Connecticut: Combined Reporting Update

As discussed in an earlier post, many states have proposed legislation to adopt combined reporting this year. The verdict is out on how many of those states will actually adopt it.

As far as Connecticut is concerned, the legislation did not make it very far. The bill, S.B. 807, failed to pass because it did not receive a favorable report before the required deadline with the Joint Committee on Finance, Revenue and Bonding; therefore it is currently "dead."

Alabama Amnesty: Time is Running Out!!

Time is running out for delinquent taxpayers in Alabama to take advantage of Operation Clean Slate - Alabama's tax amnesty program. The program began Feb. 1 and will end May 15, 2009.

As stated in a News Release on April 22, 2009, individuals and businesses that voluntarily come forward and file past-due returns or amend their returns to properly report their Alabama tax liabilities will not face penalties or prosecution. This program, however, is not available to persons who are already under investigation by the Alabama Department of Revenue (ADOR) or who have been contacted by the ADOR regarding their proper tax liability.

Operation Clean Slate is available to almost all taxpayers and for all tax types. The program applies to individual and corporate income taxes, business privilege tax, and if unregistered with the DOR, sales and use taxes.

Individuals and businesses wanting to take advantage of this program can send their delinquent or amended tax returns to:

Alabama Department of Revenue, P.O. Box 327010, Montgomery, AL 36132-7070.

If you have any questions, you can access the Operation Clean Slate website at: www.revenue.alabama.gov/cleanslate.html, or call 866-326-6755 or 334-242-1055.

Do You Qualify? Should You Take Advantage of Amnesty?

Before contacting Alabama, please contact me at leveragesalt@earthlink.net with any questions or to make sure you qualify for the program.

Minnesota Omnibus Tax Bills Passed by House and Senate

Despite Governor Pawlenty's vow to veto any bills that increase taxes, both the Minnesota House of Representatives and Senate have passed bills that would make numerous changes to the corporate and personal income tax, sales and use tax, property tax and other miscellaneous taxes.

S.F. 2074 and H.F. 2323 were passed on April 24th and April 25th, respectively. For more details on these bills, see my posts on April 21st and April 22nd.

What will happen next? Will the Governor stop it, or will Minnesotans pay more when they can least afford it?

State and Local Tax Simplicity and Uniformity

The terms "simplicity" and "uniformity" are not usually discussed in the same breath as state and local tax. With all of the taxing jurisdictions in the United States (when you include all of the states, cities, and counties, etc.), there is very little uniformity, and nothing seems simple.

With that said, I think the states are starting to act in a uniform manner which, in some sense, is creating simplicity. What do I mean?

Well, during the first four months of this year it appears that most, if not all, states are experiencing the following:

1. Budget and financial difficulties of historical proportions

2. All tax revenues are down, including: income tax, sales tax, property tax, etc.

3. Proposing or passing legislation that closes loopholes, raises taxes or creates new taxes, and attempts to encourage in-state economic development.

4. Proposing or passing legislation enacting new minimum fees or taxes.

5. Proposing or enacting legislation to adopt combined reporting, single-sales factor apportionment, market-based sourcing of revenue from service activities instead of the past cost-of-performance rules, adopting economic nexus and "amazon" type nexus, etc.

6. Proposing or enacting "amnesty" programs to encourage delinquent taxpayers to step-forward and pay back-taxes with the benefit of penalties waived (and interest decreased, in some cases).

7. Adopting language that treats all income as "business income," as much as the U.S. Constitution allows.

8. Adopting similar language in regards to what is considered to be a "unitary group."

9. Adopting or proposing legislation that accelerates the payment of tax revenue to the taxing jurisdiction by either increasing the % paid with each quarterly estimated payment, and/or requiring non-resident withholding to be paid quarterly instead of annually.

10. Increasing interest rates and penalties for late payment of taxes.

I am sure there is more, but these are my top ten (for the moment).

CONCLUSION

In summary, the world of state and local tax has always been a world that changes daily or continually, due to court cases and legislative developments.

In 2009, the state and local tax world feels like it is changing at a whirl-wind pace with the only simplicity and uniformity being created is that soon, everything will be taxable, and penalties and interest will be a revenue stream of their own (if they weren't already).

The 2009 Minnesota Omnibus Tax Bill: The Senate Version

The Minnesota Senate has proposed its own version of the Omnibus Tax Bill (S.F. 2074). This bill has numerous tax law changes and increases similar to the House Bill discussed in a previous post. However, it does include less of the offensive tax increases or disallowance of federal itemized deductions (i.e., mortgage interest, etc.).

Individual Income Tax Bracket Changes

With that said, it does make serious changes to the income tax brackets and rates for individuals, estates and trusts. The bill proposes to adjust the current three brackets and rates and adds a fourth tier bracket and rate. The new rates are for tax years 2009 through 2013, with a return to current rates in tax year 2014 (including expiration of the fourth tier).

The current rates are changed as follows: 5.35 percent to 6.00 percent, 7.05 percent to 7.70 percent, 7.85 percent to 8.50 percent. The income brackets are changed to reflect the inflation adjustment for 2009 as the new base year. The new fourth tier rate is 9.25 percent, and it begins at the following taxable net income levels: $250,000 for married individuals filing joint returns ($125,000 for married filing separately), $141,250 for unmarried individuals, and $212,500 for unmarried individuals qualifying as head of household.

Click on the following link for access to the entire bill:

http://www.senate.leg.state.mn.us/departments/scr/billsumm/summary_display.php?ls=86&session=regular&body=Senate&billtype=SF&billnumber=2074&ss_year=0

If you have any questions, please contact me at leveragesalt@earthlink.net.

The 2009 Minnesota Omnibus Tax Bill: Something to Offend Everyone

H.F. 2323, the Minnesota Omnibus Tax Bill from the House of Representatives, has enough tax increases to offend every taxpayer in Minnesota. Unfortunately, the news channels in the Minnesota Twin Cities area only reported last night about the sales tax increases on beer, alcohol, cigarettes, and the downloading of music and videos on the internet. What about all of the other tax increases?

The other tax increases are actually the major ones to be more worried about.

Individual Tax Changes

For example, in regards to individual taxpayers:

1. Disallowing the itemized deductions for real and personal property taxes, mortgage interest, and charitable contributions.

2. The elimination of numerous other subtractions from taxable income.

3. The imposition of a new 9 percent income tax rate at $300,000 of taxable income for married joint filers, adjusted for other filing statuses.

4. Imposes a gift tax to complement or back up the Minnesota estate tax.

5. Provides that for a single-member limited liability company (LLC), which the owner has elected disregarded status for individual income tax purposes, and which has income that is assigned to Minnesota, the income is taxed as though it was received directly by the individual, rather than by the LLC. This parallels the similar treatment of ownership interest in partnerships (which includes multi-member LLCs) and S corporations.

Corporate Tax Changes

For corporations, there is some good and some bad. For example:

1. Eliminates special rules for foreign operating corporations or FOCs, and the exclusion of 80% of foreign royalties.

2. Expands the definition of domestic corporations to include tax havens.

3. Accelerates the adoption of single sales factor apportionment to tax year 2009. Currently, single sales factor apportionment is being phased in. This bill would also adopt single sales factor apportionment for financial institutions.

4. Indexes (increases) the corporate franchise tax minimum fee for inflation. The lowest fee would increase from $100 to $170. the highest fee would increase from $5,000 to $8,320.

5. Conforms Minnesota's individual and corporate income tax to the increased section 179 expensing amounts for tax year 2009.

Sales Tax Changes

1. Expands the sales tax to digital products and makes conforming changes.

2. Eliminates the isolated and occasional sales exemption for private sales of boats, snowmobiles, and all-terrain vehicles.

3. Defines solicitor for sales tax nexus purposes to include persons that direct sales to internet sites through electronic links ("Amazon" or "agency" nexus).

Other changes include:

1. Providing an option for counties to impose a 1/2 cent sales tax.

2. Numerous Property Tax changes.

3. Other.

CONCLUSION

In summary, there are too many changes within the bill to mention them all here. The good news is that none of these changes have been enacted yet, and Governor Pawlenty has stated that he would veto any tax increase; we'll see. We will also see what compromises may occur that could result in some of these tax law changes being enacted.

Please click on the following link for access to the entire Omnibus Tax Bill:

http://www.house.leg.state.mn.us/hrd/bs/86/HF2323.html

If you have any questions, please contact me at leveragesalt@earthlink.net.

Missouri: Replacing Income Tax with Higher Sales Tax?

On the Missouri House of Representatives website, it has been reported that the House gave final approval to a proposed constitutional amendment that would replace the state income tax with a tax based on consumption.

According to the report, the Amendment (HJR 36) earned 90 votes in the House and it is headed to the Senate. The Amendment would replace the income tax with a higher sales tax (raising the rate from approximately 4% to a rate greater than 5%).

Since the Amendment "amends" the Missouri Constitution, the Amendment would be required to be voted on during a statewide election. Whether this Amendment will reach that stage, remains to be seen.

Click on the following link to access the Missouri House of Representatives website:

http://www.house.mo.gov/news.aspx?id=253

Alabama: Combined Reporting??

Alabama recently became the "next in-line" to introduce Combined Reporting for unitary groups (corporations, etc.)

The Alabama House of Representatives introduced a bill, that if enacted, would apply to tax years beginning after December 31, 2009.

Like all of the other states that have introduced combined reporting this year, we will just have to wait and see if it passes.

H.B. 865, as introduced in the Alabama House of Representatives on April 9, 2009

Texas: Tips For Extending Your 2009 Franchise Tax Report

The Texas Comptroller just released "Tips on Requesting an Extension of Time to File Your 2009 Franchise Tax Report." You can click on the following link to access the publication:

http://www.window.state.tx.us/taxinfo/franchise/ft_extension_tips.html

The tips are very helpful and highlight areas or items that have caused confusion and taxpayers to receive notices over the past six months.

For your convenience, I have reproduced the "tips" provided by the Comptroller:

Single Entities

1. Must complete the Extension Request (form 05-164), include the appropriate payment, and; mail it on or before the due date;

2. Single entities required to pay electronically using TEXNET will establish their extension with their timely extension payment on TEXNET and do not need to submit Form 05-164.

Combined Groups

1. General Rule: A combined group requesting an extension must file both of the following forms with the appropriate payment on or before the due date:

Extension Request (form 05-164), and Extension Affiliate List (form 05-165)

The affiliate list tells Texas which entities will be reported as a part of the combined group, so Texas will not expect a separate report from those affiliates. Filing the extension request without the affiliate list, or the list without the extension request, will not establish an extension for the group.

2. Exception to General Rule:

A combined group required to pay electronically using TEXNET will make an extension payment using TEXNET. In this case, the Extension Request (form 05-164) does not have to be submitted. The Extension Affiliate List (form 05-165) must still be filed.

A combined group is required to electronically transmit payments if any member of the group receives notice that it is required to make payment electronically.

Affiliate List

The affiliate list requires you to report three pieces of information for each affiliate:

the affiliate’s legal name, the affiliate's Texas taxpayer number, and whether or not this affiliate has nexus in Texas.

If the affiliate does not have a Texas taxpayer number, enter the entity’s FEIN. Do not use the entity’s file number registered with the Texas Secretary of State or the reporting entity’s taxpayer number. If the affiliate does not have a Texas taxpayer number or an FEIN, leave the field blank.

The nexus field is worded as "Blacken circle if affiliate does NOT have nexus in Texas." Blacken the circle for the affiliates that do not have nexus in Texas.

Use Comptroller forms to request an extension and submit the affiliate list. Texas will not accept this data in Excel spreadsheets or other formats.

Send in the affiliate list only one time with the original extension request. Do not submit the affiliate list with a second extension request, or when you file the report and affiliate schedule.

Affiliate List vs. Affiliate Schedule

Before filing the report and the affiliate schedule for the August 17 or November 16 extended due date, review the affiliate list submitted with the extension request. The reporting entity must be included on the Affiliate Schedule.

If an entity was included on the affiliate list but not on the affiliate schedule, the combined group will not be in good standing. If an entity was included on the affiliate list in error, notify the Comptroller in writing explaining the error and telling Texas how the entity will report – separately, or as a part of another combined group.

If you have any questions, please contact me at leveragesalt@earthlink.net.

New York: New Budget, New Tax Increases

The Governor of New York signed A.157B and S.57B (ch. 57) on April 7, 2009. The bills make numerous changes to New York's tax laws, including tax increases.

Here is a brief summary of some of the changes. See the bills for all of the changes or contact me at leveragesalt@earthlink.net.

1. Sales and Use Tax Changes

New York adopts an affiliate nexus standard applying to sales made, or uses occurring on or after June 1, 2009.

The term "vendor" was amended to include a seller of tangible personal property or services if either (1) an affiliated person that is a vendor uses in New York, trademarks, service marks, or trade names that are the same as those used by the seller; or (2) an affiliated person engages in activities in New York that inure to the benefit of the seller in its development or maintenance of a market for its goods or services in New York, to the extent the affiliate's activities establish nexus.

Being "affiliated" is defined as having an ownership interest of 5% or more. The 5% can be obtained directly or through another person or group of persons.

2. Partnership Annual Fee

The annual filing fee currently imposed on LLCs and limited liability partnerships, is now imposed on all partnerships. However, partnerships, other than LLPs, with less than $1 million in New York source income, are exempt from the fee.

3. Corporate Franchise Tax

For tax years beginning after January 1, 2010, the required first quarter estimated franchise tax payment will be 40% instead of 30% of the estimated tax liability for general business corporations, banking corporations, and insurance companies. This increase also applies to the Metropolitan Commuter District Surcharge estimated payments.

4. Pass-Through Entities

The sale or exchange of an interest in a partnership, S corporation or LLC that owns real property located in New York when such property has a fair market value representing 50% or more of the total assets held by such pass-through entity on the date of sale, will result in treating the gain or loss as New York source income.

To calculate total assets, only those assets owned by the entity for at least two years before the date of sale or exchange are factored into the calculation.

The gain or loss equals the federal gain or loss multiplied by the ratio of the fair market value of New York assets over the fair market value of total assets.

This change is effective immediately and applies to sales or exchanges occurring 30 or more days after April 7, 2009.

More "Meaningful" Taxes on S Corporations and LLCs?

A recent report published by the Center on Budget and Policy Priorities recommends states reform their tax treatment of S Corporations and Limited Liability Companies to help states finance public services and alleviate their budget deficits.

Summary of Report

The arguments or positions raised in the report are that businesses organized as S Corporations and Limited Liability Companies generate roughly one-fourth of all business receipts. Yet 19 states impose only nominal taxes on those entities.

The report recommends those 19 states should consider imposing "meaningful" levies on S Corporations and Limited Liability Companies as a source of additional revenue to help alleviate the large budget deficits the states are experiencing.

Another point the report makes, is that in the states that do impose significant taxes or levies on S Corps and LLCs, a large majority of those states (31 states) treat LLCs more favorably than S Corps. Therefore, the report recommends those states should consider reforming their tax laws to tax each type of entity more equitably.

NOTE: if you are familiar with the state taxation of pass-through entities (S Corporations, LLCs), then you know that several states such as California, Illinois, Texas, New Hampshire, Tennessee, Michigan, Ohio, Washington and the District of Columbia (to name a few), impose significant taxes on pass-through entities. Some of these states treat pass-through entities the same as C corporations.

Conclusion

In summary, I think the report is very interesting and the recommendations made by the report may be worth considering by the states.

However, often multiple pass-through entities are created for legal protection or asset protection reasons, and can result in a tiered group of S corporations or LLCs. Some states tax every LLC, whether it is a LLC or a single-member LLC. The same occurs with S corporations and Q-subs.

Overall, the taxing structure in many states imposed on pass-through entities with entity level taxes and non-resident withholding requirements, are already burdensome enough. If the states make their taxing structures more "meaningful" on pass-through entities, would more businesses choose to be C corporations?

Click on the following link for access to the report:

http://www.cbpp.org/cms/index.cfm?fa=view&id=2771

California LLC Fee Protective Refund Claims: April 15 Deadline Approaching

If you have a limited liability company operating or doing business in California and filed a California LLC tax return (Form 568) for 2004, the time to file a protective refund claim for the LLC fee is running out. The statute of limitations to request a refund of any or all of the 2004 LLC fee will expire on April 15, 2009.

Background

If you are asking yourself, why would I file a refund claim? Here is why (this is a summary published in California's April 2009 edition of the Tax News):

Prior to the enactment of Assembly Bill 198 (Stats. 2007, Ch. 381, effective on October 10, 2007, and operative for taxable years beginning on or after January 1, 2007), LLCs paid an annual fee based on the LLC's total income from all sources reportable to this state.

The constitutionality of the LLC fee under former Revenue and Taxation Code Section 17942 has been challenged in three separate court cases:

1. Northwest Energetic Services, LLC v. Franchise Tax Board – The LLC in this case registered with the Secretary of State but did no business in California. The Court of Appeal held that assessing an LLC fee on an entity that had no income attributable to activities in California was unconstitutional and the fee should be refunded. This case is now final with respect to the constitutional issue.

2. Ventas Finance I, LLC v. Franchise Tax Board, Court of Appeal, First Appellate District, A116277, A117751 - The LLC in this case had income attributable to activities within and without California. A decision was issued but is not final. (This is the case I mentioned a couple of posts earlier).

3. Bakersfield Mall, LLC v. Franchise Tax Board, San Francisco Superior Court CGC-07-462728 - The LLC in this case alleges it conducted all of its activities in California. The case is ongoing.

Criteria for Filing a Refund Claim

If you filed an LLC tax return (form 568) and paid a fee based on worldwide total income, regardless of where that income was sourced, you may want to file a claim for refund. If you want to file a claim for refund, there is a time limit to request a refund known as the statute of limitations. Generally, you can file a refund claim four years from the due date of the return or one year from the date of overpayment which ever occurs later.

Note: These cases have been going on for a couple of years now, and most taxpayers have filed protective refund claims for tax years prior to 2004 when the statute of limitations were still open.

Process for Filing a Protective Refund Claim (as provided by California):

If an LLC wants to file a refund claim based on recent court cases, the representative or LLC should fax a letter at 916.845.9796 with the following information:

1. The LLC name and identification number issued by the Secretary of State. Unregistered LLCs use the identification number issued by the FTB.
2. This is a claim for refund.
3. The tax years involved.
4. A description of the issue (stating that the LLC fee is unconstitutional is enough).
5. The amount of the claim, which should match the amount of the annual fee that the LLC paid. 6. Name of person to contact, phone number, and fax number.

The letter must be signed by a representative with a valid power of attorney or signed by the LLC's managing member.

California will provide a confirmation of the faxed refund claim receipt. The refund claim will be held pending result of the court's final decision on this issue. FTB cannot email information since the letter will contain confidential information.

Although California prefers a fax, you can send claims for refund for this issue by sending a letter or an amended return to the following address:

Franchise Tax Board PO Box 942867 Sacramento CA 94267-8888

Because the decision in Northwest with respect to the LLC fee is final, California is processing refund claims for LLCs that have the same facts as were involved in the Northwest case, i.e., an LLC that conducted no activities in California.

Both the Ventas and Bakersfield cases are still pending and action on claims for LLCs that have the same facts as were involved in either of these cases will be held pending the final court decision.

For more information, go to California's website and search for FTB Notice 2008-2.

Here is the link to California's April 2009 Tax News:

http://www.ftb.ca.gov/professionals/taxnews/2009/0409/Tax_News_April_2009.shtml

As always, if you have any questions or would like help in filing a protective refund claim, please contact me at leveragesalt@earthlink.net.

Amnesty: Yes or No?

Like other state tax law changes I have mentioned before, the choice to enact an Amnesty program is spreading like wildfire.

What is Amnesty?

Amnesty is generally a time period established by a state to allow taxpayers who are delinquent on their taxes to come forward, and pay those taxes without penalties being imposed. Usually interest is still imposed, but sometimes it may be waived as well.

With that said, each state amnesty program is different or unique; meaning, they each contain their own set of rules, guidelines and qualifications. Amnesty programs usually pertain to certain tax periods, specific tax types, and taxpayers who meet certain criteria. In other words, "look before you leap."

The following states have enacted or authorized amnesty periods recently:

1. Arizona (SB 1003) - Period: May 1 through June 1, 2009; applies to tax years 2002 to 2007; penalties waived; tax and interest must be paid by June 1, 2009;

2. Virginia (SB 1120) - Period: 60 to 75 day period to be set between July 1, 2009 and June 30, 2010; applies to tax years beginning before 1/1/08; penalties and 50% of the interest is waived;

3. New Jersey (AB 3819) - Period: 45 day amnesty period to be established (believed to be May 1 to June 15, 2009; applies to tax returns due after 12/31/2001; penalties and 50% of the interest is waived;

4. Maryland (SB 552) - this Amnesty program has not been enacted yet, but has been passed by the Senate; Proposed Period: September 1 through October 31, 2009; proposed to waive all interest and penalties;

Professional Help

For all of the above amnesty programs, please consult the bills and other guidelines published by the applicable state for more details. Also, consult a knowledgeable state tax professional to analyze whether your company or your client should take advantage of these amnesty programs.

Note: some of the above programs state they do apply to taxpayers under audit. Again, please see the program's details for additional information.

If you have any questions, please contact me at leveragesalt@earthlink.net.

Texas: Prepare for the "Desk Audit Program"

In the March 2009 issue of the Tax Policy News from the Texas Comptroller, Texas addresses several items affecting the Texas Franchise Tax, Insurance Tax, Motor Fuels Tax, and Sales Tax.

You can click on the following link for access to the full March 2009 issue:

http://www.window.state.tx.us/taxinfo/taxpnw/tpn2009/tpn903.html

One of the items I would like to emphasize, is the "Desk Audit Program" mentioned in the Issue.

According to the Issue, the Comptroller's office plans to review approximately 29,000 franchise tax reports that were filed in 2008. The review will focus on the following three areas:

1. Taxpayers that reported a Standard Industrial Classification (SIC) Code in the service industry and computed margin using the cost of goods sold computation;

2. Taxpayers that reported No Tax Due for 2008, but reported greater than $300,000 in gross receipts everywhere on their 2007 franchise tax report; and

3. Taxpayers that used the 0.5 percent tax rate.

Texas plans to review SIC code information previously reported by the taxpayer and the taxpayer's Web site (if applicable) to determine if the taxpayer is indeed a wholesaler or retailer that might have qualified for the 0.5 percent tax rate.

Taxable entities whose 2008 reports do not appear to meet the statutory requirements for using the cost of goods sold computation, no tax due provisions and the criteria for the 0.5 percent tax rate will be contacted. This contact may be in the form of a deficiency determination which may be contested by the taxable entity.

Any taxable entities that find they had a reporting error related to one of the above mentioned issues in their 2008 report, and then amend their report to correct the error, will be granted a waiver of penalty.

Texas also notes that this review process will not preclude an audit of the 2008 report year for other issues.

CONCLUSION

If you fall into one of the categories listed above, you may want to take proactive action to correct any errors and obtain a waiver of penalty.

California: Ventas Finance Case / U.S. Supreme Court Says No

The U.S. Supreme Court has declined to review the Ventas Finance case.

The taxpayer wanted the U.S. Supreme Court to change the remedy to a full refund of the CA LLC Fee paid (LLC Fee based on Total gross receipts). The California Court of Appeal’s remedy was a partial refund (allowing a LLC Fee to be assessed based on California gross receipts, instead of Total gross receipts).

What's Next?

In the other LLC Fee case, Northwest Energetic Services, LLC, California issued a Notice advising taxpayers with similar facts, to fax the necessary information to them so they could recalculate the refund claims. I would expect California to do the same for taxpayers with facts similar to Ventas.

So, in other words, wait for guidance from California for the next step.


Ventas Finance I LLC v. California Franchise Tax Board, U.S. Supreme Court, Dkt. 08-1022, petition for certiorari denied April 6, 2009

“Amazon” Nexus – the Next Epidemic

Alright, what is going on? The phrase, “everybody’s doing it,” seems to come to mind lately when you think of the tax law changes states are proposing or enacting.

For example, “Amazon” nexus. Several states have either enacted or proposed an “Amazon” nexus rule similar to New York’s.

On April 23, 2008, Governor Paterson signed into law N.Y. Tax Law § 1101(b)(8)(vi) ("Commission-Agreement Provision"), which provides:

"a person making sales of tangible personal property or services taxable under this article ("seller") shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ... This presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution during the four quarterly periods in question."

Quickly after it was enacted, Amazon and Overstock.com litigated and argued that the law was unconstitutional. They lost.

The New York Supreme court stated in a couple of excerpts from the case:

In any event, the statutory presumption is by its terms and effect rebuttable. The Commission-Agreement Provision does not conclude that all commissioned residents definitively will solicit business for the seller in a manner that would justify tax collection. Sellers can establish that none of their contractors engage in New York solicitation for them. Out-of-state sellers know exactly with whom they are contracting and can reasonably control and remain informed about whether their New York contractors solicit business from other New York residents.

Out-of-state sellers can shield themselves from a tax-collection obligation by altogether prohibiting in-state solicitation activities referring to them or encouraging sales on their behalf that would subject them to a tax-collection requirement and, as a condition of compensation, requiring that their New York contractors attest to compliance. To the extent that the exercise may be burdensome, it is a cost of doing business associated with the decision to contract with New York residents and offer them incentives for bringing them sales when such an arrangement is profitable to the vendor.

In the end, the Commission-Agreement Provision does not broadly tax any and all internet sales to New York consumers. It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement. The neutral statute simply obligates out-of-state sellers to shoulder their fair-share of the tax-collection burden when using New Yorkers to earn profit from other New Yorkers.

Amazon.com LLC v. New York Department of Taxation and Finance, New York Supreme Court, New York County, Index No. 601247/08, January 12, 2009

Since the loss, other states have quickly jumped on the bandwagon, such as:

Maryland (SB 1071, introduced 3/28/09)
Hawaii (HB 1405, introduced 3/10/09)
Minnesota (HF 401, SF 282, introduced 1/29/09)
North Carolina (SB 487, introduced 3/09/09)
Tennessee (SB 1741, introduced 2/12/09)

California has had public hearings and provided information regarding their position. An Information Paper released on June 18, 2008 by California stated the following:

Out-of-state online retailers offer affiliate programs with persons in California. The California person’s website includes specially formatted links that connect customers to the online retailer’s website to purchase items. The online retailer tracks these sales and pays the affiliate referral fees on qualifying revenue made through their links. Online retailers maintain that these links are similar to website banner ads, and affiliates are advertisers, not salespeople operating on behalf of the out-of-state company.

An out-of-state company has nexus in California if it has a salesperson engaged in authorized selling activities on behalf of the out-of-state retailer. Staff does not believe that a link on a retailer’s affiliate’s website suffices to establish that the affiliate is an authorized salesperson of the out-of-state retailer under section 6203(c). Consequently, under the current provisions of California law, staff does not require out-of-state companies to collect tax based solely on such links on affiliates’ websites. However, other California activities an affiliate may engage in to promote the link may suffice to establish that the affiliate is an authorized salesperson of the out-of-state retailer.

If staff’s understanding of New York’s law is correct, the main difference between New York’s approach and California’s approach regards who has the burden to prove (or disprove) that other activities in support of the link exist that are sufficient to create nexus. Since New York’s approach involves a rebuttable presumption, staff believes that under New York law, as under California law, the existence of a link on an affiliate’s website does not, on its own, conclusively create nexus.

Section 6203 of California statutes provides that “engaged in business” includes maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California. Thus, subsidiaries that are engaged in selling activities on the out-of-state retailer’s behalf create nexus in California for the out-of-state retailer. The out-of-state retailer will be required to collect sales and use tax on all of its sales of taxable property in California. The Board’s Out-of-State District office routinely investigates subsidiaries located in California to determine if their activities create nexus for their out-of-state parent companies. Staff is not aware of an Amazon subsidiary in California that participates in a selling activity on behalf of Amazon.com, such as a warehouse or distribution center.

Conclusion

Online retailers have new sales tax collection responsibilities to worry about.

If you have questions regarding these provisions or their impact on your company or client, please contact me at leveragesalt@earthlink.net.