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Effective January 1, 2018, a seller is deemed to have substantial nexus in Ohio if the seller: 

 

  • uses in-state software to sell or lease taxable tangible personal property or services to consumers, provided the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in Ohio or from providing services the benefit of which is realized in Ohio, or
  • provides or enters into an agreement with another person to provide a content distribution network in Ohio to accelerate or enhance the delivery of the seller's web site to consumers, provided the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in Ohio or from providing services the benefit of which is realized in Ohio

 

"In-state software" means computer software, as defined in section 5739.01, that is stored on property in Ohio or is distributed within Ohio for the purpose of facilitating a seller's sales. Computer software means a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task.  This could include internet cookies.

 

"Content delivery network" means a system of distributed servers that deliver web sites and other web content to a user based on the geographic location of the user, the origin of the web site or web content, and a content delivery server. Ohio previously enacted Click Through and Affiliate nexus in 2015. It will be interesting to see if a challenge is upheld as the Ohio Commercial Activity Tax (CAT) has an $500,000 economic nexus threshold which has been upheld as an adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial.  (H.B. 49, Laws 2017)

(07/26/2017)

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)

Oklahoma has enacted legislation directing the Oklahoma Tax Commission to establish a tax amnesty program that will run from September 1, 2017 through November 30, 2017. Eligible taxes include sales and use, mixed beverage, gasoline and diesel, gross production and petroleum excise, corporate and personal income, and personal withholding tax. Eligible taxpayers would be entitled to a waiver of penalty, interest, or other collection fees due on the eligible taxes if the they voluntarily file returns and pay taxes due during the course of the amnesty program. The lookback period for which additional taxes may be assessed will be limited to three taxable years for annually filed taxes or 36 months for taxes that do not have an annual filing frequency. To be eligible to participate, taxpayers must:

 

  • Not have outstanding tax liabilities other than those reported pursuant to this initiative;
  • Not have been contacted by the Oklahoma Tax Commission, or third party acting on behalf of the Commission, with respect to the taxpayer's potential or actual obligation to file a return or make a payment to the state;
  • Not have collected taxes from others, such as sales and use taxes or payroll taxes, and not reported those taxes; and
  • Not have, within the preceding three years, entered into a voluntary disclosure agreement for the type of tax owed

 

Taxpayers who meet all of the above qualifications, except those who have collected taxes from others, such as sales and use taxes or payroll taxes, and not reported those taxes, may enter into a modified voluntary disclosure agreement. The provisions of a modified voluntary disclosure agreement would be the same as a voluntary disclosure agreement except the waiver of interest shall not apply except as may be optionally granted at the discretion of the Tax Commission, and the period for which taxes must be reported and remitted or assessed is extended beyond the three year or thirty six month lookback period to include all periods in which tax has been collected but not remitted. (H.B. 2380, Laws 2017, effective July 1, 2017)

(06/05/2017)

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)

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