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Effective October 1, 2017, Maine’s legislature has enacted legislation requiring remote sellers to collect and remit sales tax on sales of tangible personal property, products transferred electronically or services that are delivered into Maine, if:

 

  • The seller’s gross revenue from such sales into Maine in the previous calendar year or current calendar year exceeds $100,000; or
  • The seller made such sales into Maine in at least 200 separate transactions in the previous calendar year or the current calendar year.

 

The state may bring a declaratory judgment action against remote sellers to establish the federal and state legal validity of the tax collection obligation. The obligation to collect and remit the sales and use tax required by the legislation may not be applied retroactively. If an injunction against the legislation is lifted, the obligation to collect sales and use tax applies from that date forward for persons covered by the injunction. The legislature overrode the Governor’s veto of the legislation. We expect litigation challenging the law to be filed as has happened in other states. (L.D. 1405 (S.P. 483), Laws 2017)

(07/12/2017)

On April 3, 2017, the Massachusetts Department of Revenue issued a directive with economic nexus provisions for out-of-state internet sellers. It adopts an administrative bright line rule, instead of applying sales and use tax collection requirements on a case by case basis. Per the directive, an internet seller with a principal place of business located outside the state is required to register, collect and remit Massachusetts sales or use tax on sales into the state as follows:

 

  • For the period of July 1, 2017 to December 31, 2017, if during the preceding 12 months (July 1, 2016 - June 30, 2017), it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions.
  • For each calendar year beginning with 2018, if during the preceding calendar year it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions. 

 

The directive discusses Quill Corp. v. North Dakota and states that internet sellers with significant Massachusetts sales meets the statutory and constitutional standards that apply for purposes of the imposition of the commonwealth’s sales or use tax collection duty. In its discussion of what constitutes substantial physical presence under the Commerce Clause, the Directive distinguishes Large Internet Vendors from mail order vendors.  Specifically, it considers software, apps and cookies that are typically used by internet sellers to be tangible personal property owned by the seller as substantial physical presence in the state.  In addition, they consider Content Distribution Networks (CDN) providers that may be located in the state of Massachusetts to be performing local activities “on behalf of the vendor that are significantly associated with the vendor’s ability to establish and maintain a market” for its sales. When that activity takes place in Massachusetts it establishes an instate physical presence on behalf of such vendor.

 

Large Internet vendors may also utilize other persons as instate representatives that result in the creation of an instate physical presence. For example, large Internet vendors commonly sell goods through “online marketplaces.”  These online marketplaces, which offer a range of potential services through employees or other contract personnel, benefit the client/vendor by, among other things, enhancing its name recognition and creating consumer confidence with respect to its products. These arrangements may vary in form. Many of these agreements allow the Internet vendor to post goods for sale on a website operated by the online marketplace, with orders and payment then processed through that website (with subsequent order fulfillment completed by the individual Internet vendor). Other agreements may provide for increased services by the employees or other personnel of the online marketplace, which may include order fulfillment, return processing, access to the online marketplace’s customer service team, and the preparation of sales reports or other analytics. In either instance, although the website maintained by the online marketplace on which the vendor’s products are sold is “virtual,” some of the various services provided by the online marketplace in connection with the sale of the vendor’s products will be physical in nature.  Because these latter, physical services operate to establish and maintain the Internet vendor’s market, these services, when performed in the state, will result in an Instate physical presence on the part of such vendor. 

 

Also, large Internet vendors may utilize delivery services that exceed the type of delivery services that were evaluated by Quill. Quill held that a state could not impose a sales or use tax collection duty on vendors that limit their contacts with the state to the contacts of mail and common carrier. In contrast, large Internet vendors may utilize delivery services that provide not merely product delivery, but additional services that may include logistics, order fulfillment, storage, return processing and order management. In general, these additional services operate to enhance the vendor’s sales. Therefore, these services, when performed in the state, will result in an instate physical presence on the part of such vendor. 

 

This is an expansive definition of substantial physical presence defined not through the legislative process but through a Department of Revenue Directive.  The Department is making this a prospective position.  It is very likely this will be challenged as economic nexus provisions in other states.  We will monitor and update this news items with developments. (Directive 17-1: Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax, April 3, 2017)

 

UPDATE:The trade associations NetChoice and American Catalog Mailers Association have filed a motion for a preliminary injunction to enjoin the enforcement of Directive 17-1. NetChoice and the American Catalog Mailers Association are challenging the directive as being in violation of the Commerce Clause of the U.S. Constitution as interpreted by the Supreme Court in Quill v. North Dakota. They also claim that the directive is in violation of the Administrative Procedure Act and is barred by the Internet Tax Freedom Act. We will continue to monitor for developments. (American Catalog Mailers Association and NetChoice v. Michael J. Heffernan, in his capacity as the Commissioner of the Massachusetts Department of Revenue)

 

UPDATE: On June 28, 2017, the Massachusetts Department of Revenue issued Directive 17-2, which revokes Directive 17-1: Requirement that Out-of-State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax, effective immediately. The Department of Revenue anticipates proposing regulations which would require large Internet vendors to collect Massachusetts sales and use tax on a prospective basis under standards similar to those in Directive 17-1.  The regulatory proposal will be based upon legal rationale similar to that in Directive 17-1. (Directive 17-2: Revocation of DD 17-1 In Anticipation of a Proposed Regulation)

(07/11/2017)

On March 6, 2017, the South Dakota Sixth Judicial Court ruled that the state’s economic nexus legislation is unconstitutional. The legislation – which became effective May 1, 2016 – requires remote sellers without a physical presence in the state to collect and remit South Dakota sales and use tax on sales in the state if the retailer makes in-state sales exceeding $100,000 or makes 200 or more separate sales transactions in the previous or current calendar year. In the ruling, the state acknowledged that under Quill Corp. v. North Dakota, the State of South Dakota is prohibited from imposing the sales tax collection and remittance obligations. The state agreed that the statute was unconstitutional and agreed with the summary judgement finding.  This was expected as the case progresses towards an appeal to the U.S. Supreme Court in an effort to overturn Quill. For our previous news item, see South Dakota Enacts Economic Nexus Legislation. (South Dakota v. Wayfair, Inc., S.D. Cir. Ct., No. 32 Civ. 16-000092, 3/6/17).

 

UPDATE: On August 29, 2017, the South Dakota Supreme Court heard oral arguments over South Dakota’s economic nexus legislation. We will monitor this situation and provide updates as more developments happen (South Dakota v. Wayfair, Inc., S.D., No. 28160, oral arguments 8/29/17).

 

UPDATE: On September 13, 2017, the South Dakota Supreme Court struck down the state’s economic nexus legislation, concurring with the South Dakota Sixth Judicial Court’s ruling that the legislation conflicts with Quill Corp. v. North Dakota and is unconstitutional. South Dakota Attorney General Marty Jackley has issued a statement confirming that the state will request the U.S. Supreme Court to review the case and reconsider the Quill decision. (South Dakota v. Wayfair, Inc., South Dakota Supreme Court, No. 28160, September 13, 2017)

 

UPDATE: On October 2, 2017, South Dakota filed a petition for certiorari with the U.S. Supreme Court to take up South Dakota v. Wayfair, Inc. in an effort to overturn Quill Corp. v. North Dakota. We will continue to monitor for updates. (South Dakota, Petitionerv. Wayfair, Inc., Overstock.com, Inc.,and Newegg, Inc. Respondents. In The Supreme Court of the United States On Petition for a Writ of Certiorari to the Supreme Court of South Dakota)

(10/23/2017)

The Direct Marketing Association has reached a settlement agreement with the Colorado Department Revenue in regards to its lawsuit over the state’s use tax notice and reporting requirements. Pursuant to the settlement agreement, the use tax notice and reporting requirements legislation becomes effective on July 1, 2017. Per the agreement, the Department of Revenue will waive penalties for non-collecting retailers who fail to comply with the legislation prior to July 1, 2017. Non-Collecting Retailers will be required to include the required transactional notices on all invoices issued after July 1, 2017 per Sec 39-21-112(3.5)(c)(I) and 1 Colo Code Regs Section 201-1: 39-21-112.3.5(2).

 

The first annual summaries of customer purchases required of non-collecting retailers must be mailed to customers by January 31, 2018. The Department will waive all penalties for non-collecting retailers who do not include customer purchases made prior to July 1, 2017 in any annual summary provided to Colorado customers before the January 31, 2018 deadline. This summary must include all transactions dated after July 1, 2017 and if possible all 2017 transactions.

 

The first customer information reports required of non-collecting retailers must be filed with the Department by March 1, 2018. The Department will waive all penalties for non-collecting retailers who do not include customer purchases occurring prior to July 1, 2017 in their customer information report provided to the Department on or before the March 1, 2018 deadline.This information report must include all transactions dated after July 1, 2017 and if possible all 2017 transactions.

 

To view our previous news item on this case, click here

 

Based on this settlement, all Colorado non-collecting retailers should review their marketing materials, invoices and systems to ensure they will be able to comply. Penalties for non-compliance are harsh.  

 

(Direct Marketing. Association v. Colorado Department of Revenue, Colo. Dist. Ct., No. 13-CV-34855, settlement announced 2/23/17)

(03/06/2017)

On June 2, 2017, the Illinois Department of Revenue issued a general information letter in response to an inquiry about whether a taxpayer’s medical transcription service activities created nexus with Illinois, necessitating the payment of sales tax. For the medical transcription service, the taxpayer hired independent contractors who worked from home using their own equipment. The independent contractors performed work for customers in various states, including Illinois.

 

Sales tax is imposed in Illinois upon people “engaged in the business of selling tangible personal property to purchasers for use or consumption” (fully described in 86 Ill. Adm. Code 150.201(i)). In the letter, the Department of Revenue explained that, generally, if no tangible personal property is transferred, then a transaction is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. Since no tangible property is transferred in connection with the medical transcription services, no tax is due. 

 


Regarding the creation of nexus with Illinois, the department clarified the characteristics of an “Illinois retailer” and a retailer “maintaining a place of business” in Illinois. Such a retailer must collect and remit use tax to the state to conform with the retailer’s occupation tax act and use tax act.  Since there was no tax due, the Department did not give a definitive answer regarding nexus under the facts of using independent contractors to perform these services. (General Information Letter ST 17-0018-GIL, Illinois Department of Revenue, June 2, 2017).

(10/23/2017)

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