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The U.S. Supreme Court has denied requests by Amazon.com and Overstock.com to review a New York Court of Appeals ruling which held that the online retailers failed to demonstrate that a statutory provision that required out-of-state Internet retailers with no physical presence in New York to collect sales and use taxes was facially unconstitutional under either the Commerce Clause or the Due Process Clause. The click-through nexus law created a rebuttable presumption that a retailer solicits business in New York if any in-state entity was compensated for directly or indirectly referring customers to the retailer, whether by a website link or otherwise, and the cumulative gross receipts from these and other New York affiliate referrals exceeded $10,000. Click here to view our previous news item on this ruling. (Overstock.com, LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Dkt. 13-252, petition for certiorari denied December 2, 2013; Amazon.com LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Dkt. 13-259, petition for certiorari denied December 2, 2013)

(12/30/2013)

Amazon.com and Overstock.com have asked the U.S. Supreme Court to review a ruling by the New York Court of Appeals which held that they failed to demonstrate that a statutory provision that required out-of-state internet retailers with no physical presence in New York to collect New York sales and use taxes was facially unconstitutional under either the Commerce Clause or the Due Process Clause. 

To see our previous news item on the New York Court of Appeals ruling, click here

For an update on this news item, click here.

(Overstock.com, LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Dkt. 13-252, petition for certiorari filed August 22, 2013; Amazon.com LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Dkt. 13-259, petition for certiorari filed August 23, 2013)

(09/16/2013)

The New York Department of Taxation and Finance has issued a bulletin discussing materialmen and the pay-when-paid option.  Materialmen who make qualified sales to contractors may be able to postpone payment of the sales tax incurred until they receive payment from the contractor. The bulletin explains which sales qualify under the pay-when-paid option, and how materialmen should report these transactions on their sales tax returns. A materialman is a person or business that sells any of the following to a property owner, contractor, subcontractor, or repairman to be used for the improvement of real property: building materials; machinery, tools, or equipment; compressed gases for welding or cutting; or fuel or lubricants for the operation of machinery or motor vehicles. To qualify for the pay-when-paid option, a seller must have been a materialman during any two sales tax quarters within the most recent four consecutive sales tax quarters; must be primarily engaged (more than 50% of sales) in selling building materials to contractors, subcontractors, or repairmen (including a property owner acting as his or her own contractor) for the improvement of real property; and must be authorized by the Lien Law to file a mechanic’s lien upon the property and improvements to the property. Also, in order to qualify, a sale must be made on credit granted by the seller. Payments made with cash or sales financed by a third party where credit is not extended by the seller to the purchaser do not qualify for the pay-when-paid option. On those types of sales, sales tax must be collected at the time of the sale and remitted with the sales and use tax return filed for that reporting period. Qualifying sellers must submit Form ST-112, Annual Application for a Materialman to Remit Sales Tax Under the Pay-When-Paid Option, by June 1 of each year. Under the pay-when-paid option, a materialman must report qualifying sales as gross sales (not taxable sales) on the tax return covering the period in which the sale is made. The sales are then reported as taxable sales for the period when the materialman receives payment. The tax must be remitted within one year of the date of sale whether or not payment is received from the purchaser. When the return is filed and the sales tax due is remitted, tax is computed at the rate in effect at the time the sale was made. If the sales tax rate changes after the sale, the materialman must file a paper sales tax return for the current quarter and will have to manually enter the correct name of the taxing jurisdiction; the jurisdiction code that was in effect when the sale was made; the amount received for the taxable sale; the tax rate that was in effect when the sale was made; and the sales tax due. (TB-ST-555, New York Department of Taxation and Finance, July 27, 2012)

(06/03/2013)

Amazon.com and Overstock.com failed to demonstrate that a provision that requires out-of-state Internet retailers with no physical presence in New York to collect New York sales and use taxes is unconstitutional on its face under the Commerce Clause or the Due Process Clause. The click-through nexus provision created a rebuttable presumption that a retailer solicits business in New York if any in-state entity is compensated for directly or indirectly referring customers to the retailer, whether by an online link or otherwise, and the cumulative gross receipts from these and other New York affiliate referrals exceed $10,000. Amazon and Overstock alleged that the statute is unconstitutional on its face because it violates the Commerce Clause by subjecting online retailers, without a physical presence in the state, to New York sales and use taxes. The court held that although there is some dispute as to the appropriate standard to apply when evaluating a facial challenge under the Commerce Clause, the statute is constitutional on its face under either standard. A state tax that impacts the Commerce Clause will be upheld when the tax: is applied to an activity with a substantial nexus with the taxing state; is fairly apportioned; does not discriminate against interstate commerce; and is fairly related to the services provided by the state. All parties agreed that the only item at issue was whether the statute satisfies the substantial nexus test.Taking precedent into consideration, the court noted that although an in-state physical presence is necessary, it does not need to be substantial, but it must be demonstrably more than the slightest presence. The presence requirement is satisfied if economic activities are performed in-state by the seller’s employees or on its behalf. When the click-through statute was enacted, the legislature attached significance to the physical presence of a resident website owner, recognizing that many websites are geared toward predominantly local audiences, so that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Through these affiliate agreements, a vendor is essentially deemed to have established an in-state sales force. As such, the Court of Appeals ruled that the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as demonstrably more than a slightest presence. If a vendor is paying New York residents to actively solicit business in the state, the vendor should shoulder the appropriate tax burden.The court also observed that vendors are not required to pay these taxes out-of-pocket, but are instead collecting taxes that are unquestionably due, which are difficult to collect from individual purchasers, and for which there is no risk of multiple taxation.

 

Physical presence is not required in order to satisfy due process. Due process analysis focuses on whether a party has purposefully directed its activities toward the state and whether it is reasonable, based on the extent of a party’s contacts with that state and the benefits derived from that access, to require it to collect taxes for that state. An entity engaged in continuous and widespread solicitation of business within a state has fair warning that its activity may subject it to the jurisdiction of the state, even in the absence of physical presence. The court held that a "brigade" of affiliated websites compensated by commission constitutes such solicitation.

 

Amazon and Overstock claimed that the statute violates the Due Process Clause by creating an irrational and non-rebuttable presumption of solicitation of business within the state. They argued that there must be a rational connection between the facts proven and the fact presumed, and a fair opportunity for the opposing party to make a defense. The court noted that the New York residents are compensated for referrals resulting in purchases, and at least some of those residents will actively solicit other residents in order to increase their referrals and their compensation. Given the direct correlation between referrals and compensation, the court found it rational to presume that it is likely that residents will seek to increase their referrals by soliciting customers, and that it is not unreasonable to presume that affiliated website owners in New York State will reach out to their in-state friends, relatives, and other local individuals in order to accomplish this purpose. Amazon and Overstock also argued that the presumption is not rebuttable because it will be extremely difficult, if not impossible, to prove that none of their New York affiliates is soliciting customers on the retailers’ behalf. However the New York Department of Taxation and Finance has provided a method (contractual prohibition and annual certification) through which the retailers will be deemed to have rebutted the presumption. Although obtaining the necessary information may impose a burden on the retailers, inconvenience does not make the presumption non-rebuttable. The court also noted that the presumption places the burden on the retailers to provide information about the activities of their own affiliates, information that the department would have significant difficulty uncovering on its own.

 

To see previous news items covering this topic, click here and here

(Overstock.com, LLC v. New York State Department of Taxation and Finance, Court of Appeals of the State of New York, Nos. 33 and 34, March 28, 2013)

(04/29/2013)

The federal Marketplace Fairness Act of 2013 was introduced in the House of Representatives and the Senate on February 14, 2013.  If passed, the bill would authorize states that meet certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes.  Under the legislation, a state would be authorized to require a remote seller to collect sales and use taxes only if the remote seller has gross annual receipts in total remote sales in the United States of more than $1 million in the preceding calendar year.

 

Member states of the Streamlined Sales and Use Tax (SST) Agreement would be authorized to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that member state pursuant to the provisions of the SST Agreement. The SST Agreement would have to include certain minimum simplification requirements. An SST member state could begin to exercise authority under the Act beginning 90 days after the state publishes notice of its intent to exercise such authority, but no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Act.

 

States that are not members of the SST Agreement would be authorized, notwithstanding any other provision of law, to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to the state if the state implements certain minimum simplification requirements. The authority would begin no earlier than the first day of the calendar quarter that is at least six months after the state enacts legislation to exercise the authority granted by the Act.

 

To enforce collection requirements on remote sellers that do not meet the small seller exception, states that are not members of the SST Agreement would have to implement the minimum simplification requirements listed below. For SST member states to have collection authority, the requirements would have to be included in the SST Agreement.

 

-       A single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state

-       A single audit of a remote seller for all state and local taxing jurisdictions within that state

-       A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

-       Each state would have to provide a uniform sales and use tax base among the state and the local taxing jurisdictions within the state.

-       Each state would have to source all interstate sales in compliance with the sourcing definition outlined below.

-       Each state would have to provide information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the state and a rates and boundary database. States would have to provide free software for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect state and local rate changes. States would also have to provide certification procedures for persons to be approved as certified software providers (CSPs). Such CSPs would have to be capable of calculating and filing sales and use taxes in all the states qualified under the Act.

-       Each state would have to relieve remote sellers from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a CSP.

-       Each state would have to relieve CSPs from liability to the state or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of misleading or inaccurate information provided by a remote seller.

-       Each state would have to relieve remote sellers and CSPs from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the state.

-       Each state would have to provide remote sellers and CSPs with 90 days’ notice of a rate change by the state or any locality in the state and update the taxability and exemption information and rate and boundary databases, and would have to relieve any remote seller or CSP from liability for collecting sales and use taxes at the immediately preceding effective rate during the 90-day notice period if the required notice is not provided.

 

For non-SST member states, the location to which a remote sale is sourced would be the location where the item sold is received by the purchaser, based on the location indicated by instructions for delivery. When no delivery location is specified, the remote sale is sourced to the customer's address that is either known to the seller or, if not known, obtained by the seller during the transaction, including the address of the customer's payment instrument if no other address is available. If an address is unknown and a billing address cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. SST member states would be required to comply with the sourcing provisions of the SST Agreement.

 

On March 22, 2013, the U.S. Senate voted 75-to-24 in favor of the concept of the Marketplace Fairness Act. The actual Marketplace Fairness Act was introduced in both chambers in February, but last week Senator Enzi, the sponsor of the Senate bill, offered an amendment to the 2014 Budget Resolution that would include insertion of the language of Marketplace Fairness in the budget. It was a largely symbolic tactic since the Budget Resolution itself will not become law, but by approving the amendment, the Senate has shown that there is broad, bipartisan support for the notion of requiring remote sellers to collect sales tax.

 

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act with a 69-27 vote.

 

UPDATE: On September 18, 2013, Rep. Bob Goodlatte, the chairman of the House Judiciary Committee released a set of seven principles that he believes any internet sales tax bill should meet.  The seven principles outlined by Goodlatte are tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights.  For more details on the principles, click here to see the House Judiciary Committee’s press release.

 

We are continuing to track the activities of these bills.  We are also involved in planning efforts involving states and businesses regarding the potential implementation consequences of passage.  Watch for updates in the Sales Tax Compass as well as through our Twitter account and LinkedIn updates. 

 

The text of the bill passed by the Senate can be viewed here.

 

For an update on this news item, visit Senate Introduces Marketplace Fairness Act of 2015.

 

(H.R. 684 and S. 336, as introduced in Congress on February 14, 2013; S.743, as passed by the U.S. Senate on May 6, 2013)

(09/20/2013)

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