system may be one of the most complex and inefficient consumption tax systems in the world.

−Exemption of Business Inputs: Sales taxes were designed to tax end-user consumption (not a general gross receipts tax) – however, on average, 42% of the states’ sales tax revenue is derived from business inputs. Virtually all other countries mitigate pyramiding of their consumption tax by providing more expansive credits for business inputs.

−Uniformity and Simplification: There is a much higher level of consumption tax uniformity in Europe (harmonization through the EU) than in the United States where the largest states with about two-thirds of the U.S. population have not adopted SSUTA.

−Central Administration: While 45 states have sales taxes (plus DC), when taking into account local sales tax jurisdictions, there are over 10,000 separate taxing jurisdictions. Accordingly, the U.S. has one of the most decentralized tax consumption systems in the world.

Why Modernizing State Sales Tax Systems Is Critical to State Tax Policy


The stakes may be high:

• In the 1930’s with the development of the states sales taxes, sales of tangible personal property represented about 2/3rds of the U.S. economy – today 2/3rds of the economy is service sector driven.

• State efforts to significantly broaden the sales tax base to tax the service sector are challenged because of business opposition to the pyramiding of sales tax on business inputs and the overall complexity of sales tax compliance.

• The sales tax base, as a share of personal income, is currently only about two-thirds its 1970 level.

Why Modernizing State Sales Tax Systems Is Critical to State Tax Policy (cont’d)

32

An example: Louisiana


Wayfair Consequences in Louisiana

Louisiana’s systems lack the features outlined in Wayfair:• No factor presence economic nexus

thresholds … yet (Act 5 not yet “applicable”)• Louisiana has not adopted SSUTA• No single, state-level tax administration

scheme• No simplified rate structure• No uniform rules

Louisiana Sales and Use Tax Commission for Remote Sellers (Act 274 of 2017 Regular Session)

• Responsible for administration and collection of state and local sales and use taxes related to “remote sales”

• Created to provide uniformity and simplicity in sales and use tax compliance for “remote sellers”

• Questions asked to Commission:• Who is a qualifying “remote seller?”• What is a qualifying “remote sale?”

Local nexus issues in Louisiana

• Parishes relying on state statutory definitions of “dealer”• Does one physical location in the state implicate every

parish?• Each individual parish provides its own local sales tax

system, which does not have all the features in Wayfair• Potential burden to businesses – annually having to file

over 750 different state and local sales tax returns (with numerous disparate calculations made on each return)

Remote Sellers Information Bulletin No. 18-001 (8/10/ 18)• Opines that due to Wayfair decision, Commission is now

authorized under Act 5 of 2nd 2018 Extra. Session to act as single entity for administration and collection of sales and use taxes with respect to remote sellers• As of now, Act 5 is not applicable

• Opines that a flat adoption of the SSUTA is not a requirement found in Wayfair decision

• Provides that Department will not be seeking any retroactive application of Wayfair decision and will instead begin enforcing collection from remote sellers on January 1, 2019


Wayfair Consequences in Louisiana

Remote Sellers Information Bulletin No. 18-002 (December 18, 2018)• Provides definition of “Remote Seller”

• “A remote seller means a seller who sells for sale at retail, use, consumption, distribution, or for storage to be used for consumption or distribution any taxable tangible personal property, products transferred electronically, or services for delivery within Louisiana but does not have physical presence in Louisiana. If a seller has physical presence in Louisiana, the seller is considered a dealer as defined by La. R.S.47:301(4) and subject to state and local collection and remittance requirements.”

• Uses older “physical presence” standard• Commission determined that physical presence

should not include “affiliate nexus”

Marketplace Providers:• Commission noted Marketplace Providers

will be addressed in a legislative packet from the Governor during the 2019 Regular Session

• A district court has held that the statutory definition of dealer set forth in LA R.S. 47:301(4)(l) applies to a marketplace operator (decision pending)

35

Wayfair: What’s Next?


A growing trend in the sales tax arena is adoption of “marketplace” laws, also referred to as “platform” laws. In general, these laws impose collection and/or reporting obligations on a “marketplace facilitator” or “marketplace providers” for sales made by “marketplace sellers”

• To date, about 9 states have adopted platform laws:

− e.g., Alabama, Connecticut, Iowa, Minnesota, New Jersey, Oklahoma, Pennsylvania, Rhode Island, and Washington.

• Of these 9 listed states, 4 states give the platform the option to collect and remit sales tax on third party sales, or comply with the Colorado-style reporting requirements:

− Alabama, Oklahoma, Pennsylvania, and Washington

− Will these states change their laws to require collection in 2019?

• 4 of these states require the platform to collect (with no choice to report):

− Connecticut, Iowa, Minnesota, and New Jersey

• Rhode Island only imposes reporting obligations on platforms

Will State “Platform” Laws Be the Hot Legislative Item in 2019 & Beyond?


• Stop Taxing Our Potential Act (STOP), S. 3180

−Introduced June 28, 2018 by Sen. Jon Tester (D-MT) with cosponsors Sens. Jeanne Shaheen & Maggie Hassan (D-NH) and Jeff Merkley (D-OR)

−Prohibits states from imposing any reporting or collecting obligations for sales and use tax on sellers with no physical presence

• Protecting Businesses from Burdensome Compliance Cost Act, H.R. 6724

−Introduced September 6, 2018 by Rep. Bob Gibbs (R-OH)

−Prohibits retroactive sales tax collection on transactions pre-January 1, 2019

−Requires states to establish a single statewide sales tax rate for remote sellers

−Requires states to allow remote sellers to remit to a single state location and bars localities from imposing collection obligations

Post-Wayfair Federal Legislation


• Online Sales Simplicity and Small Business Relief Act, H.R. 6824

−Introduced September 13, 2018 by Rep. Jim Sensenbrenner (R-WI)

−Bans retroactive taxation on transactions occurring before June 21, 2018

−Establishes a small seller sales threshold of $10 million

−Requires states to develop and adopt a Congressionally-approved compact governing sales taxation of remote sellers

−Bars states from imposing remote seller collection obligations before January 1, 2019

Post-Wayfair Federal Legislation (cont’d)

39

Q&A


Contact information

Doug Lindholm

Council On State Taxation (COST)

[email protected]

William M. Backstrom, Jr.

Jones Walker LLP

[email protected]

Mike Bryan

Deloitte Tax LLP

[email protected]

mailto:[email protected]




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Challenging state sales tax regimes - Deloitte United States...•Additional retroactive tax issue with sales/use tax is consumer obligation to self-report tax -- imposing retroactive