Amazon.com Nexus: The Epidemic Continues!

The "Amazon.com" nexus standard or "click-thru" nexus standard continues to spread the country like an epidemic. Since January 1, 2011, 12 states have introduced "click-thru" nexus legislation.  The most recent to do so are:  Texas (HB1317), Massachusetts (HO1731), Tennessee (HB1912) and Minnesota (SB458). 

The other 8 states that introduced legislation this year are Arizona, Hawaii, Illinois, Mississippi, New Mexico, California, Connecticut, and Vermont.  For information on these bills, go to Amazon.com Nexus.

Recent Update Re:  Illinois

Since Illinois introduced its Amazon.com legislation, Illinois has proposed legislation to stop or prevent Amazon.com nexus (SB1783).

Summary

Legislation continues to be introduced, but no one has passed it yet.  New York, North Carolina and Rhode Island continue to be the only states with Amazon.com legislation on its books. 

What will happen next?

Minnesota State Tax Audits and Appeals: What's The Process?

Are you or your clients currently undergoing a state tax audit?  Have you or your clients received an audit assessment you disagree with?  If the answer is yes, what are your options?

If you disagree with the adjustments being proposed or assessed, it is usually in your best interest to attempt to resolve the issue at the lowest level possible (audit or appeals).  Obviously, the issue, the facts and the strength of your position will determine the approach you should take. 

Statute of Limitations

In Minnesota, the Department of Revenue (DOR) generally has 3½ years after a return is due or filed, whichever is later, to audit your return and send you a formal notice of any change in the amount of tax, penalty and interest you owe, or of a refund.

The time limit to adjust your return can be extended if:

■ you amend or the Internal Revenue Service (IRS) adjusts your federal return,

■ you and the IRS sign an agreement to extend the time period to adjust your federal return,

■ you and the Department of Revenue sign an agreement to extend the time period to adjust your state return,

■ you fail to report 25 percent or more of your gross income on your return,

■ you omit more than 25 percent of the taxes reported on a sales tax or withholding tax return, or

■ you intentionally understate or fraudulently file your return.

These are the most common circumstances in which time limitations are extended. Other situations may also dictate an extension. Note: there are no time limits if you have not filed a return.

After The Audit

If you agree with the audit, you must pay the full amount of tax, penalty and interest due within 60 days of the date the MN DOR notifies you. Otherwise, you will also owe a late payment penalty and additional interest.
If you are entitled to a refund, the MN DOR will notify you and issue you a check.

If you disagree with the audit, you have 60 days from the date the MN DOR notifies you to appeal informally to the Department of Revenue or formally to the Minnesota Tax Court.

You have 60 days from your notice date to:
■ pay the amount due without further penalty or interest, or
■ file an informal appeal with the Department of Revenue, or
■ request an extension to file an appeal with the Department of Revenue, or
■ file a formal appeal with the Minnesota Tax Court.

Note:  During the time of the appeal, interest will continue to accumulate on any unpaid tax determined to be due.  Therefore, it is important to consider if you agree with any amount of the assessment and pay that tax to stop the interest.

Extension

If you are unable to file the written appeal during the 60 day period, you can request a 30 day extension prior to the expiration of the 60 day period.

After the Appeal

If you still disagree with the determination of your appeal, you will have an additional 60 days to appeal to the Minnesota Tax Court.  If you disagree with the Minnesota Tax Court, the next step is the Minnesota Supreme Court.

Need  Help?

Please contact me if you are undergoing an audit and would like representation, or need to appeal a state tax audit.  The initial consultation is free. 

I handle state tax audits and administrative appeals involving individual and corporate income tax, and sales and use tax.  I do not represent taxpayers in the court system, as I am not an attorney.  Whether or not an attorney should be involved depends on your case, and if you desire to take your case all the way to court.  If you contact me, I will be honest and upfront regarding whether you should get an attorney involved or not.  I will consult tax attorneys to obtain their opinion, if necessary. 

If at any time during the appeal,you feel it is necessary to get an attorney involved, I will provide referrals to tax attorneys for your convenience.

Advertising Agencies and Sales Tax: What's The Use?

Depending on the state, advertising services performed by an advertising agency may be taxable or not.  In Minnesota, advertising services can be taxable or nontaxable depending on the "functional use" of the item produced or sold to the customer.

The following is a brief summary of Minnesota's rules:

Definition and Example

Functional use is a term used to distinguish nontaxable advertising services from taxable advertising. It refers to the medium on which the advertising is produced. If the medium has a use beyond the promotional message, it has functional use. Advertising that has a functional use is taxable.

Example: A brochure is used only for advertising. If the advertising message is taken away, nothing is left but a piece of paper. However, a calendar with an advertising message on it is used for both advertising and also date information. If the advertising message is removed, the calendar still provides information about day and month. This calendar has functional use so it is taxable.

Examples of items that will generally be considered nontaxable are:

• printed materials, such as fliers, promotional materials, direct mail materials, and posters;
• radio, television, and other audio or visual commercials (including the cassettes, tapes, films, or slides of such commercials);
• print media advertising such as ads in magazines, newspapers, and other printed materials;
• billboard ads; and
• direct marketing materials not distributed by mail.

Examples of items that will generally be considered taxable are:

• specialty advertising items, such as key chains, calendars, matchbooks, and napkins;
• business cards and stationery;
• books and training and educational materials;
• annual reports;
• business identification signs;
• business directories ( e.g., the yellow pages); and
• items that generally are considered nontaxable but that are mass produced or reproduced in quantities in excess of that reasonably anticipated to be necessary for an advertising campaign, but only to the extent of such excess.

So What?

If you are an advertising agency and not sure if your services or the item you are selling is taxable, please contact me for assistance.  The sales tax rules are different in every state.  The Minnesota rules are provided only as an example.

What Is Your State Doing?

All states are experiencing some level of budget problems. 

Some states are raising taxes.  Some states are cutting spending.

Some states are still in the proposal and negotiation stages. 

What will happen next?

I want to know what is happening in your state? 

Please comment on this post and let me know what is going on in your state. 

Amazon and Its Fight To NOT Collect Sales Tax: Great Tax Planning???

Amazon and its fight to NOT collect sales tax - the battle across the country that seems to be in the press constantly.  Is it great tax planning or aggressive tax planning?  Is it "tax avoidance" or "tax evasion"? 

I know those are strong terms, but I just want to raise the discussion.  I am a taxpayer advocate, I fight for taxpayers every day.  With that said, I wonder if Amazon's efforts are really helping or hurting the Internet or remote retailer community at large?  Has it helped limit the methods that states have tried to utilize to reach Internet and remote retailers? Or has it brought a lot of extra attention to this industry, which in turn has made it an easy target for states that are hurting for money. For example, since January 1, 2011, 10 or so states have introduced "amazon.com" nexus or "click-through" nexus standards. In addition, a few other states have introduced nexus presumption standard legislation and notice requirement legislation.

The use tax "gap" will continue to grow as online sales continue to grow. Unfortunately, I think something is going to have to change to allow states to collect the sales tax or use tax that is due, in an easier manner. I know constitutional nexus standards and court case nexus standards should not be quickly overturned or disregarded, but like I said, something needs to change.

One final note, regardless if what the press is saying is accurate or not regarding the situation, the press does not paint a "nice" picture of Amazon to the tax-paying community.

What do you think?

Minnesota Governor Proposes Amazon.com Nexus!

Minnesota Governor proposes Amazon.com nexus or "click-through" nexus standard in his budget proposal (page 25).

Recommendation

The Governor proposes amending statutes for sales tax nexus to create a rebuttable presumption that a retailer maintains a place of business in the state if they enter into an agreement with a solicitor for the referral of Minnesota customers for a fee and the retailer’s gross receipts are at least $10,000 over a 12-month period. The proposal will result in an additional $10.6 million of sales tax collections in FY 2012-13 on the sale of products that are already subject to the sales and use tax.

Rationale

The proposed change will promote fairness and compliance with the sales and use tax by clarifying the expectation that remote sellers of taxable products to Minnesota purchasers should collect and remit taxes as do storefront retailers selling the same products.

Under current law, taxable purchases for use and consumption in Minnesota are already subject to sales and use tax. However, it is difficult to collect the tax on purchases made from remote sellers who are not required to collect the tax for Minnesota because they do not have a physical presence in Minnesota. Many of these remote sellers sell their products over the Internet. This change would require remote sellers who sell to Minnesota purchasers that are referred under an agreement by a business that has nexus (physical presence) in Minnesota to collect the sales and use tax on those purchases. This situation typically occurs when a purchaser goes to a Minnesota seller’s web-site and then is directed to a remote seller’s web-site to purchase products.

Several states have taken steps to ensure the collectability of tax by remote sellers in recent years and more states are considering such action in current legislative sessions. The current proposal is similar to the approach adopted by the state of New York a few years ago.

Effective for sales and purchases made after June 30, 2011.

Key Goals and Measures

This change would create fairness by leveling the playing field between brick and mortar businesses located within Minnesota and out-of-state sellers who do not have a physical presence in Minnesota. This change would also reduce the burden on purchasers to file Individual Use Tax returns to remit their use tax on their purchases.

Conclusion

Nothing new here.  Proposal is similar to the current laws in New York, North Carolina and Rhode Island (and the other 10 states that have proposed this law in 2011).

Minnesota Governor Proposes Changes to Research and Development Credit!

The Minnesota Governor's budget proposal (page 21) proposes an adjustment to the computation of the base year percentage of the Minnesota research and development credit.  Taxpayer-friendly?  You decide.

Recommendation

The Governor recommends modifying documentation requirements so that taxpayers may benefit from the current law research and development credit when limited base period documentation is available. The change will decrease general fund revenues by $200,000 in FY 2012-13.

Rationale

Under current law, Minnesota businesses may earn a Research and Development Credit (R&D Credit) equal to 10% of the first $2 million and 2.5% of the excess over $2 million of qualifying research and development expenses in Minnesota. Qualifying expenses are calculated relative to a base amount. Some taxpayers lack documentation on R&D spending in the base years of 1984-1988. Without this information, no base year percentage can be computed and no R &D tax credit can be computed. Establishing such documentation would be burdensome for the businesses and difficult to audit and verify for the state.

The recommendation allows the taxpayer to use a base year percentage of 16% when the taxpayer no longer has documentation for 1984 through 1988. Taxpayers that identify that they may be allowed the credit may no longer have documentation from 1984 through 1988.

• The credit provision currently requires that 1984 through 1988 base period documentation must be provided to establish the base year percentage. The maximum base year percentage by statute is 16 %. It is to the benefit of the taxpayer to have the lowest base year percentage. Allowing the maximum base year percentage affords taxpayers the credit when the documentation is no longer available.

• Taxpayers will be allowed the credit when documentation of old years is no longer available.

This change is effective for taxable years ending after December 31, 2010. The department will notify the taxpayers and tax preparation community through the normal publications and internal tax return processing systems will be modified to reflect this change.
 
Conclusion
 
Is this a positive or taxpayer-friendly adjustment or not?  It provides certainty, but is a 16% base-year percentage accurate or helpful to the taxpayer?  Maybe.

Minnesota Governor Proposes to Tax Software-As-A-Service (SaaS)

Minnesota Governor proposes sales taxation of "software-as-a-service" (SaaS) and cloud computing in his budget proposal (page 30).

Recommendation

The Governor recommends that the sales tax apply to charges for the access and use of remote access (web-based) software maintained by the seller or a third-party. Remote access models may also be known as “software as a service” (SaaS), application service provider (ASP), or cloud computing. The sales tax already applies to other software purchases or leases. The provision will increase general fund revenues by $3.4 million in FY 2012-13.

Rationale

As the economy and technology continue to evolve, statutory definitions related to the applicability of the sales tax often need to be adjusted to keep pace and to ensure a level playing field with taxation of similar products and services. This modification will ensure that the purchase or rental of computer services that are hosted remotely will be subject to sales tax the same as would be the case if a customer purchased computer equipment or purchased software for installation on a computer.

Under current law, the sales and use tax applies to charges for a license to use prewritten computer software but does not apply to the access charges for the use of similar software if provided by the seller because the customer does not have title to or control over the prewritten computer software they are using. Minnesota Rule 8130.0500 states that the making available of a computer on a time-share basis for use by customers securing access by remote facilities is a nontaxable service, not the granting of a “license to use” which is taxable. Also, Minnesota Rule 8130.9700 states that the use of equipment on a time-sharing basis, where access to the equipment is only by means of remote access facilities, is not a taxable leasing of such equipment. This makes the applicability of the sales tax more fair by leveling the playing field by making the time-sharing of hardware and the time-sharing of software the same for tax purposes. This proposal would tax the use of prewritten computer software as a license to use prewritten computer software and the use of computer equipment by remote access as a taxable lease of tangible personal property.

Effective July 1, 2011.

Conclusion

This proposal is not quite a surprise, since cloud computing and SaaS are a growing trend.  Most states have not updated their tax laws to directly address it.  Therefore, this proposal may be the first of many across the country.

Minnesota Governor Proposes Tax Increase on Unitary Groups

The Minnesota Governor proposes in his budget plan (page 16), to require all unitary sales to Minnesota to be included in the numerator of the apportionment factor, regardless if the entity with the Minnesota sales has nexus in Minnesota.

Recommendation

The Governor recommends amending statutes to require that all sales to this state of a unitary business to be included in the sales factor for this state. The proposal will increase general fund revenues by $46.0 million in FY 2012-13.

Rationale

As more states have moved closer to full single sales apportionment for corporate tax purposes, some companies have attempted to avoid taxation by restructuring their business to locate all their sales in a company that is in the unitary group but has no nexus in Minnesota. Current law only requires members of a unitary business to include their sales in the numerator of the sales factor if they have Minnesota nexus. The proposed revision to our definition of Minnesota sales would require that sales by members of the unitary business be included even if they have no Minnesota nexus.

The basis for unitary filing is to ensure that the income of the unitary business subject to Minnesota corporate tax reflects the income attributable to Minnesota based on the market provided to the unitary business. When sales to customers in Minnesota by a member of a unitary business are not included in the numerator of the sales factor the net income of the unitary business allocated to Minnesota is understated. Requiring that all Minnesota sales of the unitary business are included in the numerator of the sales factor ensures that the appropriate net income of the unitary business is allocated to Minnesota. By enacting this recommendation Minnesota will be allocated the proper income of the unitary business. This will maintain an even playing field for all businesses benefiting from the Minnesota marketplace.

Effective for taxable years beginning after December 31, 2010. The department will notify the taxpayers and tax preparation community through the normal publications and internal tax return processing systems will be modified to reflect this change.
 
Conclusion:
 
If this proposal passes, it could possibly increase the Minnesota tax liability of all unitary groups filing in Minnesota.

Minnesota Governor Wants to Lower Residency Threshold!

According to Governor Mark Dayton's Budget Proposal (page 11), he wants to lower the residency threshold for individuals that maintain an "abode" in Minnesota for at least six months.

Recommendation

The Governor recommends extending the income tax to persons who are present in the state for more than 60 days but less than 183 and who maintain an abode in Minnesota for at least six months. An exception is made for days an individual is in the state for the purpose of receiving medical services. The provision will generate $30 million a biennium beginning in FY 2012-13.

Rationale

Under current law, an individual is a Minnesota resident for income tax purposes if they are domiciled in Minnesota or if they maintain an abode in Minnesota and are present in the state for 183 days or more. The 183-day bright line test allows for individuals who spend substantial portions of the year in Minnesota (up to 182 days), and maintain an abode in Minnesota, to avoid paying Minnesota income tax but continue to benefit from public services, natural resources and arts and cultural opportunities in Minnesota.

Under the change proposed by the Governor, individuals will continue to make lifestyle choices about where to live and vacation but will no longer be able to avoid Minnesota income taxes simply by being physically present in the state for fewer than 183 days.

Individuals who maintain an abode in Minnesota and are physically present in the state for more than 60 days, but less than 183, will be considered “part-year residents.” Part-year residents will be subject to tax on their Minnesota-sourced income (as they are now) and a pro-rata share of all other income based on the number of days they are present in the state. A credit will be granted for income taxes paid on the same income to other states if the other state does not allow a credit for tax paid to Minnesota. Days an individual is in the state receiving, or caring for a close family member who is receiving medical services will be excluded from determination of part-year resident.

The proposed change will be effective beginning with tax year 2011.
 
CONCLUSION:
 
We will have to wait and see if this budget proposal gets anywhere.  If it does, more individuals are going to be considered Minnesota residents.  Generally, this would apply to individuals that claim residency in other states like Florida, Nevada, etc., but also maintain an "abode" in Minnesota.
 
Keep in mind that Minnesota has aggressively conducted individual residency audits over the past two years.  This may make it even worse.

"Bundled Transactions" - Who Cares?

"Bundled transactions," or "mixed-transactions" as they are sometimes called, is when a business sells items that are taxable with items that are non-taxable (from a sales tax perspective).  When a company sells taxable and non-taxable items together and does not separately state them on the invoice, but "bundles" them together, what happens?  How is the transaction or invoice taxed? 

Separately State (Unbundle)?

In most states, when a taxable item is bundled together with a non-taxable item, the whole transaction becomes taxable.  Ouch!  If you didn't know that, you need to take action now to "unbundle" your transactions and only charge tax on the taxable items.  This is general guidance.  You should consult the state's laws for the state in which your transaction takes place to reach a final conclusion, as each state is different. 

Impacts Services and Tangible Personal Property

This not only impacts sales of tangible personal property, but also services.  You could have a taxable service bundled with a non-taxable service.  You could also have taxable tangible personal property bundled with a non-taxable service. 

So What?

Don't wait until the auditor arrives to review your transactions and correct this.  Act now and mitigate your exposure.

Amazon and Texas: Round 2?

A few months ago, Texas made an audit assessment against Amazon for $269 million in uncollected sales tax.  Texas claims Amazon has nexus in Texas because it has a distribution facility in Texas.  Amazon claims having a distribution facility is not enough to have nexus.

Last week, Amazon served notice that it will be closing its facility in Texas in April.  It did have plans to expand in Texas, but now claims Texas's nexus laws are causing it to withdraw from Texas all together.

Now, I am normally a strong advocate for taxpayers; however, in this case, based on the facts and current Texas nexus standards, I believe Amazon has nexus and should be collecting sales tax. 

With that said, based on other articles on the web, the Texas Governor is unhappy with the Texas Comptroller's position and Amazon's withdrawal from Texas.  Therefore, maybe Texas will consider changing its nexus standard just to make Amazon happy?  If it doesn't change its standard, but relieves Amazon from sales tax collection responsibilities, what does that mean for other similarly situated taxpayers? 

What do you think?

Check out these articles for more info:

Texas Tribune

Columbia Journalism Review

Business Insider

All Companies Have Nexus in Washington State?

A recent Washington State Supreme Court case ruled that an out of state company had "substantial nexus" for Washington's infamous Business and Occupation (B&O) Tax. 

Facts

The taxpayer was an out of state company without a permanent physical presence in the state.  Three employees visited major customers in Washington about two or three times a year.  During those visits, the employees did NOT solicit sales directly, but they answered questions and provided information about the taxpayer's products.

Taxpayer's Position

The taxpayer argued that they did not have "substantial nexus" because in order for a taxpayer to have "physical presence" in a state, the taxpayer must have a "small sales force, plant or office" in the taxing state.  The taxpayer also suggested that the United States Supreme Court requires "continuous local solicitation" to establish substantial nexus. 

Court's Position

The Washington State Supreme Court disagreed with the taxpayer.  The Court stated that "the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state."

The Court held that the taxpayer's activities in the state were designed to maintain its relationships with its customers and to maintain its market within Washington State.  In addition, the activities were not slight or incidental to some other purpose or activity.
 
For your reference, the case is Lamtec Corporation v. Department of Revenue, State of Washington, Washington Supreme Court, No. 83579-9, January 20, 2011.

So What?

Does your company or client have minimal activity (in your opinion) in Washington State that would be treated as "designed to maintain the company's relationships with its customers and to maintain its market within Washington State"?

If the answer is "yes," you may want to take advantage of Washington's amnesty program that is currently in effect.  For more information on the amnesty program, go to WASHINGTON's AMNESTY PROGRAM.

New Jersey Applies Economic Nexus Back to 2002?

Last month, New Jersey issued a Technical Advisory Memorandum (TAM-6) which essentially imposes an economic nexus standard for privilege periods beginning on or after January 1, 2002 for the New Jersey corporation business tax (CBT).

The TAM states:

Corporations that derive receipts from sources within New Jersey or engage in contacts within New Jersey are subject to tax in New Jersey, provided that the taxpayer’s business activity in New Jersey is sufficient to give this State jurisdiction to impose the tax under the constitution and statutes of the United States.

It also states:

Applying the principles of the statute as amended and the above-referenced court decisions, taxpayers performing services and domiciled outside the State that solicit business within the State or derive receipts from sources within the State must file a Corporation Business Tax return and pay the applicable tax to New Jersey. This principle applies to all corporations, including financial corporations. A financial business corporation, a banking corporation, a credit card company or similar business that has its commercial domicile in another state is subject to tax in this State if during any year it obtains or solicits business or receives gross receipts from sources within this State.

Relief Available

Taxpayers may continue to request an adjustment under N.J.S.A. 54:10A-8. Pursuant to N.J.S.A. 54:10A-8 and N.J.A.C.18:7-8.3, if it appears that the business allocation factor computed on the basis of all or any of the property-receipts-payroll fractions does not properly reflect the activity, business, receipts, capital, entire net worth or entire net income of the taxpayer in New Jersey, the Director may adjust or taxpayer may request an adjustment of the business allocation factor.

So What?

If you are deriving income from New Jersey sources, and not filing a New Jersey corporation business tax return, you might have exposure.  If you would like assistance in mitigating your exposure, please contact me.

State and Local Taxes: What Will Happen in 2011?

What do you think are the "hot" state and local tax (SALT) issues in 2011?  What do you think will impact your clients the most? 

Well, to help you get started, here are a few of the topics I see impacting companies this year:

1. Economic nexus standards - currently 42 states say they have economic nexus standards and yet only 5 have adopted "bright-line" standards.  Therefore, the other 37 states have not provided clear guidance on how to apply their economic nexus standards.  Will they adopt "factor-presence" nexus standards or a "bright-line" test? 
2. Will P.L. 86-272 become irrelevant?  As states look more to economic nexus or "bright-line" nexus standards, will they also seek to adopt gross receipts or non-income based taxes so they can apply economic nexus to all companies, not just service providers and sellers of intangibles? 
3. Will all states follow the trend and adopt "market-based" sourcing of service income?  Currently, 13 states utilize "market-based" sourcing or sourcing service income based on where the benefit of the service is derived; generally, the location of the customer.  The other states currently source service income based on where the service is performed.  The combination of "market-based" sourcing and economic nexus may cause service providers to become subject to tax in new states.
4. Amazon.com or "click-thru" nexus - Since January 1, 8 new states have proposed legislation to adopt Amazon.com nexus standards similar to those already adopted by New York, Rhode Island and North Carolina.  Will the legislation pass?  Will other states jump on the bandwagon?
5. E-commerce retailers and remote retailers are under attack either via Amazon.com nexus standards, other nexus presumption standards and the imposition of notification and reporting requirements (similar to Colorado and Oklahoma).  It appears these options are popular tactics to help states close the "use tax" gap.  Will this trend continue?
6. Sales taxation of software, software-as-a-service (SaaS) and Cloud Computing - as the methods in which companies provide and purchase software/services have changed, eventually the sales taxation of software/services will change as well.  The states are currently behind in addressing this change and will soon seek ways to tax it - either by saying the new method is a sale of tangible personal property or by expanding the imposition of their sales tax to services.

Overall, our economy has become predominantly a service economy (whether this is good or bad, is yet to be seen).  We are also moving more and more towards an electronic economy (e-commerce).  The problem is that our current state tax laws were built for a manufacturing economy.  The economic recession's impact on state budgets may just be the "tipping point" which leads or allows states to change their tax laws to more aptly address our economy.  Unfortunately for taxpayers, I think that means more taxes.

Will Rhode Island Repeal Its Amazon.com Nexus Standard?

The Rhode Island General Assembly has introduced a bill (HB5115) that would repeal its "click-thru" nexus or "Amazon.com" nexus standard.

Isn't this ironic?  As other states have introduced Amazon.com nexus standards in 2011, Rhode Island is considering repealing it. 

Stay tuned to see which side will win.

Amazon Nexus Laws Introduced By Everyone???

Okay, not everyone: yet.  It seems that every day lately or every other day, another state is introducing "Amazon.com" affiliate nexus legislation, nexus presumption standards and/or notification/reporting requirements.

Last week, Arizona, and Hawaii joined the ranks of Illinois, Mississippi, New Mexico, California and Connecticut.  Vermont just joined yesterday.  To see the details on all of these, go to Amazon Nexus Runs Wild.  South Dakota hasn't proposed "Amazon.com" nexus, but has proposed nexus presumption standards and notification/reporting requirements.

Arizona's Bill (HB 2551) states the following:
For the purposes of this section, a person making sales of tangible personal property is presumed to be conducting business in this state if the seller contracts with a resident of this state who, for a commission or other consideration, directly or indirectly refers potential customers to the seller, by an Internet website link or otherwise, if the cumulative gross income or gross proceeds from sales by the seller to customers in this state who are referred to the seller by all residents with that type of an agreement with the seller exceeds ten thousand dollars during the preceding twelve months. This presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in this state on the seller's behalf that would satisfy the nexus requirement of the United States constitution during those preceding twelve months.

Hawaii's Bill (HB 1183) creates a nexus standard for taxing out-of-state businesses on their business activities in Hawaii. Amends the definition of engaging in business to include local affiliate agreements. Allows out-of-state businesses to file information regarding sales to residents of the State instead of collecting GET.  In other words, it imposes similar notification and reporting requirements as Colorado has attempted to do.

The "Amazon.com" nexus language in the Hawaii Bill is as follows:
The sale of tangible personal property by a person soliciting business through an independent contractor or other representative if the person 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 person.  This presumption may be rebutted by proof that the resident with whom the person has an agreement did not engage in any solicitation in the State on behalf of the person that would satisfy the nexus requirement of the United States Constitution during the taxable year in question.

South Dakota has introduced two bills.  SB 146 seeks to require certain notice requirements for retailers that do not have nexus in South Dakota which are selling tangible personal property, services, or products transferred electronically for use in South Dakota.  This is similar to Colorado's notification requirements. 

SB 147 seeks to impose a nexus presumption standard for retailers in multiple ways; however, there is no "Amazon.com" nexus standard in the bill.  The Bill States:

A retailer is engaged in the business of selling tangible personal property, services, and products transferred electronically for use in this state if: (1) Both of the following conditions exist:
(a) The retailer holds a substantial ownership interest in, or is owned in whole or in substantial part by, a retailer maintaining a place of business within this state; and
(b) The retailer sells the same or a substantially similar line of products as the related retailer in this state and does so under the same or a substantially similar business name, or the instate facility or instate employee of the related retailer is used to advertise, promote, or facilitate sales by the retailer to a consumer; or
(2) The retailer holds a substantial ownership interest in, or is owned in whole or in substantial part by, a business that maintains a distribution house, sales house, warehouse, or similar place of business in this state that delivers property sold by the retailer to consumers.

Any retailer that is part of a controlled group as defined in § 10-45-20.3 and that controlled group has a component member that is a retailer engaged in business in this state as described in this Act, shall be presumed to be a retailer engaged in business in this state. This presumption may be rebutted by evidence that during the calendar year at issue the component member that is a retailer engaged in business in this state did not engage in any of the activities described in this Act on behalf of the retailer. For purposes of this section, the term, component member, means any component member as defined in Section 1563(b) of the Internal Revenue Code as of January 1, 2011.

Any retailer making sales of tangible personal property to purchasers in this state by mail, telephone, the Internet, or other media which has a contractual relationship with an entity to provide and perform installation, maintenance, or repair services for the retailer's purchasers within this state shall be included within the definition of retailer under the provisions of this Act.

Vermont's bill (HB 143) states:
A person making sales that are taxable under this chapter shall be presumed to be soliciting business through an independent contractor, agent, or other representative if the person 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 person if the cumulative gross receipts from sales by the person to customers in the state who are referred to the person by all residents with this type of an agreement with the person are in excess of $10,000.00 during the preceding tax year.

The presumption may be rebutted by proof that the resident with whom the person has an agreement did not engage in any solicitation in the state on behalf of the person that would satisfy the nexus requirements of the United States Constitution during the tax year in question. This act shall take effect on July 1, 2011.

CONCLUSION

Hopefully this is "clear as mud."  In simple terms, if you are an out-of-state retailer that doesn't collect sales tax on sales into any of the states mentioned, then you need to pay attention.  More specifically, if you are an out-of-state retailer that is part of controlled group of corporations in a similar line of business, OR you are a remote retailer involved in "affiliate programs," and you don't collect sales tax on sales into the states mentioned, then you need to pay attention.

Currently, New York, Rhode Island and North Carolina have Amazon.com nexus laws.  Colorado and Oklahoma have nexus presumption standards for retailers who are component members of controlled groups and meet other requirements.  Colorado and Oklahoma also have notification/reporting requirements. Although, Colorado's notification/reporting requirements are currently ON HOLD.

Stay tuned, "we've only just begun."

Sales Tax Problems Cause SEC Fine!

The Securities and Exchange Commission (SEC) recently ruled in an administrative proceeding that a corporation did not maintain appropriate internal controls and books and records relating to its sales tax liabilities.

Summary

The SEC ruled that the corporation failed to consistently comply with tax laws that required the company to collect sales taxes from its customers and to remit them to the taxing jurisdictions. According to the ruling, the reason for these failures is that the corporation did not have accounting software capable of calculating the amounts of sales taxes owed. The sales tax laws mandated that if the corporation failed to collect and remit the taxes as required, and if the corporation's customers did not otherwise pay the taxes, the corporation became liable for the outstanding sales taxes, plus potential interest and penalties.

In the ruling, the corporation's failures to consistently collect and remit the required taxes ultimately required it to pay substantially all of the uncollected taxes ($3.9 million) itself.

To add insult to injury, not only did the corporation have unpaid sales tax liabilities to deal with, but as a result of the SEC's administrative proceeding, the SEC imposed a penalty of $200,000.

What did the Corporation Do Wrong?

1. Failed to collect sales tax from its customers and remit sales tax to the taxing jurisdictions for several years.
2. Corporation's accounting software was inadequate to track sales tax rates and taxability of the corporation's goods and services.
3. Corporation's software failed to source sales to the correct location or jurisdiction.
4. Corporation's software did not track which customers had "direct pay permits" and other exemptions.
5. Corporation's financial statement reserve for its sales tax liability was understated, and wasn't allocated to specific states.
6. Corporation's records were incomplete and required manual reconstruction of sales data to calculate taxes owed.

So What?

If you are a public company governed by the SEC, it is imperative that you take action immediately to accurately manage and monitor your sales tax obligations and exposure. 

If you are a private company not governed by the SEC, it is still imperative that you take action immediately as well. 

Having outstanding sales tax liabilities can become a significant liability with interest and penalties, if neglected.  If sales tax returns are not filed, the statute of limitations never begin.  Meaning, if the state contacts you first, they can make you file sales tax returns for all prior years in which your company had a requirement to collect and remit sales and/or use tax.

Proactive measures can be taken to mitigate sales and use tax exposure, such as entering into a voluntary disclosure agreement (VDA).  A voluntary disclosure agreement is a process that allows a taxpayer to approach a state on an anonymous basis to "clean-up" past tax liabilities, and comply on a go forward basis.  A VDA allows a company to limit the look-back period (number of prior tax years a state requires returns to be filed), potentially reduce interest, and waive penalties. 

If your company is unsure whether it has sales or use tax exposure, or is unsure how to mitigate that exposure, please contact me for assistance.


For a copy of the SEC Administrative Proceeding, go to:  http://www.sec.gov/litigation/admin/2011/34-63688.pdf

The Battle to Collect Sales Tax on Online Purchases

I was going through my daily morning reading, and found two articles that I thought you would find interesting.  Both articles discuss the continuing saga and complexity of the states' attempts to collect sales and use tax on online purchases.

Check them out and let me know your opinion.  What do you think the answer is?

States Try to Collect Billions in Unpaid Online Sales Taxes

Amazon Fights Off Tax Man