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On July 14, 2016, Rep. Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016.  Taking the opposite approach of the Marketplace Fairness Act and Remote Transactions Parity Act, this proposed bill would limit the ability of states to require remote sellers to collect use tax. If enacted, the Act would codify the physical presence requirement established by the US Supreme Court in Quill Corp v. North Dakota.  The bill would define physical presence and create a de minimis threshold. If enacted, the bill would preempt click-through nexus, affiliate nexus, reporting requirements and marketplace nexus legislation. The bill would be effective as of January 1, 2017. The bill defines “seller” and provides that states and localities may not:

 

  • Obligate a person to collect a sales, use or similar tax; 
  • Obligate a person to report sales; 
  • Assess a tax on a person; or 
  • Treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

 

Persons would be considered to have a physical presence only if during the calendar year the person: 

 

  • Owns or leases real or tangible personal property in the state; 
  • Has one or more employees, agents or independent contractors in the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or 
  • Maintains an office in-state with three or more employees for any purpose.

 

Physical presence would not include: 

 

  • Click-through referral agreements with in-state persons who receive commissions for referring customers to the seller; 
  • Presence for less than 15 days in a taxable year; 
  • Product delivery provided by a common carrier; or 
  • Internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

 

The bill defines seller to exclude marketplace providers; referrers; third-party delivery services in which the seller does not have an ownership interest; and credit card issuers, transaction or billing processors or financial intermediaries.Marketplace Providers are defined as any person other than the seller who facilitates a sale which includes listing or advertising the items or services for sale and either directly or indirectly collects gross receipts from the customer and transmits the amounts to the marketplace seller. (No Regulation Without Representation Act of 2016 (H.R. 5893))

 

UPDATE: This bill failed to pass during the 114th Congressional Session running from January 3, 2015 to January 3, 2017.  Therefore, this bill has died and would need to be reintroduced to be considered and voted on.

(08/23/2016)

On February 22, 2016, the U.S. Court of Appeals for the Tenth Circuit issued its opinion in Direct Marketing Association v. Brohl and reversed the district court’s order granting summary judgment. The Court of Appeals held that Colorado’s use tax reporting requirements legislation for out-of-state retailers did not violate the Commerce Clause because the reporting requirements neither discriminated against, nor unduly burdened, interstate commerce. Additionally, the Court of Appeals held that the application of Quill v. North Dakota is narrowly limited to sales and use tax collection. The court held that the law does not discriminate against interstate commerce because it imposes differential treatment based on whether the retailer collects Colorado sales or use taxes, not whether the vendor is located in-state or out-of-state. The court also considered whether the reporting requirements law unconstitutionally discriminated by favoring in-state economic interests over out-of-state interests. The court stated that the party claiming discrimination must show that the state law benefits local actors and burdens out-of-state actors, and the result must alter the competitive balance between in-state and out-of-state firms. The court noted that the reporting requirements for out-of-state sellers do not violate the Commerce Clause because Colorado customers are required to pay sales or use tax when they purchase goods from a collecting or non-collecting retailer. As a result, the reporting requirements do not give in-state sellers a competitive advantage. The court also noted that equal treatment requires that those similarly situated be treated alike. Out-of-state retailers and in-state retailers are not similarly situated because the in-state retailers are required to comply with tax collection and reporting requirements. It is expected that DMA will appeal the decision.  Questions that we will monitor include will Colorado continue its stay on the reporting requirement until a final decision, if Colorado is successful at the end of the process will it change the effective date to a current or prospective date or are companies at risk going back to 2010 when it was first enacted.  Many in the state tax community are expecting other states to introduce similar legislation in the current sessions – we’ll watch for these and bring them to your attention.

 

The reporting requirements legislation requires non-collecting retailers who make sales to Colorado purchasers but do not collect sales or use tax to file reports with the Colorado Department of Revenueas well as notify customers of their use tax obligation.  Retailers are also prohibited from indicating no tax is due.  Penalties will apply for failure to comply with both requirements.  Note that a “non-collecting retailer” does not include a retailer whose sales in Colorado are de minimis. For purposes of this regulation, the Department will presume that a retailer that makes less than $100,000 in total gross sales in Colorado in the prior calendar year and reasonably expects total gross sales in Colorado in the current calendar year will be less than $100,000 is a retailer whose sales in Colorado are de minimis.  In addition, a non collecting retailer does not include a retailer that makes sales solely by means of download of digital goods or software.

 

Non-collecting retailers must give notice to all Colorado purchasers that Colorado sales or use tax is due on all purchases that are not exempt from sales tax. This notice must be provided with respect to each transaction. A non-collecting retailer may not display or imply that no tax is due on any Colorado purchase (which includes an invoice line labeled Sales Tax with an amount of $0), unless such a display is accompanied by the required notice each time the display appears. The notice must contain the following information: The non-collecting retailer does not collect Colorado sales or use tax; The purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet or by other remote means; and the State of Colorado requires that a Colorado purchaser (A) file a sales or use tax return at the end of the year reporting all of the taxable Colorado purchases that were not taxed and (B) pay tax on those purchases. This notice must be clearly legible, reasonably prominent, and located in close proximity to the total price. It will be sufficient if the non-collecting retailer provides a prominent linking notice that reads as follows: "See important sales tax information regarding the tax you may owe directly to your state", if such linking notice directs the Colorado purchaser to the principal required notice. The non-collecting retailer shall pay a penalty of $5 for each sale to a Colorado purchaser with respect to which the required notice does not appear. 

 

In addition,annual reports are required to be issued to Colorado customers as well as with the Department of Revenue.  These reports must include the following information: The name of each Colorado purchaser; The billing address of each Colorado purchaser, if the information was provided; The shipping address of each Colorado purchaser, if the information was provided; and the total dollar amount of Colorado purchases made by each Colorado purchaser during the prior calendar year. No other information about the purchase shall be provided. If the non-collecting retailer has more than one Colorado billing address or more than one Colorado shipping address for a Colorado purchaser, then the non-collecting retailer shall provide all such addresses of the Colorado purchaser. The notice must be sent by January 31st of each year summarizing purchases made for the prior calendar year. The notice must be sent by January 31st of each year summarizing purchases made for the prior calendar year. These notices have similar requirements as the issuance of Federal 1099 notices and must be followed.  The non-collecting retailer shall pay a penalty of $10 for each notice that is not sent by the non-collecting retailer to the Colorado purchaser.

 

UPDATE: On April 6, 2016, the U.S. Court of Appeals for the Tenth Circuit denied a petition for rehearing of the February 2016 ruling.

 

UPDATE: On August 29, 2016 the Direct Marketing Association filed a petition for review with the U.S. Supreme Court, asking it to overturn the April ruling by the U.S. Court of Appeals for the Tenth Circuit.

 

UPDATE: On December 12, 2016, the U.S. Supreme Court declined to review the ruling of the U.S. Court of Appeals for the Tenth Circuit that upholds Colorado’s use tax notice and reporting requirements. The Court also denied a cross-petition for certiorari filed by Colorado, which urged the Court to address whether the physical presence standard in Quill v. North Dakota should be overruled. Colorado is now free to enforce the use tax notice and reporting requirements legislation. This means that out-of-state sellers making sales into Colorado must notify in-state customers of their responsibility to remit use tax, and sellers must provide the Department with the required customer information. Failure to fulfill these obligations will result in a $10 per violation fine. Colorado has not yet indicated when the provisions will be deemed effective.  We will continue to monitor this and update as more information is made available.  In the meantime, all sellers who make sales into Colorado should prepare to comply with the notification and reporting requirements.  

 

For our previous news item on this case, see U.S. Supreme Court Rules that Federal Court has Jurisdiction Over Challenge to Colorado Reporting Requirements Law.

 

For an update on this news item, see Colorado Use Tax Notice and Reporting Requirements Become Effective July 1, 2017

 

(Direct Marketing Association v. Brohl, Case No. 12-1175 (10th Cir. Feb. 22, 2016); Direct Mktg. Ass'n v. Brohl, U.S., 15A1259, petition for certiorari review 8/29/16)

(12/20/2016)

On February 11, 2016, the U.S. Senate approved a permanent extension of the Internet Tax Freedom Act (ITFA) that is included in H.R. 644, the Trade Facilitation and Trade Enforcement Act of 2015. The bill also establishes an end date of June 30, 2020 for the seven states that currently impose a tax on internet access: Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. President Obama is expected to sign the permanent extension of the ITFA into law. The House of Representatives had previously passed H.R. 235, the Permanent Internet Tax Freedom Act, on December 15, 2015.  For our previous news item on this topic, visit Internet Tax Freedom Act Extended Through October 1, 2016.

 

UPDATE: On February 24, 2016, President Barack Obama signed into law the permanent extension of the Internet Tax Freedom Act.

 

(Trade Facilitation and Trade Enforcement Act of 2015)

(02/23/2016)

On December 18, 2015, President Barack Obama signed H.R. 2029 – Consolidated Appropriations Act, 2016. The Act extends the Internet Tax Freedom Act (ITFA) through October 1, 2016. Prior provisions that grandfather taxes that existed prior to October 1, 1998 are also extended through October 1, 2016. For our previous news item on this topic, see Internet Tax Freedom Act Extended Until December 11, 2015. (H.R. 2029 – Consolidated Appropriations Act, 2016)

(01/18/2016)

On September 30, 2015 the U.S. House of Representative passed H.R. 719, which includes a provision that would extend the Internet Tax Freedom Act (ITFA) through December 11, 2015. The ITFA was scheduled to expire on October 1, 2015. The bill will now go to President Obama for signature.

 

To see our previous news item on the ITFA, visit Internet Tax Freedom Act Extended Until October 1, 2015, Permanent Extension Introduced.

 

To see an update on this news item, visit Internet Tax Freedom Act Extended Through October 1, 2016,

 

(H.R. 719)

(10/26/2015)

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