'AS IF' the Seller Had A Physical Presence

The Governor of South Dakota signed SB 106 on March 22, 2016. The law requires any seller selling tangible personal property, products transferred electronically, or services for delivery into South Dakota, who does not have a physical presence in the state to remit sales tax 'as if the seller had a physical presence' in the state. For this new requirement to apply, the seller must meet one of two criteria in the previous calendar year or the current calendar year:

1. The seller's gross revenue from sales into South Dakota exceeds $100,000; or
2. The seller has 200 or more separate transactions in South Dakota;

The law applies to sales made on or after May 1, 2016.

BEWARE

If you disagree with South Dakota's new law, you can voluntary comply and request a refund. However, the law explicitly provides that no claim will be granted on the basis that the taxpayer lacked a physical presence in the state.

IMMINENT HARM

In the new law, South Dakota states that the inability to effectively collect sales or use tax from remote sellers is "seriously eroding the sales tax base," "causing revenue losses" and "imminent harm" through the "loss of critical funding for state and local services."

South Dakota asserts that their revenue loss is more problematic because the state has no income tax.

WANT U.S. SUPREME COURT TO RECONSIDER QUILL

South Dakota also states in its new law that the U.S. Supreme Court has an urgent need to reconsider Quill and the physical presence requirement. The law provides that the legislature recognizes that the enactment of this law places remote sellers in a complicated position because existing constitutional doctrine calls this law into question. In other words, South Dakota is enacting an unconstitutional law to create a case to litigate with the hopes of overturning Quill.

The law states that the Legislature intends to clarify that the obligations created by this law would be stayed by the courts until the constitutionality of the law is clearly established by a binding judgment.

WARNING: ENFORCEMENT OF PROVISIONS CURRENTLY BARRED

As the state tax group at McDermott Will & Emery reported in their INSIDE SALT blog, two declaratory judgment suits have been filed which now bars the enforcement of the provisions until the litigation is resolved. The plaintiffs are trade associations representing catalog marketers and e-commerce retailers.

The bottom line is that remote retailers can breathe easy for a moment and do not have to comply with this new law while we wait for the courts to decide. For more details, read the INSIDE SALT post.

How are you protecting your company from state taxes?

As I was reading Deloitte's, "The New Normal in State Taxation," I was thinking, this is great information, but what are companies doing with this information? How are they responding? Are they doing anything differently? Are companies becoming more aggressive in light of the fact that states are aggressively expanding the definition of what is taxable and when you are taxable? Or are companies becoming more conservative, more risk averse? 

Companies are in a difficult position. All of the legal arguments are great, but practically speaking, where do opportunities exist to reduce state and local taxes or conduct your business in a tax-efficient manner? How will you find them? How do you know if other companies are taking similar positions or taking more aggressive positions?  Will those positions withstand the scrutiny of an audit or succeed upon appeal?

Companies seek outside counsel via accounting and law firms, and some times even call the state for guidance. Some companies lobby to obtain favorable legislation or get it changed because proposed legislation will have unintended consequences. 

What is your company doing to make sure it isn't overpaying its state and local taxes?

How is your company reducing risk? 

what level of tax avoidance is permissible?

The following is an excerpt from my December 2, 2013 article in Tax Analysts State Tax Notes:

Here’s a multiple choice: the difference between tax avoidance and tax evasion is (a) whatever the IRS says, (b) a smart lawyer, (c) 10 years in prison, (d) all of the above. — Avery Tolar (Gene Hackman) in The Firm

According to the courts, tax avoidance is legal, but tax evasion is not. However, tax avoidance without business purpose or economic substance may be treated as a sham and disallowed. The history of state tax planning and two recent conflicting state decisions raise a question: What level of tax avoidance is acceptable?

Senate Finance Committee member Chuck Grassley, R-Iowa, once said that at the heart of every abusive tax shelter is a tax lawyer or accountant. That may be true, but what about legal tax planning and avoidance? Who, or what, is at the heart of tax avoidance? The answer to that may depend on the experience of the individual responding — whether he has worked for the government or has represented taxpayers against the government. Hence, we all decide whether tax avoidance should be allowed based on our own biases. For example, I have always worked as a taxpayer representative or advocate. Thus, I naturally lean toward the taxpayer’s point of view.

From the taxpayer’s side, I have experienced tax authorities abuse power, neglect the law, and use vague laws to raise revenue. States have imposed unconstitutional state taxes and pleaded bankruptcy when found guilty. On the other side, I have experienced taxpayers and advisers who analyze laws to the finite detail to wiggle around corners and yet stay within the boundaries of the law. As a result, both government and taxpayers can take advantage of the law, but who is right? What is acceptable? What came first — aggressive tax planning or overreaching and vague tax laws?

When Will Your State Make Tax Law Changes?

If you are looking for some insight into 'when' your state will make tax law changes in 2016, I have provided a link to Multistate Associates schedule of state legislative session dates, and a Map of Current Legislative Sessions.

Let me know if you have any questions or any insights into what changes your state may make. Some of the hot topics or possibilities seem to be a continuation of prior years, depending on what your state has enacted in the past:

1. Imposing nexus on remote retailers for sales tax collection purposes
2. Market-Based Sourcing for apportionment of services
3. Combined Reporting
4. Single-Sales Factor apportionment
5. Tax Haven legislation
6. Transfer Pricing 
7. Addback legislation for related party expenses
8. Sales taxation of services
9. Credits and Incentives

WE ARE WHAT WE ALLOW

"We are what we allow" - if you watch Grey's Anatomy, then you may know I got this quote from last week's show. When Dr. Grey made the comment, I was like 'yes,' we are what we allow. If we allow others to treat us small, then we will be small. If we allow others to define who we are and what we do, then we will become that version of ourselves.

We have a choice. We have a daily decision. Are we going to be what we want to be? Or will we allow others to decide who we will be and how they treat us?

In regards to working in the state tax profession, whether you work in a corporate tax department, the Big 4 or a small regional firm, people in your department or partners will try to define who you are. They will treat you a certain way. You need to decide if you are okay with how they are treating you. Are you who you want to be? Is how they are treating you interfering with who you want to become? Just say no. Stop it today. Decide for yourself.

In regards to state taxation, corporations can get ran over by auditors, by unconstitutional laws, by unreasonable compliance deadlines and notices. Will you sit by and let it go on? Or will you stand up? Will you fight? Will you take action? Will your company defend itself? Will your company lobby for better policy? Will you take your audit issues to appeals? 

We are what we allow.

Peace.

are states knowingly enacting unconstitutional tax laws?

States balance their budgets each year and use the revenue they receive to run programs. When laws are ruled unconstitutional and refunds are required to be paid, it puts a state in a tough position. Sometimes states enact new retroactive legislation to mitigate or eliminate the amount of refunds that would have been required to be paid out under the reversal of an unconstitutional law. 

Note:  I wrote my thesis on this very topic as part of my masters in taxation degree several years ago. However, the issue remains alive and well today.

When a state enacts legislation that later is found to be unconstitutional, what is the appropriate remedy?

• Prospective relief only?
• Retroactive refunds for all taxpayers for all years still open under statute?
• Retroactive refunds for only those taxpayers that have filed protective refund claims?
• Or better yet, should states be allowed to change the unconstitutional legislation/statute in such a way as to make it constitutional? If yes, should states be allowed to make that change retroactive to limit the amount of refunds they will have to pay to taxpayers who paid the tax in prior years (or filed protective refund claims)?

The answers to these questions have been played out in several states over the years. Unfortunately, a state is usually allowed to enact retroactive legislation and reduce the economic pain of paying refunds. 

State Budgets + Political Pressure = Unconstitutional Taxes and Fees?

When states are concerned about their budgets and face political pressures, governors and legislatures often enact, knowingly or unknowingly, unconstitutional state taxes or fees. When states need new revenue (without "raising taxes” or political “fall-out"), certain fees or taxes become attractive alternatives. However, those alternatives may be unconstitutional.

It seems not only unfair, but perhaps “illegal,” for states to collect taxes by enacting laws later to be found unconstitutional, and then refuse to give the money back to taxpayers. A state should not be allowed to profit from collecting taxes it should not have been allowed to collect in the first place.

The Current Problem

Currently, states are knowingly enacting or attempting to enact potentially unconstitutional sales tax collection laws on remote sellers (see Alabama). States are trying to overturn or 'drive around' the Quill Corp. v. North Dakota decision that requires retailers to have a physical presence in a state before the state can require the retailer to collect sales tax on its in-state sales. States are forcing taxpayers to challenge these laws with the hopes the U.S. Supreme Court will accept a case and overturn Quill.

The U.S. Court of Appeals for the Tenth Circuit recently ruled in Direct Mktg. Ass'n v. Brohl (DMA) that Quill did not apply to Colorado's sales tax reporting requirement since Colorado's law was not requiring sales tax collection. Even though the DMA decision did not fall under the application of Quill, Quill was referred to throughout the case. Consequently, if the taxpayer appeals the case, states are hoping the U.S. Supreme Court will take the case and somehow use it to overturn Quill.

The attempt to overturn Quill by enacting laws that are obviously overreaching at best, unconstitutional at worst, puts taxpayers in a difficult predicament. The options are (1) compliance, (2) comply and challenge, or (3) explicitly refuse to comply and challenge the law in court. All of these options are a win for the state and a loss for the taxpayer.

Questions Remain

1. Will Congress enact the Marketplace Fairness Act?
2. Will the U.S. Supreme Court accept a case challenging Quill? If it does, will it overturn Quill or reinforce it?
3. Will the states continue to aggressively skirt Quill regardless of the action or inaction by Congress or the U.S. Supreme Court?

Stay tuned.