Minnesota Marketplace Law Ripe for Legal Challenge

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By Michael J. Bologna

Minnesota’s first-in-the-nation law imposing sales tax collection duties on electronic marketplace providers will likely be challenged in court, tax practitioners and an e-commerce trade association told Bloomberg BNA June 1.

Several specialists in state and local tax issues expressed doubts about the legal foundation beneath Minnesota’s marketplace provider requirements, enacted as part of a general revenue law ( House File 1) and signed by Gov. Mark Dayton (DFL) May 30. The law directs the state to require e-commerce marketplaces such as Amazon.com Inc., eBay Inc., and Etsy Inc. to collect Minnesota’s sales and use taxes on behalf of thousands of retailers selling goods and services on their platforms.

“I would expect a challenge,” Harley Duncan, tax managing director in the State and Local Tax group at KPMG LLP and member of Bloomberg BNA’s State Tax Advisory Board. “This is really the last frontier. You have a handful of large marketplaces providing an aggregation point for hundreds, if not thousands, of retailers.”

Jamie Yesnowitz, state and local tax practice and National Tax Office leader for Grant Thonton LLP, said marketplace providers would likely drive such litigation and draw a line in the sand for other states considering similar requirements.

“I think it invites litigation by the marketplace providers,” said Yesnowitz, a member of Bloomberg BNA’s State Tax Advisory Board. “I think marketplace providers are going to think that requiring them to be responsible for the sales and use tax obligations of the businesses that work within these marketplaces is a step too far for them.

“And if Minnesota has decided to do this, you’ve got to think other states are going to follow very quickly,” he told Bloomberg BNA.

At least six states have mulled plans this year to require marketplace providers collect tax from third-party sales on their platforms. Minnesota, however, is the only state to enact such a law.

Reviewing Legal Strategies

H.F. 1 breaks new ground in state tax law with language imposing sales and use tax collection duties on marketplace providers. Online retailers such as Amazon sell their own goods and services, but also provide their platforms to other sellers. In 2015, Amazon revealed it has more than 2 million sellers worldwide, accounting for 40 percent of its sales volume.

Steve DelBianco, executive director of the e-commerce trade association NetChoice, said his policy staff is already reviewing legal options for a court challenge. NetChoice is party to litigation pending in South Dakota and Tennessee over their “economic nexus” regimes that require remote retailers satisfying a specified threshold of in-state sales to collect and remit sales tax.

“Think about the nonsense of a law that would require a shopping mall to be liable for the sales tax on purchases made at stores in the mall,” DelBianco told Bloomberg BNA. “If that sounds absurd, then you understand why this online marketplace law cannot stand up to legal scrutiny or common sense.”

Spokespersons for Amazon and Etsy declined an opportunity to discuss their responses to the new Minnesota law.

Two Fundamental Changes

Jonathan Maddison, a state tax practitioner with Reed Smith LLP in Philadelphia, said H.F. 1 makes two fundamental changes in Minnesota’s sales and use tax code.

The definition of “retailer maintaining a place of business in the state” was amended to include sellers that make sales over a marketplace provider operating in Minnesota. Marketplace providers are defined as any person facilitating a sale by a retailer by listing or advertising items for sale, or entering into agreements with third parties for collecting payments from customers and transmitting such payments to the retailer.

Maddison said the broader definition essentially creates nexus for online retailers selling goods over a marketplace, regardless of physical presence in the state. However, retailers with in-state taxable sales less than $10,000 annually are exempt if they maintain a place of business solely through sales on marketplace platforms.

Maddison said the second change requires marketplace providers to collect and remit tax on any retailer’s sales over their platform, unless the retailer registers with the state to perform such duties.

Two-Tiered Effective Date

H.F. 1 creates two possible effective dates. The marketplace provider requirements would become effective on July 1, 2019, or sooner if the U.S. Supreme Court modifies its 1992 ruling in Quill Corp. v. North Dakota , which limited the ability of states to collect sales tax to those taxpayers with an in-state physical presence. Several states are pushing litigation that they hope will reach the highest court and ultimately overturn Quill.

Maddison said the two-tiered effective date is the most curious feature of the marketplace requirements.

“It means they know it is clearly unconstitutional under current precedent,” Maddison told Bloomberg BNA. “They know that Quill says you have to be physically present to impose a collection obligation, and they see this as constitutionally suspect, and they are hoping something happens within two years.”

Yesnowitz agreed. He said Minnesota is essentially telling providers and retailers “we don’t know whether this passes legal muster yet, so we are preserving it and hopefully down the road we will get some sort of clear guidance from the U.S. Supreme Court.”

Arguments Beyond ‘Quill’

Maddison noted that marketplace providers planning to challenge Minnesota’s law will face a series of procedural hurdles. He said any potential plaintiff seeking injunctive or declaratory relief would have a hard time gaining the sympathies of a judge during the next two years. He noted that plaintiffs won’t be able to demonstrate tangible injuries until the state actually requires the collection of taxes.

Maddison also warned the state to prepare for litigation hung on legal arguments that go beyond the precedent established in Quill.

“It is important for Minnesota to remember the commerce clause is not the only restriction on a state’s taxing authority,” he said. “I think there could be potential challenges under the due process clause and the Internet Tax Freedom Act.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of H.F. 1 is at http://src.bna.com/ptx.

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