United States: SALT Top Stories Of 2015

2015 was notable in large part due to a series of decisions issued by state and federal courts which could pave the way for future resolution of several gray areas in state and local taxation. For example, the U.S. Supreme Court issued several major decisions impacting state and local taxes, including Obergefell v. Hodges and Comptroller of the Treasury v. Wynne. In Obergefell, the Court held that same-sex couples had the right to marry. States that did not recognize same-sex marriage prior to the decision issued guidance on filing returns after Obergefell. In Wynne, the Court determined that the failure of Maryland law to allow a credit against county personal income tax for Maryland residents for their passthrough income from an S corporation's out-of-state activities that was taxed by other states was unconstitutional. The costly financial impact of the decision is emerging as Maryland starts issuing refunds. The amount of interest to be paid is unclear and a class action complaint on this issue has already been filed.

At the state level, both New York and Vermont issued decisions that helped practitioners gain insight in those states on what constitutes a unitary business. Meanwhile, Alabama is testing the boundaries of a 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, by promulgating a regulation that challenges the nexus requirement of physical presence. Practitioners may see the first challenges to this move in 2016 as the regulation takes effect at the beginning of next year. In addition, many states enacted either click-through nexus statutes, affiliate statutes or both. The states are clearly moving faster on this issue than Congress, where little progress was made on the federal remote seller nexus bills in 2015.

The Multistate Tax Compact three-factor apportionment election controversy continued in 2015 as a series of taxpayer-unfavorable decisions were issued. The most anticipated and watched case, Gillette Co. v. Franchise Tax Board, is expected to be decided in early January 2016. Meanwhile, the Multistate Tax Commission (MTC) made progress on both its Arm's-Length Adjustment Service (ALAS) and model market-based sourcing regulations in 2015. The success of the MTC's ALAS program is contingent on ten states participating in the program. With only six states currently enlisted, it remains to be seen whether the MTC will be able to get the additional states needed to commit to the program.

On the political front, Illinois and Pennsylvania continue to work on resolving their budget issues and a resolution by the end of 2015 does not look promising. Meanwhile, three jurisdictions, Nevada, Connecticut and the District of Columbia, faced strong opposition from the business community and had to revisit legislation enacted in 2015.

Voters in Nevada may get the opportunity to decide the fate of the state's unpopular commerce tax in 2016 if enough signatures are obtained to get the question on the November ballot. Also, the use of revenue targets as a means to lower tax rates found favor in North Carolina and the District of Columbia, which utilized these provisions in the past year.

Alabama tests boundaries of Quill

In recent years, taxpayers, practitioners and tax authorities alike have recognized the fact that Quill Corp. v. North Dakota1 was decided during a different technological era, and that perhaps in today's electronic economy, the result requiring that a taxpayer have physical presence to be subject to the collection and remittance requirements of a state sales and use tax might be different. In Direct Marketing Association v. Brohl, a U.S. Supreme Court case in which the Tax Injunction Act (TIA) 2 did not bar a challenge in federal court of Colorado's sales and use tax notice and reporting requirements for out-of-state (remote) retailers, Justice Anthony Kennedy addressed the Quill issue in a concurring opinion. 3 Stating that the "legal system should find an appropriate case" for the U.S. Supreme Court to reexamine Quill, the concurring opinion was regarded as a pointed invitation, the likes of which are rarely seen in the jurisprudential context.

The Alabama Department of Revenue swiftly responded to Justice Kennedy's invitation by promulgating a regulation4 that directly challenges the U.S. Supreme Court's decision in Quill by requiring out-of-state sellers to collect and remit sales tax in the absence of a physical presence in the state. 5 The regulation took effect October 22, 2015 and applies to transactions occurring on or after January 1, 2016. 6

While the regulation will be implemented in the coming months, the road to the U.S. Supreme Court is long and uncertain. Once the impact of the regulation becomes substantial, a lawsuit may be filed testing the validity of the regulation. The lawsuit would then need to work its way through the appellate process, be appealed to the U.S. Supreme Court and be heard by the Court. In the meantime, out-of-state sellers will be forced to collect and remit the tax while that viable challenge emerges.

Under the regulation, out-of-state sellers will be required to collect and remit sales and use tax if they meet two conditions: (a) prior calendar year retail sales of tangible personal property in the state are greater than $250,000, based on the previous year's sales; and (b) the seller performs one or more of the activities listed in Alabama Code Section 40-23- 68(b). 7

The activities described in Section 40-23-68(b) generally include:

  • Maintaining, occupying or using an Alabama place of business (by itself or through a subsidiary or agent).
  • Qualifying to do business or registering with the state to collect the sales and use tax.
  • Utilizing employees, agents, salesmen or other personnel operating in Alabama to sell, deliver or take orders for the sale of tangible personal property or services taxable under the Alabama sales and use tax law, or otherwise soliciting and receiving purchases or orders by agents or salesmen.
  • Soliciting orders for tangible personal property by mail if substantial and recurring, and if the retailer benefits from banking, financing, debt collection, telecommunication or marketing activities occurring in Alabama, or benefits from authorized installation, servicing or repair facilities located in Alabama.
  • Using a franchisee or licensee operating under its trade name.
  • Soliciting orders for tangible personal property through advertising disseminated primarily to Alabama customers; advertising transmitted or distributed over an Alabama cable television system; or through a telecommunication or television shopping system intended for broadcast to Alabama customers.
  • Maintaining any contract with Alabama that would allow Alabama to require collection and remittance of sales and use tax under the U.S. Constitution.
  • Distributing catalogs or other advertising matter resulting in orders from Alabama residents. 8

As an alternative to following the statutory provisions in the Alabama Code regarding use tax collection, reporting and remittance obligations, sellers potentially may apply the provisions under the Simplified Sellers' Use Tax Remittance Program. 9 A few details with respect to the Program should be noted, considering that other states ultimately may look to the Program as a template for improving compliance in this area. 10 Admittance into the Program requires the seller to complete an application process with the Department. 11 Sellers must go through an approval process. 12 Under the Program, the simplified sellers' use tax rate is 8 percent of the sales price of any tangible personal property sold or delivered into Alabama by an eligible seller. 13 Purchasers and sellers will not be liable for any additional state or local use tax if they collect and remit the 8 percent tax. 14

Specifically, the rate is capped at 8 percent, regardless of whether the actual combined rate is greater. 15 A taxpayer that pays a higher use tax under the Program than the actual tax imposed in the area where the sale was delivered can apply for a refund or credit. 16 Sellers will be allowed to "keep a percentage of collections as compensation for compliance." 17 This discount is 2 percent of the amount of the use tax collected and timely remitted. 18 The program also provides an amnesty provision. 19 Eligible sellers will be granted amnesty for any uncollected remote use tax on sales in Alabama for the twelve-month period preceding the effective date of the sellers' participation in the Program. 20

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1 504 U.S. 298 (1992).

2 28 U.S.C. § 1341.

3 135 S. Ct. 1124 (2015) (Kennedy, J., concurring). For a discussion of this case, see GT SALT Alert: U.S. Supreme Court Holds Challenge to Colorado's Sales and Use Tax Notice and Reporting Requirements Not Barred by Tax Injunction Act.

4 ALA. ADMIN. CODE r. 810-6-2-.90.03.

5 For further information on this regulation, see GT SALT Alert: New Alabama Regulation to Require Out-of-State Sellers to Collect Sales and Use Tax Contrary to Supreme Court Precedent.

6 Notice – To all persons, firms and corporations making retail sales of tangible personal property into the State of Alabama, Alabama Department of Revenue, Nov. 17, 2015.

7 ALA. ADMIN. CODE r. 810-6-2-.90.03(1).

8 ALA. CODE § 40-23-68(b)(1)-(10).

9 ALA. ADMIN. CODE r. 810-6-2-.90.03(2).

10 For additional information regarding the Program, see Notice – To all persons, firms and corporations making retail sales of tangible personal property into the State of Alabama, Alabama Department of Revenue, Nov. 17, 2015; ADOR Offers Simple Way for Internet Sellers to Remit Use Tax, Alabama Department of Revenue, Sep. 4, 2015.

11 ALA. CODE § 40-23-192(c).

12 Id.

13 ALA. CODE § 40-23-193(a).

14 Id.

15 ALA. CODE § 40-23-193(c).

16 ALA. CODE § 40-23-196.

17 Notice – To all persons, firms and corporations making retail sales of tangible personal property into the State of Alabama, Alabama Department of Revenue, Nov. 17, 2015.

18 ALA. CODE § 40-23-194.

19 ALA. CODE § 40-23-199.

20 Id.

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