Remote Transactions Parity Act (RTPA) of 2015 Provides No Exceptions

The RTPA of 2015 was introduced by Rep. Chaffetz this week in an attempt to provide an alternative to the Marketplace Fairness Act (MFA). If you have read the numerous articles circling in the media, there are groups that praise the RTPA and several that throw stones.

Without taking sides on the issue, the RTPA proposes to reach the same goal of the Marketplace Fairness Act and that is, 'level the playing field' between remote/online retailers and traditional brick and mortar retailers. The RTPA plans to achieve that level playing field the same way the MFA proposed - by ignoring legal precedent against imposing sales tax collection obligations on out-of-state taxpayers who lack a physical presence in a state.

The RTPA proposes to allow each member state under the Streamlined Sales and Use Tax Agreement to require remote sellers not qualifying for the small remote seller exception to collect and remit sales and use taxes on remote sales. States that are not members of the Streamlined Sales and Use Tax Agreement may require remote sellers to collect and remit sales and use taxes on remote sales as long as the state adopts and implements minimum simplification requirements. The act provides a listing of the 'simplification requirements.'

Perhaps the most significant concern with the RTPA (aside from the obvious) is the definition of 'small remote seller." Small remote sellers would be excluded from the collection requirements. The small remote seller exclusion is a phased-in approach and the definition doesn't include remote sellers that use an 'electronic marketplace' (like Etsy). Consequently, any small remote seller using Etsy would be subject to the collection requirements. That is crazy my friends. Most, if not all, remote sellers using Etsy are 'small remote sellers,' otherwise they wouldn't be using Etsy.

The RTPA defines an 'electronic marketplace' as a digital marketing platform where products or services are offered for sale by more than one remote seller, and buyers may purchase such products or services through a common system.

For the first year after enactment, small remote sellers are defined as having gross receipts less than $10 million. For the second year, small remote sellers are defined as having less than $5 million. For the third year, small remote sellers are defined as having less than $1 million in gross receipts.

Despite what side of the issue you are on, you have to ask the following questions: Why does the 'small remote sellers' exception phase-out? Why tax remote sellers using an electronic marketplace regardless of the amount of sales? 

The RTPA asserts that the Act does not create any nexus between a person and a state. This is a strange statement since the effect of the RTPA is creating a nexus relationship between the remote seller and customer causing the remote seller to collect and remit sales taxes. That's like the common analogy of 'putting lipstick on a pig.' Regardless of what you do or call it, it is still a pig.

The RTPA defines a 'remote sale' as a sale that originates in one State and is sourced to another State which the seller would not legally be required to pay, collect or remit state or local sales and use taxes without the authority provided by the RTPA. Consequently, the RTPA is giving states the right to do something that (without the RTPA) would be illegal.

Regardless of what you think about the RTPA, Congress is definitely looking for solutions to resolve this perceived loophole or problem of collecting sales tax on remote sales. My intuition tells me that a solution will be enacted; however, I'm not convinced that solution should be the RTPA.

the 'upfront' Minnesota capital equipment exemption

Companies that make capital equipment purchases in Minnesota will no longer have to go through the pain of paying sales tax, and then filing refund claims. Minnesota legislation (enacted in 2014) changing the capital equipment exemption to an 'upfront' exemption goes live July 1, 2015.

According to Minnesota Sales Tax Fact Sheet No. 103, taxpayers must give a supplier a completed Form ST3, Certificate of Exemption and use the code, "Capital Equipment" to claim the exemption.

This is welcome news for taxpayers in Minnesota. The process of filing refund claims was not only costly (causing taxpayers to pay the tax first), but created a burden on taxpayers to jump through 'hoops' to identify eligible purchases, gather the paperwork and file the claims. 

the usual suspects rise again: economic nexus, combined reporting, market-based sourcing

State legislatures and governors continued to move in the same direction this week - economic nexus, combined reporting, and market-based sourcing. The usual suspects popped up everywhere.

1. Tennessee enacted the "Revenue Modernization Act" (HB 644 and HB 291) - implementing economic nexus (effective for tax years beginning on or after January 1, 2016), and market-based sourcing (applicable to tax years beginning on or after July 1, 2016); the bills also make changes to the affiliated intangible expense addback (applicable to tax years beginning on or after July 1, 2016) and impose a new use tax on cloud computing starting July 1, 2015.
2. Tennessee Supreme Court heard oral arguments in the alternative apportionment Vodafone case (see prior posts for details). The case may be impacted by the Revenue Modernization Act's enactment of market-based sourcing.
3. Connecticut Senate proposed mandatory combined reporting (HB 7061). General Electric and Aetna, Inc. publicly communicated their disapproval by stating they would actually consider moving their operations out of state if the bill is signed by the Governor.
4. Virginia workgroup met to discuss enacting market-based sourcing.
5. Maryland Tax Court continued to use unitary principle to establish nexus (Staples Inc. v. Comptroller).
6. California Court of Appeals held that allowing only intrastate unitary taxpayers to make a separate or combined filing election was discriminatory (Harley-Davidson, Inc. v. Franchise Tax Board).
7. New York Tax Appeals Tribunal reversed an administrative law judge's determination and decided that affiliated corporations were entitled to file on a combined basis (SunGard Capital Corp).

does state sovereignty allow states to overreach?

"Substantial nexus," "economic nexus," "physical presence nexus" - who will win?

Federalism and state sovereignty - are they in conflict or can they work in concert?

"Substantial nexus" used to mean a seller had to have a physical presence in a state before they were subject to taxation. Now, more and more states are leaning on economic nexus standards which essentially say a seller can be subject to tax simply if they have customers in a state or direct some type of activity towards the state to create or maintain a market (vague, I know). Some states have taken it a step further (to make it less vague), and have instituted "factor presence" nexus standards which simply provide 'bright-line' thresholds. Meaning, these states maintain that a seller is subject to tax in their states if the seller has a specific amount of sales, property or payroll in their state. For example, the thresholds may be $50,000 of property, $50,000 of payroll or $500,000 of sales. Some state thresholds are lower for sales, such as $350,000 in Michigan or $250,000 in Washington. Regardless of the threshold limit, factor presence nexus standards and economic nexus is the trend as states look to maintain services and their budgets while imposing tax on non-voters (out-of-state taxpayers).

This discussion regarding nexus standards and the ability of the federal government to create legislation to 'big brother' the states was the subject of the June 2, 2015 Hearing before the U.S. House Subcommittee on Regulatory Reform, Commercial and Antitrust Law. Several government officials and interested parties presented testimony either for or against the 3 pieces of federal legislation currently under review:

1. The Mobile Workforce State Income Tax Simplification Act of 2015 (HR 2315)
2. The Digital Goods and Services Tax Fairness Act of 2015 (HR 1643)
3. The Business Activity Tax Simplification Act of 2015 (HR 2584)

The title to this post insinuates that states are using economic nexus to reach (or overreach) beyond their borders and tax out of state companies based on standards that are arguably unconstitutional. Regardless of that debate and regardless of which side of the fence you stand, states do have the right to determine 'how' and 'who' they tax inside their state as long as they stay with the boundaries of the U.S. Constitution and other applicable federal laws, such as P.L. 86-272. Companies and individuals have the right to conduct business across state lines without concern that they will be subject to tax when their activities are de minimus or do not reach significant (substantial) levels. Otherwise, the burden on interstate commerce is unnecessary and misplaced.

States argue that taxpayers will avoid (evade) paying taxes if the nexus standard or threshold is too high. However, states should only be able to tax what they legally can tax. Then they should seek to adjust their rules to tax who they can tax. Consequently, avoiding taxes that taxpayers shouldn't have to pay in the first place, really isn't evasion.

The states keep wanting to change their rules so they can tax more taxpayers because the economy changes (i.e., impact of Internet, remote sellers, service companies). Fine, change your rules, just don't exceed your authority and taxpayers will comply. Taxpayers deserve clarity, and to be treated within the boundaries of the law (both federal and state), so they can function and operate effectively in what is already a multi-jurisdictional, non-uniform, complex playing field.

don't let state tax 'blind spots' wreck your company

WHAT IS A BLIND SPOT?

According to Wikipedia, a blind spot, also known as a scotoma, is an obscuration of the visual field. A particular blind spot known as the blindspot, or physiological blind spot, or punctum caecum in medical literature, is the place in the visual field that corresponds to the lack of light-detecting photoreceptor cells on the optic disc of the retina where the optic nerve passes through it. Since there are no cells to detect light on the optic disc, a part of the field of vision is not perceived. The brain fills in with surrounding detail and with information from the other eye, so the blind spot is not normally perceived.

Now, that wasn't exactly what I think of when I think of a blind spot.  I usually think of a blind spot when I am driving my car.

In that context, Wikipedia says a blind spot in a vehicle is an area around the vehicle that cannot be directly observed by the driver while at the controls, under existing circumstances. Blind spots exist in a wide range of vehicles: cars, trucks, motorboats and aircraft.

As one is driving an automobile, blind spots are the areas of the road that cannot be seen while looking forward or through either the rear-view or side mirrors. The most common are the rear quarter blind spots, areas towards the rear of the vehicle on both sides. Vehicles in the adjacent lanes of the road that fall into these blind spots may not be visible using only the car's mirrors. Rear quarter blind spots can be:

• checked by turning one's head briefly (risking rear-end collisions),
• eliminated by reducing overlap between side and rear-view mirrors, or
• reduced by installing mirrors with larger fields-of-view.

STATE TAX BLIND SPOTS

Now, what does this have to do with state taxes?  

Well, I believe most, if not all, companies have state tax blind spots.  These blind spots may include:

1. nexus (taxable presence) in states in which the business is not filing income tax returns or collecting sales tax
2. using the incorrect apportionment formula, including the wrong items or amounts in apportionment factors or using the wrong method to apportion different types of income (tangible, intangible, service, etc.)
3. including the wrong entities in a combined or consolidated state income tax return due to incorrect unitary group analysis
4. classifying business income as nonbusiness income (or vice versa)
5. misapplying P.L. 86-272 protection (i.e., business is not operating within limits of protection or business is applying P.L. 86-272 protection to the wrong type of tax)
6. misapplying sales and use tax exemptions
7. not self-assessing and remitting use tax on purchases of taxable items
8. assuming the business is selling is a nontaxable service, when it is actually selling tangible property
9. assuming the business is selling intangible property, when it is actually selling tangible property
10. not adding back related-party expenses on the business' state income tax return when required
11. adding back related-party expenses on the business' state income tax return when NOT required
12. when acquiring or merging entities, failing to perform state and local tax due diligence to uncover liabilities and determine a tax-efficient way to combine the entities (before and after the acquisition/merger)
13. failing to comply with state bulk-sale notification requirements
14. filing a separate return when a combined group return should be filed
15. allowing a FIN 48 reserve for state uncertain tax positions to grow year after year without attempting to reduce uncertainty

And the list goes on and on and on.

YOUR COMPANY / YOUR STATE TAX BLIND SPOTS

In regards to your company's state tax "blind spots," it usually depends on the stage your company is in and the size of your business.

As your business grows and changes, it is vital that your business examines its state tax "blind spots" before a "wreck" (audit assessment, nexus questionnaire, etc.) occurs.

Do you know what your state tax 'blind spots' are?

Do you need to install a warning system?

this week's top 10 developments include: nexus, alternative apportionment, amnesty, transfer pricing and more

Rulings, court cases, and proposed legislation change the landscape of multistate taxation every day. It is impossible to follow all of it. I attempt to keep you aware of the items that may have a significant impact on a broad range of taxpayers. If you are following a major issue in your state that isn't listed below, and would like me to highlight it on this blog, please contact me.

Here are my top 10 for the week:

1. Tennessee is looking to establish click-through nexus for sales tax and economic nexus for income tax. Legislation moving to Governor (HB 644).
2. South Carolina issued draft guidance on alternative apportionment methods. Open for public comments until May 14th. Conference to be held on May 21st.
3. Maryland enacts favorable Amnesty? See McDermott Will & Emery's Inside SALT post for details.
4. North Dakota enacts law to phase-in single sales factor and repeal some Multistate Tax Commission provisions (SB 2292).
5. Louisiana proposes combined reporting (HB 775).
6. Missouri General Assembly passes bill that would establish market-based sourcing for sales other than sales of tangible personal property (SB 19).  
7. Nevada Senate approves bill to broaden definition of physical presence to cause remote sellers to collect sales tax, including a click-through nexus provision (SB 382).  
8. New York enacts multiple tax law changes as part of 2015-2016 budget (AB 3009).
9. New York enacted legislation makes numerous changes to New York City's taxation of corporations (SB 4610).
10. District of Columbia's transfer pricing enforcement program and combined reporting regime - appropriate? - read McDermott Will & Emery's post for details.

If you would like assistance in determining how any of the above will impact your company or clients, please contact me. Also, please contact me if you would like LEVERAGE SALT, LLC to comment, on your behalf, on the South Carolina draft guidance on alternative apportionment methods.