salt legislative and regulatory trends - eversheds · pdf fileon march 22, 2016, south dakota...

© 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP

All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

SALT Legislative and Regulatory Trends

Todd A. Lard Partner Andrew D. Appleby, Counsel

TEI New York State and Local Tax Seminar November 9, 2016

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Agenda

Elections Gross Receipts Taxes Sales Tax Nexus Expansion Combined Reporting Market-Based Sourcing Apportionment Ecommerce Platform Collection Tax Havens Taxation of Digital Goods Qui Tam/False Claims Act

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ELECTIONS

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Governor Races

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GROSS RECEIPTS TAXES

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Gross Receipts Taxes

Nevada Commerce Tax: S.B. 483 (signed 6/9/15) ‒ After voters in 2014 rejected a gross receipts tax, NV’s legislature

enacted a new “Commerce Tax” effective 7/1/2015 ‒ Estimated to raise $243 million over the biennium, and it is

imposed on all business entities engaged in a business in Nevada, including pass-through entities (certain exemptions) w/over $4 million in receipts Potential Gross Receipts Tax State

Oregon Ballot Initiative ‒ State government employee unions have successfully placed on

the ballot an initiative (IP 28 or Measure 97) to modify the annual minimum tax (capped at $100k) to impose a 2.5% gross receipts tax on Oregon C corporations with sales exceeding $25 million – with no cap

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State Election Impact

New Commissioners of Revenue Budget control Tax policy

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SALES TAX NEXUS EXPANSION

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Shifting Nexus Landscape

The U.S. Supreme Court has not accepted a nexus case since Quill.

Federal legislation addressing state sales tax collection is caught up in political wrangling.

States have taken action to overturn Quill. ‒ Aggressive nexus positions

‒ Anti-Quill legislation

‒ Anti-Quill legislation that allows for immediate review by state courts

‒ Use tax reporting

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Economic Nexus – Alabama

The Alabama Department of Revenue promulgated regulation 810-6-2-.90.03 imposing sales and use tax reporting and collecting obligations on out-of-state retailers without physical presence in Alabama if such retailer had at least $250,000 in retail sales of tangible personal property the prior calendar year.

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Economic Nexus – South Dakota

On March 22, 2016, South Dakota enacted S.B. 106, which imposes a South Dakota sales and use tax reporting and collection on out-of-state retailers without physical presence in South Dakota if such retailers have in the current year or had in the prior year either:

– $100,000 of gross revenue from the sale of tangible personal property, electronic products, or services delivered into South Dakota; or

– 200 separate transactions in which tangible personal property, electronic products, or services were delivered into South Dakota.

S.B. 106 permits the state to bring a declaratory judgment action in any South Dakota Circuit Court against “any person [that South Dakota] believes meets the criteria of section 1 of [S.B. 106] to establish that the obligation to remit sales tax is applicable and valid under state and federal law.”

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Proposed Economic Nexus

Tennessee: On June 16, 2016, the Tennessee Department of Revenue proposed regulation 1320-05-01-.129 imposing sales and use tax reporting and collecting obligations on out-of-state retailers without physical presence in Tennessee if such retailer had at least $500,000 in retail sales of tangible personal property during the calendar year.

Illinois: On April 15, 2016, the Illinois General Assembly proposed S.B. 1041 to amend Illinois sales tax law to provide that a retailer is also presumed to be “maintaining a place of business in this State” if the retailer's total gross receipts from sales occurring in Illinois in the previous calendar year is $1,000,000 or more.

Minnesota: On April 1, 2016, the Minnesota Legislature proposed H.B. 3787 that would require a remote seller that does not have physical presence in the state to collect and remit Minnesota sales tax if the seller:

– engaged in one of several specified activities that do not require an in-state physical presence; and

– made taxable sales to 20 or more Minnesota purchasers that aggregate to more than $200,000 or makes 200 or more taxable in-state sales.

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COMBINED REPORTING

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Combined Reporting for 2016

Separate Reporting

Combined Reporting

* Based upon general rules.

Not applicable

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Push for Combined Reporting

Pushed in 2016 to no avail: - Alabama - Kentucky - Louisiana - Maryland - Pennsylvania

Success in 2015:

- Connecticut

Pending in 2016: - New Jersey

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Push for Combined Reporting

Indiana: On March 24, 2016, the Indiana General Assembly enacted S.B. 323 calling for a study to be performed by the legislative services agency examining mandatory unitary combined reporting.

- Study released on October 1, 2016

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MARKET-BASED SOURCING

APPORTIONMENT

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Sales Factor: Weighting for 2016

Three factor, double weighted sales

Three factor, triple weighted sales

Single sales factor (DC)

* Based upon general sourcing rules.

Not applicable, no general corporate income tax

Three factor

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Shift Toward Market-Based Sourcing

Changing economy causing states to shift toward adoption of market-based sourcing 23 states and the District of Columbia have adopted

market-based sourcing for service receipts Since 2014, the following jurisdictions have shifted to

market-based sourcing:

- Connecticut - New York - District of Columbia - Pennsylvania - Louisiana - Rhode Island - Massachusetts - Tennessee - Nebraska

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Recently Enacted Market-Based Sourcing

Connecticut - On June 6, 2016, S.B. 502 was enacted, which adopts market-

based sourcing effective for taxable years beginning on or after January 1, 2016.

Louisiana - On June 28, 2016, H.B. 20 was enacted, which adopts market-

based sourcing effective for taxable years beginning on or after January 1, 2016.

North Carolina - On July 1, 2016, H.B. 1030 was enacted, which adopts proposed

market-based sourcing provisions and requires the North Carolina Department of Revenue to issue related proposed regulations.

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Market-Based Sourcing for 2016

Income producing activity / cost of performance sourcing

Service performed sourcing

Market-based sourcing (DC)

* Based upon general sourcing rules.

Not applicable

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Market-Based Sourcing Final Regulations and Guidance

California - On September 15, 2016, the California Franchise Tax Board filed its

final amendments to 18 CCR § 25136-2 governing market-based sourcing of sales of intangible property, amending its rules governing the sourcing of income from interest, marketable securities, dividends and goodwill. The effective date is January 1, 2017.

Massachusetts - On January 2, 2015, the Massachusetts Department of Revenue

issued its new final regulation, 830 CMR 63.38.1, that provides market-based sourcing rules for apportioning receipts from services and transactions involving intangible property.

Michigan - On October 16, 2015, the Michigan Department of Treasury issued

guidance, Michigan Revenue Administrative Bulletin 2015-20, on how to determine where the recipient of services receives the benefit of those services.

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Market-Based Sourcing Final Regulations and Guidance

Nebraska - On December 27, 2015, the Nebraska Department of Revenue

amended business entity regulations, Neb. Admin. Code 24-301 et seq., on apportionment to incorporate market-based sourcing rules.

Rhode Island - On December 23, 2015, the Rhode Island Division of Taxation

issued its new final regulation, R.I. Regs. § CT 15-04, that provides market-based sourcing rules. The effective date was January 12, 2016.

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Market-Based Sourcing Draft Regulations and Guidance

New York - On October 15, 2015, the New York State Department of Taxation

and Finance issued draft market-based sourcing regulations that describe how to source receipts under the hierarchies described in NY Tax L § 210-A.4 for digital products, and NY Tax L § 210-A.10 for other services and other business activities.

Tennessee - On February 25, 2016, the Tennessee Department of Revenue

issued draft market-based sourcing regulations. Market-based sourcing was enacted during the 2015 session (H.B. 644).

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ECOMMERCE PLATFORM COLLECTION

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Sales Tax Collection

Generally, sales or use tax is either: - Paid by seller; - Collected by seller from customer and remitted to state;

or - Paid by customer. Thus, either the seller or the customer in a retail

transaction is responsible for collecting or paying the sales or use tax.

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Ecommerce Platform Collection

With the expansion of electronic commerce marketplaces, states have looked for opportunities to shift the tax collection obligation to new types of entities. States have focused on:

- Online hotel intermediaries (OTC); - Marketplaces (e.g., Ebay); - Transportation platforms (e.g., transportation network companies); - Financial entities; and - Common carriers.

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Ecommerce Platform Collection

States have attempted to shift the tax collection obligation to these entities through: - Asserting these entities are the seller/vendor/retailer OTCs

- Asserting these entities are agents for the sellers - Enacting legislation to require such entities to collect tax OTCs Short-term rental platforms Transportation platforms

- Proposing legislation to require such entities to collect Credit and debit card processors Marketplaces

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Ecommerce Platform Collection – Marketplaces – New York

New York’s 2015 Budget Bill proposed to create a new class of sales tax payer – a “marketplace provider.”

Marketplace providers would have been responsible and liable for

collecting and remitting New York sales tax on sales by all marketplace sellers with which they have an agreement, irrespective of whether the marketplace seller has nexus in New York.

Marketplace providers would have all the duties, benefits and

entitlements of a person required to collect the sales tax as if such marketplace provider were the vendor, operator or recipient with respect to such sale, occupancy or admission.

This proposal was ultimately removed from the final Budget Bill.

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Ecommerce Platform Collection – Marketplaces – Washington

In Washington, H.B. 2224 proposed legislation that would have created a sales tax collection requirement for marketplace facilitators.

The legislation would have shifted the obligation to collect Washington sales and use tax from the actual seller of the product to the marketplace facilitator.

A marketplace facilitator would have been deemed to be an agent of any marketplace seller selling through the marketplace facilitator’s marketplace.

As such, the marketplace facilitator would have been required to collect Washington sales tax on all retail sales to Washington customers made through the marketplace facilitator’s marketplace – even when the sales are not made by the marketplace facilitator and even when the actual seller has nexus and an independent sales tax collection requirement in Washington.

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Ecommerce Platform Collection – Marketplaces – Other States – 2016

Minnesota - Several bills included language that would have required marketplace

providers that facilitate sales to customers in the state to collect and remit sales tax for the marketplace seller unless the seller is already collecting.

- Bills were never passed. Oklahoma

- H 2531 would have required marketplace providers to collect and remit sales and use tax.

- Language was modified before enactment to “allow” marketplace providers to collect.

Rhode Island - H 7375 would have required marketplace providers to collect and remit

sales tax. - Bill was referred to House Committee on Finance.

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TAX HAVENS

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Tax Haven – Developments

Recent tax haven legislative activity: - Colorado (House bill failed in Senate on May 11, 2016) - Connecticut (adopted in 2015; repealed tax haven list on December 29, 2015) - District of Columbia (repealed tax haven list in 2015) - Maine (Governor vetoed in 2014, and 2015 and 2016 renewal efforts failed) - Massachusetts (House withdrew proposed legislation on April 27, 2015; House rejected

proposed budget amendment on April 25, 2016) - Minnesota (efforts in House and Senate failed on May 23, 2016) - New Hampshire (House tabled bill on March 11, 2015) - Oregon (enacted Or. Rev. Stat. § 317.715, effective for tax years beginning on or after January

1, 2014; DOR withdrew proposed rule to lower tax haven ownership threshold on May 24, 2016)

- Rhode Island (enacted R.I. Gen. Laws §§ 44-11-1(c)(8), 44-11-4.1(d), effective for tax years beginning on or after January 1, 2015)

Submissions in response to proposed legislation argue that tax haven lists:

- Are arbitrary and misleading; - Are a “slippery slope” to worldwide unitary combination; and - Are an unsuitable method to address states’ tax avoidance concerns

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TAXATION OF DIGITAL GOODS

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What Are Consumer Digital Goods?

Often digital equivalents to historically tangible items, e.g., books, music, video games and videos (movies, television)

Important distinctions with cloud-based services and B2B services

Influence of the Streamlined Sales and Use Tax Agreement

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Alabama Proposed Regulations – Rental Tax Applies to Streaming Video

The Alabama Department of Revenue (DOR) proposed amendments to the state’s rental tax regulations, which would have applied the tax to “digital transmissions” including on-demand movies and TV, and streaming audio and video. Prop. Ala. Admin. Code r. 810-6-5.09.

After heavy scrutiny during the comment period, and a letter from the Alabama Legislative Council that indicated that the Council would use its administrative review powers to reject enactment of the proposed rule, the Alabama DOR withdrew the proposed amendments.

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Pennsylvania Sales Tax

Beginning August 1, 2016, Pennsylvania imposes sales and use tax on items “electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other manner, including maintenance, updates and support” as tangible personal property. - H.B. 1198, 2016 Sess. (Pa. 2016) (amending 72 Pa. Cons. Stat. §

7201(m)(2)).

Pennsylvania expressly taxes video, photographs, books, any otherwise taxable printed matter, apps, games, music, any other audio, including satellite radio service, canned software, and any other otherwise taxable tangible personal property electronically or digitally delivered, streamed, or accessed.

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QUI TAM/FALSE CLAIMS ACT

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Overview

Under-collection

Qui tam/ False Claims Act

risk

Over-collection

Class action risk

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State False Claims Acts

Approximately 30 jurisdictions have False Claims Acts ‒ Some states restrict their False Claims Act provisions to Medicaid and/or

contractor-type “frauds.” ‒ A number of state False Claims Act provisions contain explicit “tax bars” prohibiting

qui tam actions for allegedly false tax claims (e.g., CA, DC, HI, MA, NM, NYC, NC, TN, VA).

‒ Some state False Claims Act provisions impose a tax bar only with respect to income tax matters (e.g., IL, IN, RI).

‒ A number of states do not appear to restrict the action to a particular subject matter (e.g., DE, FL, NV, NH, NJ).

In 2010, New York became the first state to explicitly authorize the application of its False Claims Act to tax claims.

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Continued Fine Tuning

Some states are seeking expansion of their False Claims Act provisions to authorize application to tax claims. – On June 8, 2016, the Michigan Senate proposed S.B. 1020 to allow qui

tam actions for tax law violations if the net income or sales of a company exceed $1 million for the tax year and damages pleaded exceed $350,000.

Illinois has attempted to curb its False Claims Act without success. – On February 20, 2015, the Illinois General Assembly proposed H.B. 2803

and its companion bill S.B. 1828 to provide that no court could have jurisdiction over a qui tam action relating to a tax administered by the Illinois Department of Revenue, unless the action is brought by the Attorney General.

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Questions?

Todd A. Lard

Sutherland Asbill & Brennan LLP 202.383.0909

[email protected]

Andrew D. Appleby Sutherland Asbill & Brennan LLP

212.389.5042 [email protected]

mailto:[email protected]

mailto:[email protected]

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salt legislative and regulatory trends - eversheds · pdf fileon march 22, 2016, south dakota...

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