Sham, Due Process, & More – Trends in Sales Tax

SEATA63rdAnnual Southeastern Association of Tax Administrators Conference

Hilton Head, South Carolina July 28 – 31, 2013

Donald M. Griswold, Crowell & Moring LLP

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Nexus Common Law Doctrines & Sales Tax Intrastate Transactions Statutory Discrimination SEC Actions

Trends in Sales Tax

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Nexus

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“Click-Through” Nexus Litigation Legislative Developments Attributional Nexus Due Process – PACT Act Due Process -- SCOTUS

Nexus

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◦ Overstock.com, Inc. (N.Y. Ct. App. 2013)& Amazon.com, LLC

Facial challenge to the constitutionality of NY’s “click-through” nexus statute

Held: statute was not unconstitutional on its face

Taxpayers will petition the U.S. Supreme Court for review

Click-Through Nexus Litigation

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Fifteen states have recently proposed or enacted nexus legislation:

Florida, Hawaii, Indiana, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, Oklahoma, Pennsylvania, Utah, Virginia

Legislative Developments

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Barnesandnoble.comLLC (N.M. 2013)

◦ Supreme Court of New Mexico affirmed: For GRT purposes, the in-state activities of an affiliate

could be imputed to a “dot com” out-of-state retailer

Attributional Nexus

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Red Earth LLC (2d Cir. 2011 Gordon(DC Cir. 2013)

PACT Act’s requirement – retailers must prepay excise taxes on out-of-state sales – denies due process

Due Process Nexus – PACT Act

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Goodyear (2011)

Due Process “minimum contacts” for tax may be tougher standard after all !

“. . . attenuated connections to the state fall far short of the ‘continuous & systematic general business contacts’ necessary to empower [the state] to entertain suit against them on claims unrelated to anything that connects them to the state.”

Due Process – US Supreme Ct

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McIntyre (2011)

“The principal inquiry in cases of this sort is whether the defendant’s activities manifest an intention to submit to the power of the sovereign … and to have that … you must have purposeful availment … In this way, sovereignty prevails over metaphor as authority replaces fairness.”

Due Process – US Supreme Ct

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Common Law Doctrines & Sales Tax

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Sham, Economic Substance, Business Purpose

Policy

Sullivan Bros (WI Cir. Ct.) Dunk & Bright (NY TAT)

Common Law Doctrines &Sales Tax

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Intrastate Transactions

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Hartney Fuel Oil (Ill. App. Sept. 2012)

◦ Held: must follow statutory sourcing rule Source sales to jurisdiction where POs are received Rejected Department’s argument for sourcing

based on “totality of circumstances”

Intrastate Transactions

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RTA v. United

◦ Regional Transportation Authority has accused United & American Airlines of operating small sham offices outside Chicago to avoid paying sales tax on fuel in Chicago.

Intrastate Transactions

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California Enterprise Zone Credits

◦ DiCon Fiberoptics (Cal. S.Ct. 2012)

◦ Elimination of Enterprise Zone Program A.B. 93 signed by Gov. Brown (July 2013

Intrastate Transactions

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Statutory Discrimination

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CSX v. Ala. (11th Cir. July 2013)

◦ Sales tax on interstate rail carriers is discriminatory

◦ Alabama did not provide a sufficient justification for exempting interstate motor and water carriers

4-R Act

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Chicago v. StubHub! (IL 2011)

Chicago overstepped its home rule authority by attempting to impose a tax obligation under Illinois law.

Internet Tax Freedom Act

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Performance Marketing (Ill. Cir. Ct. May 2012)

Illinois’ “Amazon” law: violated the Commerce Clause because it

required retailers with no substantial nexus with the state to register and collect the state’s sales &use taxes

violated the ITFA as a “discriminatory tax” on e-commerce

Internet Tax Freedom Act

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SEC Actions

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Sprint Nextel

◦ SEC initiated an investigation following a suit attempting to collect taxes

SEC Actions

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Hudson Highland

◦ SEC fined Hudson for failing to accurately reflect sales tax liabilities in its books

SEC Actions

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Dell

◦ SEC charged two former Dell executives with fraud, alleging misconduct relating to the use of the company’s excess tax reserves

SEC Actions

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Donald M. GriswoldCrowell & Moring LLP1001 Pennsylvania Ave., NWWashington, DC 20004(202) 624-2730dgriswold@crowell.com