Taxing Tech

A Reed Smith State Tax Blog on the Taxation of Emerging Technologies

BREAKING NEWS: IL Circuit Judge Strikes Down Amazon Nexus

By Kelley C. Miller on Posted in Amazon, Illinois, Mike Wynne, Uncategorized

Hat tip to our colleague (and IL guru) in Chicago, Mike Wynne, for letting us know as news broke today that an IL Circuit Court Judge has invalidated as unconstitutional IL Public Act 096-1544, a law enacted last year containing certain so-called Amazon nexus provisions.

After the legislation was signed into law, the Performance Marketing Association (“PMA”) filed a lawsuit in the Circuit Court of Cook County challenging the law and specifically, language that expanded the definition of a retailer maintaining a place of business in Illinois to include remote sellers having contracts with in-state publishers whereby the publisher would refer—either directly or indirectly—customers to the remote seller’s website in exchange for a sales commission or other consideration (and where the seller’s gross receipts amount to more that $10,000 a year as a result of these sales).

Citing Quill Corp. v. North Dakota, 504 U.S. 298 (1992), PMA asserted that absent substantial nexus with Illinois (e.g., a business location or other indicia of physical presence), a law requiring a remote seller to collect and remit sales tax to Illinois would violate the Commerce Clause.

Judge Robert Lopez Cepero today agreed with PMA. A yet-to-be-issued order (there was no decision written up; an order should be released in a few days), will confirm today’s notice striking down the law.

In a nutshell, this may be big news.

Why? Well, first, although the IL decision is just one decision of one Circuit Court Judge in one state, when issued, the Order will be cite-inducing precedence for those that may wish to chip away at the constitutionality of the states’ so-called Amazon laws. Specifically, those that wish to challenge states that have incorporated this “advertising nexus” language.

This is significant because Illinois is not alone in either considering or enacting similar language that would expand the definition of those doing business in the state—i.e., those obligated to collect and remit sales tax for online purchases made as a result of the remote seller entering in to, say, an advertisement agreement with an in-state person (“publisher”).  California, Arkansas, North Carolina, New York, Vermont, and Rhode Island are among the states that have legislatively considered this language. Pennsylvania, while not enacting a law to the same, used similar language in a widely-discussed Bulletin issued last year.

If the law fails in IL, what will this mean for other states? It could mean the end—or, at least, a reprieve or pause—of language in broader laws that affect so-called performance-based marketers or even, just “plain” advertisers. It could also create Constitutional ripples into the various points in opposition to the states’ Amazon laws.

We will post a link to the order here as soon as it is issued.

You Lose? You Lose. Illinois Begins Online Lottery Sales This Weekend

By Kelley C. Miller on Posted in E-Comm, Federal Tax Issues, Illinois

*UPDATED* The New York Times just posted AP’s TechBits roundup, which reports that first day sales on online lottery tickets netted the state of Illinois $15K.  The first ticket was purchased at 7:03 AM.  Illinois residents must register and verify their age in order to purchase the tickets.  Sales include tickets for Lotto as well as Mega Millons games. 

Starting on Sunday, Illinois will begin selling lottery tickets online.  The State projects that the online sales will raise between $80 to $120M each year, generating about one-half of those amounts as profits for the State.  For a cash-strapped state like Illinois, this revenue is not insignificant.

It’s fair to say that other states will soon consider online lottery sales.  In fact, Illinois got a green light from the Justice Department to conduct online sales last December in a joint ruling request submitted by Illinois and New York.  Interestingly, as we’ve seen in the affiliate nexus debates, brick-and-mortar lottery outlets in Illinois have voiced a concerned about the online sales, asserting that the online sales—while offering no price incentive—will nonetheless sharply decrease their revenues since many in-store buyers also make impulse purchases of candy, snack foods, and cigarettes.

While the online sales of lottery tickets don’t raise any state tax issues (aside from the academic argument that lotteries are examples of a regressive tax), there is a notable personal income tax issue.  While gambling losses—including losses from playing lottery games—are deductible for federal tax purposes (but only to the extent of winnings assuming—as is often the case—where a taxpayer is not engaged in the trade or business of gambling; See Section 165(d) of the Internal Revenue Code) gambling losses are not deductible for Illinois residents.  

Utah Zaps a Phantom Menace

By Kelley C. Miller on Posted in New York, Sales and Use Tax, Utah

Zappers and phantomware—software programs that are added-on (zappers) or factory installed (phantomware) to electronic cash register systems and other point-of-sale devices—have been around since the mid-point of the last decade and have been on the minds of state sales tax authorities since about the same time. 

Of the two programs, zappers (traditionally) appear to have no legitimate purpose beyond potentially skimming a bit of cash out of each transaction as it is processed.  Phantomware, on the other hand, may have some legitimacy in the sense that these programs create an electronic “second” record, if you will, of a cash register’s till, however, the software is more often connected with point-of-sales manipulations to potentially alter sales tax ramifications.  Another reason that phantomware programs are particularly troubling to the states is that these programs are often embeds in the operating system and their presence is usually not detectable were the state to ask for a system’s user manual or make-and-model information during a sales tax audit. 

Cognizant of the evasive effects that both zappers and phantomware may have on sales tax receipts, several states have introduced or enacted legislation in the last few years prohibiting the sale of any device or software that might “falsify the electronic records of point-of-sale systems for the purpose of tax evasion.”  (That language is straight out of one of those bills—S2611-2011—legislation passed last year byNew York.) 

Now, Utah has become the latest state to prohibit the sale of zappers and phantonware.  The state recently enacted legislation that would make it illegal to anyone to “willfully or knowingly [sell, purchase, or install] an automated sales suppression device or phantomware with the intent to defraud.”  This, of course, would suggest that phantomware purchased or installed for “legitimate” reasons would not be a crime. 

Penalties include fines up to double the amount of state that would have been due.  The law is slated to go into effect on July 1, 2012.

What We’re Reading…

By Kelley C. Miller on Posted in Affiliate Nexus, Clouds, Cool!... Now, E-Comm

The Oxford Internet Institute’s Policy & Internet Journal has published a Special Issue on Internet Taxation.  The issue features articles that address issues “arising from the application of tax policies that have been developed for the physical world into the new virtual reality.”

Notable pieces include:

Internet Taxation and Principles of Good Tax Policy
Annette Nellen

Traditional and Virtual Shopping Trips: The Taxation of Ecommerce Reconsidered
Aloys Leo Prinz

Incentivizing Out-of-State Vendor Compliance with Sales Tax Revenue Rebates
Geoffrey Propheter

The Intergovernmental Politics of Internet Sales Taxation in the United States

Mitchel Norman Herian

Internet Diffusion and Implications for Taxation: Evidence from U.S. Cigarette Sales
Rajeev K. Goel and Michael A. Nelson

 

 

New Jersey Assembly Passes Affiliate Nexus Deferral Bill

By Kelley C. Miller on Posted in Affiliate Nexus, Allie Carlson, Amazon, E-Comm, New Jersey, Sales and Use Tax

An update on our previous coverage of affiliate nexus legislation in New Jersey: Word this morning that the New Jersey Assembly has passed A2608, a bill that would—at least temporarily—defer sales tax obligations for certain qualified persons who make “significant investments” and “create specified jobs” in the state. The bill amends the state’s sales and use tax definition of seller to allow qualified persons a temporary deferral from their sales tax obligation (regardless of their physical presence in New Jersey) to register as sellers with the State and to collect and remit sales tax.

There is a list of requirements that must be met in order for a qualified person to be eligible for the temporary deferral. Generally, the person must: (1) demonstrate to New Jersey that it does not engage in certain activities (meaning no more than operating a customer operations and processing facility—these are further defined in the bill); (2) demonstrate that the person meets or will make the necessary investments in and create the necessary jobs it will need to in the state (through an intention to create one or more customer operations and processing facility in the state; showing or making a $130M capital investment; creating or showing ability to create 1,500 full-time jobs; and maintaining those jobs for 59 months –all of these things to be shown or done by December 1, 2013); and (3) enter into an agreement with the Division of Taxation (to register as a seller and begin to collect sales tax due on New Jersey purchases on or before July 1, 2013).

Utah Passes Affiliate Nexus Legislation; Urges Congress to Pass Nexus Bill

By Kelley C. Miller on Posted in Affiliate Nexus, Amazon, Federal Legislation, Sales and Use Tax, Utah

Last week, the Utah legislature passed both an affiliate nexus bill that will require remote sellers to collect and remit sales tax and a joint resolution urging Congress to pass national, remote-seller legislation.

H.B. 384 expands the obligation on a seller to collect and remit sales tax to remote sellers who “sell tangible personal property, a service or a product transferred electronically for use in the state if:

(1) the seller holds a substantial ownership interest in, or is owned in whole or substantial part, by a related seller, and

(2) the seller sells the same or a substantially similar line of products as the related seller and does so under the same or substantially similar business name, or

(3) the place of business of the related seller or an in-state employee of the related seller is used to advertise, promote, or facilitate sales by the seller to a purchaser.”

Notability, another bill introduced at about the same time as H.B. 384—H.B. 385, a bill that would have required remote sellers to provide notice to Utah purchasers that their purchases may be subject to use tax—died in the House.

Also last week, the legislature passed H.J.R. 14, a joint resolution urging the U.S. Congress to “support equity and sales tax fairness.” The resolution urges Congress to pass “fair and constitutional collection of state sales tax by both in-state and remote sellers.” The legislature hopes that Congress will consider a laundry-list of factors in the enactment of such legislation, including: (1) state provided or state-certified tax collection remittance software that is simple and easy to maintain; (2) immunity form civil liability for retailers using state provided tax collection software; (3) audit accountability to a single state tax audit authority; (4) the elimination of interstate tax complexity through the streamlining of taxable goods categories; (5) adoption of meaningful small business exceptions (so that small online retailers will not be effected); and (6) fair compensation to a tax collecting retailer.

Currently, there are three sales tax nexus bills pending before Congress—the Main Street Fairness Act; the Marketplace Equity Act; and the Marketplace Fairness Act. (Majority Leader Reid has apparently promised Senator Durbin a vote call on the Marketplace Fairness Act if 60 Senators sign on—there are currently 12 co-sponsors.)

Utah’s affiliate nexus legislation will take effect on July 1, 2012.

Connecticut Legislature Considering Tax on iTunes, eBooks, Ring Tones

By Kelley C. Miller on Posted in Connecticut, Cool!... Now, Dan Dixon, Digital Goods and Services, Sales and Use Tax, Will I Pay Tax on This?

The Connecticut General Assembly’s Finance, Revenue and Bonding Committee has introduced Bill No. 400—legislation that would expand the state’s current sales tax definition of ‘sale’ to include, “the electronic transfer, for consideration, of any digital product [as further defined by the bill] that grants to a purchaser the right or license to use, retain or make a copy of such digital product.”  The bill defines “digital products” as: “digital audio visual works, digital audio works, ring tones, electronic books, and digital codes that provide purchasers with a right to obtain a product.”*

Yesterday, in an interview with Janice Posada of The Hartford Courant, Dan and I explained that Connecticut is the latest in a long string of states that have looked to electronic goods and services—which, at their inception were usually not taxable due to either the lack of a specific, enumerated statute or a lack of policy or other guidance—as a potential source of revenue.

If passed, the bill would impose Connecticut’s 6.35% sales tax on electronic purchases of books, videos, music, games—including digital codes that unlock gaming levels or provide virtual goods for use in online and social media games—and ring tones.

Posada spoke with Committee Chair and State Representative Patricia Wildlitz, who said the purpose of Bill No. 400 is to “level the playing field for the state’s brick-and-mortar retailers.”  Notably, Connecticut’s legislature passed affiliate nexus legislation just last year.  This bill may be the latest effort to accommodate the “level-the-playing-field” argument that is oftern raised by in-state, brick-and-mortar retailers in the affiliate nexus debate.  Wildlitz also told Posada that the Committee was “focusing on jobs and businesses” and that “what [the Committee] want[s] to do is give [Connecticut] retailers the chance to compete with online service.”

Next stop for Bill No. 400 is a public hearing scheduled for tomorrow at 10 AM in Hartford.  Stay tuned (or, should we say, “iTuned”) for continuing developments.

*[Note: Although this definition is similar to the definitions of digital goods per the Streamlined Sales and Use Tax Agreement, Connecticut is an advisory member state—not a full member (read: conforming) state—of the Streamlined Sales Tax Project.]

Tennessee Legislature Passes Affiliate Nexus; Awaiting Governor’s Signature

By Kelley C. Miller on Posted in Affiliate Nexus, Amazon, Sales and Use Tax, Tennessee

Following a series of negotiations with Amazon.com last year regarding the retailer’s plan to build two of its distribution centers in the state, the Tennessee legislature last week passed House Bill 2370/Senate Bill 2232, a new sales tax law that establishes the requirements for determining whether affiliates have physical presence in Tennessee sufficient to establish nexus with the state for sales tax purposes.

The newly passed legislation provides that certain activities of a business’ affiliates in Tennessee, including the sale of tangible personal property for resale and other non-retail activities, may not be considered in determining whether the business has a physical presence in Tennessee sufficient to establish nexus for sales and use tax purposes. This provision would not apply, however, to an affiliate that performs, within Tennessee, the following retail activities on behalf of a business: (1) operates a retail store or kiosk at which customers make purchases, return or exchange items or place orders of tangible personal property; or (2) uses personnel to solicit sales of tangible personal property.

The new law only applies to a business having an affiliate that: (1) places a distribution facility in service after January 1, 2011, and before January 1, 2014; (2) makes, or causes to be made, a capital investment of at least $350 million after January 1, 2011, and before January 1, 2014; and (3) creates at least 3,500 qualified jobs after January 1, 2011, and before January 1, 2014.  Qualified jobs are defined as permanent positions that provide an individual with employment for 12 consecutive months for at least 37.5 hours per week, with minimum health care benefits under current Tennessee law.

Notably, Tennessee’s new affiliate law will be repealed as of the earliest of: January 1, 2014; the failure of the business’s affiliate or the third party to meet the requirements of the law; or the effective date of a law enacted by the U.S. Congress that authorizes Tennessee to require that its sales tax be collected and remitted even if the taxpayer does not have substantial nexus with that state.  The new law will only apply if the business entered into a written agreement pursuant to which it and its retail affiliates would collect state sales and use tax beginning immediately after the earliest of these events.

These provisions afford Internet retailers and specifically, Amazon.com, who meet the above criteria to avoid collecting sales tax on purchases made to Tennessee residents until January 1, 2014.  After January 1, 2014, all companies that meet the affiliate definition will be required to collect and remit sales tax.  In sum, the legislation ensures that if a federal sales tax nexus bill does not pass by 2014, Amazon.com—and possibly other online retailers—will be required to collect sales tax.

In addition to the foregoing provisions, the law also contains a new notice requirement.  A person or business that does not establish nexus with the state under the new law, but that still makes online sales to Tennessee residents must notify the purchaser via email that the purchaser may owe Tennessee use tax on the total sales price of the transaction and must include a link in the email to the Department of Revenue’s website that would allow the purchaser to pay the use tax.  Additionally, sellers must provide a year-end statement of goods purchased and delivered into Tennessee by February 1st of each year (and within 60 days after the enactment date of this law for purchases made in 2011).

 

Idaho Issues Reminder to Online Shoppers; Eye on Federal Nexus Legislation

By Kelley C. Miller on Posted in Affiliate Nexus, Federal Legislation, Idaho

In a press release issued by the Idaho State Tax Commission on Wednesday, the Commission reminded residents that “while a lot has been said recently about whether Internet sales should be taxed” (a not-so-subtle reference to the growing affiliate nexus debate as well as a recently introduced SSUTA conformity bill–see below) under the current Idaho sales and use tax law, residents are required to report and pay use tax on all non-exempt purchases made online where the seller has not collected sales tax.

The release goes on to stress that “the law does not exempt Internet purchases from tax.” Ryan Tilley, the Tax Commission’s Audit and Collections administrator is quoted in the release saying, “When Idaho citizens make untaxed purchases online, it creates an uneven playing field for local businesses that have to charge tax on their sales.”

This reminder comes on the heels of H.B. 581, legislation introduced in the Idaho House late last month that would make Idaho a full member to the Streamlined Sales and Use Tax Agreement which—perhaps more notably—would qualify Idaho full inclusion in states that would be eligible to assert nexus on out-of-state retailers if U.S. Senate Bill 1832—also known as The Marketplace Fairness Act—is passed.

Arizona to Affiliates: No Nexus (For Now); Focus Shifts to Use Tax Reporting

By Kelley C. Miller on Posted in Affiliate Nexus, Arizona, E-Comm

After the Arizona Senate abruptly postponed a vote on S.B. 1338 (its affiliate nexus bill) on Wednesday, yesterday, the Senate—just as quickly as it cancelled the first vote—took up the affiliate bill, and in a vote of 20-8, resoundingly defeated the legislation. During the argument preceding the floor vote, several senators, including Sen. Jerry Lewis (R), argued against the law, citing to the “many high paying jobs” that have been created in the state by Internet retailers, including Amazon.com.

This is not the first time that Arizona has considered affiliate nexus legislation… and it likely won’t be the last. Last year, and directly related to the legislature’s consideration of affiliate nexus, the state passed a bill that now requires residents to report and pay use tax on purchases made from out-of-state Internet retailers on their 2011 state income tax returns.

Notably, there is a pending bill in the house that would eliminate this use tax reporting requirement. Last month, Rep. Debbie Lesko (R) introduced House Bill 2629, which would remove the newly-added Line 30 to the state’s personal income tax return form. Proponents of the measure argue that Line 30 has led to vast confusion among taxpayers and an undue burden on individuals to track their online purchases. The bill was unanimously passed by the House Ways and Means Committee and is presently before the House Rules Committee. A hearing was held on the bill in the Senate Finance Committee earlier this month.