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In a substantial win for taxpayers in the class action lawsuit nightmares,an Illinois court held that a Nevada-based online retailer that sells cosmetics online and through catalogs did not have substantial nexus with Illinois and was therefore not required to collect sales tax in Illinois. The online retailer licensed the brand. A brick-and-mortar company also licensed the brand and sold the cosmetics at its retail stores. The online retailer mailed catalogs into Illinois several times a year. The catalogs were also available at stores owned by the brick-and-mortar company. In Illinois, a retailer has substantial nexus and is required to collect and remit Illinois sales tax if the retailer solicits orders by mail and benefits from marketing activities in Illinois.

 

The court held that the online retailer did not have a physical presence in Illinois, and the brick-and-mortar company did not act as an agent of the online retailer or act on behalf of the online retailer even though it had the online retailer’s catalogs in its stores. The online retailer and brick-and-mortar company were separate entities, maintained separate merchandise and employed separate marketing schemes. In fact, the two companies competed for business. The two companies had separate financial records and income tax returns. Further, the brick-and-mortar company did not accept returns of merchandise purchased from the online retailer. As a result, the online retailer did not benefit from the brick-and-mortar company’s marketing activities.

 

The court also held that the online retailer did not knowingly fail to pay an Illinois tax obligation under the False Claims Act. The online retailer had consulted with tax advisors about its potential tax liability in Illinois and was informed that it did not have nexus in Illinois. The online retailer did not collect sales tax in Illinois until it changed its business operations and determined it had nexus in-state. (State of Illinois v. Lush Internet Inc., Appellate Court of Illinois, First District, No. 1-16-1601, September 25, 2017)

(10/23/2017)

On July 28, 2017, the Massachusetts Department of Revenue issued a proposed regulation with economic nexus provisions which would take effect October 1, 2017. A public hearing on the proposed regulation is scheduled for August 24, 2017.  The proposed regulation is similar to a previous economic nexus directive issued by the state, which was revoked on June 28, 2017

 

Massachusetts has taken an alternative approach to the pure economic nexus approaches used by other states.  Rather, they are proposing that certain activities engaged in my internet vendors do meet the substantial physical presence standard due to the ownership and use of property in the state. 

 

Per the proposed regulation, an internet vendor with a principal place of business located outside the state that is not otherwise subject to tax is required to register, collect and remit Massachusetts sales or use tax with respect to its Massachusetts sales as follows:

 

  • For the period beginning October 1, 2017 through December 31, 2017, if during the preceding 12 months (October 1, 2016 to September 30, 2017) it had in excess of $500,000 in Massachusetts sales from transactions completed over the Internet and made sales resulting in a 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 from transactions completed over the Internet and made sales resulting in a delivery into Massachusetts in 100 or more transactions.

 

An internet vendor is defined as “a vendor that derives sales from transactions consummated over the Internet, whether such transactions are (1) completed on a website maintained or operated by the vendor itself, or a website maintained or operated by a related person or a person with which the vendor contracts, including a marketplace facilitator and/or (2) fulfilled by a related person or a person with which the vendor contracts.”

 

The proposed regulation states that the $500,000/100 transaction test only applies to an internet vendor whose only physical presence in Massachusetts is through property interests in and/or the use of in-state software and ancillary data (“cookies”) which are distributed to or stored on the computers or other devices of the vendor’s in-state customers; contracts and/or other relationships with content distribution networks (CDNs); and/or through contracts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services, including, but not limited to, payment processing and order fulfillment, order management, return processing or otherwise assisting with returns and exchanges, the preparation of sales reports or other analytics and consumer access to customer service.

 

However, internet and non-internet vendors with other contacts including the presence in the state of inventory or a contract with an in-state representative other than as described above has always established nexus and the $500,000/100 transaction rule does not apply.  Nexus is established at the time these activities and contacts began.

 

The proposed regulation also contains language stating that it does not violate the Internet Tax Freedom Act. It states that the regulation is non-discriminatory to e-commerce transactions because it asserts jurisdiction over all vendors (Internet or non-Internet) who have the contacts identified in the legislation and applies the same jurisdictional standards to all vendors (Internet or non-Internet) that are otherwise subject to tax. We will monitor and update this news items with developments. (Proposed 830 CMR 64H.1.7: Vendors Making Internet Sales)

 

UPDATE: On September 22, 2017, the Massachusetts Department of Revenue finalized the state’s proposed economic nexus regulation. The final regulation takes effect October 1, 2017. (830 CMR 64H.1.7: Vendors Making Internet Sales)

(11/20/2017)

The Multistate Tax Commission (MTC) has announced a sales/use tax and income/franchise tax amnesty program for online sellers that will run from August 17 to November 1, 2017 (previously October 17, 2017). Qualified online sellers with potential tax liability may be able to use the MTC's voluntary disclosure agreement (VDA) to negotiate a settlement during the amnesty period if they meet certain eligibility requirements. Taxpayers that have not been contacted by any of the states participating in the amnesty program will be able to apply to start remitting sales tax on future sales without penalty or liability for unpaid, prior accumulated sales tax in the participating states. 25 MTC member states have agreed to participate in the amnesty program. The participating states include: 

 

  • Alabama
  • Arkansas
  • Colorado (sales/use tax only)
  • Connecticut
  • District of Columbia (may not waive all prior periods)
  • Florida
  • Idaho
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Massachusetts (special provisions apply)
  • Minnesota (special provisions apply)
  • Missouri
  • Nebraska (may not waive all prior periods)
  • New Jersey
  • North Carolina
  • Oklahoma
  • Rhode Island
  • South Dakota
  • Tennessee
  • Texas 
  • Utah
  • Vermont
  • Wisconsin (will require payment of back tax and interest for a lookback period commencing January 1, 2015 for sales/use tax, and including the prior tax years of 2015 and 2016 for income/franchise tax)

 

Some of the additional states may require a limited look-back period for prior tax liabilities. Sellers who wish to participate in the program will need to file the voluntary disclosure program paperwork during the program dates. The MTC will route the paperwork for each participating state for which the seller is seeking amnesty protection. For more details visit the MTC website.

 

UPDATE: The Multistate Tax Commission's online seller amnesty program is now over. If you didn't take advantage of this program but realize you need to evaluate your activities, you can contact us here.

(11/07/2017)

On June 12, 2017, Rep. Jim Sensenbrenner (R-WI) and House Judiciary Chairman Bob Goodlatte (R-VA) introduced the No Regulation Without Representation Act of 2017. A previous version of this bill had been introduced in 2016 and failed to pass. Under the proposed bill, a State may tax or regulate a person’s activity in interstate commerce only when such person is physically present in the State during the period in which the tax or regulation is imposed. Under the proposed bill, the physical presencerequirement would apply to sales and use taxand net income and other business activities taxes, as well as the states’ ability to regulateinterstate commerce. “Physical presence” in a state includes:

 

  • maintaining a commercial or legal domicile in the state;
  • owning, holding a leasehold interest in, or maintaining real property such as an office, retail store, warehouse, distribution center, manufacturing operation, or assembly facility in the state;
  • leasing or owning tangible personal property (other than computer software) of more than de minimis value in the state;
  • having one or more employees, agents or independent contractors present in the state who provide on-site design, installation, or repair services on behalf of the remote seller;
  • having one or more employees, exclusive agents or exclusive independent contractors present in the state who engage in activities that substantially assist the person to establish or maintain a market in the state; or
  • regularly employing in the state three or more employees for any purpose.

 

“Physical presence” in a state would not include:

 

  • entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the state, whether by an Internet-based link or platform, Internet Web site or otherwise;
  • any presence in a state for less than 15 days in a taxable year (or a greater number of days if provided by state law);
  • product placement, setup or other services offered in connection with delivery of products by an interstate or in-state carrier or other service provider;
  • Internet advertising services provided by in-state residents which are not exclusively directed towards, or do not solicit exclusively, in-state customers;
  • ownership by a person outside the state of an interest in a limited liability company or similar entity organized or with a physical presence in the state;
  • the furnishing of information to customers or affiliates in such state, or the coverage of events or other gathering of information in such state by such person, or his representative, which information is used or disseminated from a point outside the state; or
  • business activities directly relating to such person's potential or actual purchase of goods or services within the State if the final decision to purchase is made outside the state.

 

In addition, the bill prohibits the imposition or assessment of a sales, use or other similar tax or a reporting requirement unless the purchaser or seller has physical presence in the state.  This would prohibit all the remote seller legislation (click through, affiliate, economic, marketplace and reporting/notification). If enacted, the legislation would apply with respect to calendar quarters beginning on or after January 1, 2018. (No Regulation Without Representation Act of 2017)

(07/12/2017)

Effective July 1, 2017, Vermont has enacted legislation that requires non-collecting vendors making sales into Vermont to file with the Department of Taxes on or before January 31 of each year a copy of the notice notifying purchasers that sales or use tax is due on nonexempt purchases they make from the vendor and that Vermont requires the purchaser to file a sales or use tax return. The submission of this document relates to the annual notice that must be sent to all customers who made more than $500 in purchases from a non-collecting vendor. (see http://www.salestaxinstitute.com/resources/news/vermont-enacts-notice-reporting-requirements-and-economic-nexus-legislation) This requirement only applies to non-collecting vendors who made $100,000 or more of sales into Vermont in the previous calendar year. Failure to file a copy of the notice will subject the non-collecting vendor to a penalty of $10 for each failure, unless the non-collecting vendor shows reasonable cause. (H.B. 516, Laws 2017)

(06/19/2017)

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