Online Sales Tax Battle Pushing State Boundaries

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Joyce E. Cutler

Nov. 8 — U.S. Supreme Court watchers are waiting on justices to take up a challenge to the long-standing principle that an entity must be physically present in a state in order to assess tax, lawyers told Silicon Valley tax professionals.

States are aggressively enacting laws pushing the nexus standard to find threads between a company, including internet-based companies, and an in-state presence, practitioners said during a panel at the High Technology Tax Institute, co-sponsored by Tax Executives Institute and San Jose State University. Alabama, Colorado and South Dakota are among the states expanding their reach to tap revenue from major out-of-state retailers that are suing over the laws.

States are trying to “prosecute as fast as possible to get to the U.S. Supreme Court,” said Carl Erdmann, counsel with Skadden, Arps, Slate, Meagher & Flom LLP in Washington, D.C.

The trade group Direct Marketing Association is challenging a Colorado law requiring out-of-state retailers that don’t collect and remit state sales and use tax on in-state buyers’ purchases to report certain sales and notify purchasers of their tax obligation ( Brohl v. Direct Mktg. Ass’n, U.S., No. 16-458, opposition brief field 11/7/16 ).

Colorado already successfully argued the nexus standard doesn’t apply to its reporting and notice requirement for online vendors. The state is cross petitioning the Supreme Court to clarify the continuing validity of its physical presence rule under Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

The expectation is the court will take the newest case, Jerry McTeague, a Deloitte Tax LLP multistate practice partner in San Jose, Calif., said during the panel.

Friends in Other States

In another potential challenge on Quill, Alabama is defending a Newegg Inc. challenge to the state’s new economic presence regime that requires out-of-state sellers with more than $250,000 of in-state annual sales to collect and remit sales tax (Newegg, Inc. v. Ala., Dep’t of Revenue, Ala. Tax Tribunal, No. S. 16-613, reply filed 9/29/16).

The law took effect the beginning of this year. “My clients got notices by the end of April,” said Brian Pedersen, a partner with Alvarez & Marsal Taxand LLC in Seattle.

Alabama looked up the clients, which are internet retailers, estimated their sales based on population, and issued an assessment plus interest and penalty. “So you get two choices: pay up and go forward or come get us. Sue us, get in line,” Pedersen said.

Due Diligence Issues

Companies with sales representatives living in the states have nexus, Pedersen said. And that’s becoming a due diligence issue, said John Clausen, a director with Moss Adams LLP certified public accountants.

“We’re definitely seeing more startup companies wanting to see where they have nexus and document that,” Clausen said. Nexus can occur earlier on in a company’s existence, and that comes up when companies are acquired.

To contact the reporter on this story: Joyce E. Cutler in San Francisco at JCutler@bna.com

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

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