Update: Status of 2010 Affiliate Nexus Legislation

As we reported on March 9, New York-style “Amazon” affiliate nexus legislation was introduced in the 2010 legislative sessions of multiple states.  Even as the North Carolina Department of Revenue has introduced a program intended to entice retailers to register for sales and use tax purposes under its existing affiliate nexus statute (see our recent post for further discussion of the issue), other states are moving closer to adopting similar laws.  At the same time, affiliate nexus legislation has died, for this legislative season at least, in several states.  Here’s an update with regard to such legislation in a number of states:

Moving Forward:

• Connecticut: Bill favorably reported out of committee with recommendation that it “ought to pass”
• Minnesota: Committee hearing on bill scheduled for April 20
• Tennessee: Bill recommended for passage by Tax Subcommittee of Ways & Means, but Tennessee Department of Revenue has indicated that it does not believe mere affiliate relationship would be adequate for nexus

In Committee:

• California: Last action (re-referral to Committee on Appropriations) was April 28, 2010
• Illinois: Last action (referral) was March 19, 2010

Dead (it appears) for 2010:

• Iowa: General Assembly adjourned without acting on the bill
• Maryland: General Assembly adjourned without the bill getting out of committee
• Mississippi: Bill died in committee
• New Mexico: Bill tabled
• Vermont: Ways and Means Committee voted not to include affiliate nexus measure in tax legislation
• Virginia: Affiliate nexus legislation tabled in committee

UPDATE, Aug. 31, 2008:  Please see our most recent post concerning the status of the California Bill here. 

North Carolina’s “Carrot and Stick” Approach To Sales Tax Collection

Recently, a number of our clients received a letter from the North Carolina Department of Revenue, which contained an announcement by the Department of a new “Internet Transactions Resolution Program.” North Carolina, which is one of the three states that has adopted an Amazon Affiliate Nexus Law (see my blog post dated March 9, 2010), provides the following “carrot” as part of the Program: if a retailer registers for sales and use tax and agrees to collect and remit those taxes for four years, beginning September 1, 2010, the Department in turn will not assess tax, penalties or interest for the period prior to September 1, 2010.  In addition, the Department states that it will not seek to obtain information regarding names and addresses of the retailer’s customers prior to September 1, 2010.  (It is noteworthy that Amazon has sued the Department of Revenue on the ground that it has sought personally identifiable information from Amazon regarding Amazon’s customers.)

So, now to the “stick.”  The Department also notes in its letter to direct marketers that for those retailers who fail to participate but are “subject to nexus filing requirements,” the Department will assess all applicable tax, interest and penalties and will not waive any penalties.  Thus, the Department is offering the carrot of an amnesty for past tax liability and relief from any demand for customer information from the retailer for periods prior to September 1, 2010, in lieu of the enforcement.

The next obvious question is how enticing is the carrot and, conversely, how threatening is the stick?  Clearly, if a retailer does not have an affiliate program, and does not otherwise have a physical presence in North Carolina, neither the carrot nor the stick may be enough to induce the retailer to register for sales and use tax purposes.  If, however, a retailer has an affiliate program involving North Carolina companies or individuals, or creating a physical presence in North Carolina, then the offer from the Department may be attractive.

A retailer, guided by its counsel, should look at the nature of its affiliate relationships and, in particular, the terms and conditions of its affiliate program, to determine how it fits within the nexus provisions of the North Carolina statute.  For example, the North Carolina statute states that if a retailer uses an affiliate that is a North Carolina resident and is not able to overcome the presumption that the affiliate is engaged in traditional solicitation activities in the state, then the retailer has nexus.  For retailers that may have difficulty rebutting the presumption, the Department’s offer may be attractive.  If, however, a retailer believes that it can overcome the statutory presumption of nexus resulting from its affiliate relationships, then it would need to engage in a traditional cost-benefit analysis, i.e., do the costs of registering to collect tax (administrative expense, possible negative impact on sales) outweigh the benefits of registering (eliminating any risk of liability for uncollected tax, past and future).

In any event, the decision should not be a knee jerk reaction, but should be based upon a careful analysis of the facts and circumstances of the retailer, and reviewed by counsel for the retailer.  I will be assisting my clients in making such reasoned business decisions, informed by the relevant legal considerations.

Cybersquatting and the UDRP

Recently, I was a guest lecturer at the trademark law class at the University of Maine School of Law, invited by my colleague, Rita Heimes, director of the Maine Center for Law and Innovation.  I always enjoy an opportunity to discuss trademark law in an academic setting, and it is invigorating to meet aspiring young trademark lawyers.

The topic for my talk was the Uniform Dispute Resolution Policy (“UDRP”). For those unfamiliar with this policy, it helps protect businesses against “cybersquatting.”  For instance, if the owner of the Acme brand discovers that the domain name "acme.com" is registered by someone else, and is being used in bad faith, the UDRP is the most effective tool available for Acme to recover that domain name.  Prior to the creation of the UDRP, the prospects for success in a domain name dispute were uncertain, and the costs were potentially exorbitant.  In the mid to late 1990's, when widespread use of the Internet was first becoming prevalent, it was unclear whether existing trademark doctrine enabled the recovery of a domain name in this manner, and in any event, the only way to find out was to launch an expensive and time consuming lawsuit.  This time period was typified by a “gold rush” for ownership of domain names and many famous brand owners discovered to their dismay that their best option for securing the all-important “.com” domain name was to pay millions of dollars to the prescient person who had beaten them to the punch.

The UDRP was introduced at the insistence of brand owners by the Internet Corporation for Assigned Names and Numbers (“ICANN”), the entity that governs the allocation of Internet "real estate," in order to address the gap left by preexisting law.  Any person registering a domain name must consent to participation in the UDRP’s form of alternative dispute resolution, and agree to abide by the dispute resolution’s results. Typical costs to recover a domain name using this process are between $1500 and $3000, the success rate is very high (around 85%), and the process can be completed in a month or less.  The UDRP has been around for more than 10 years and has been used very effectively by brand owners to recover millions of improperly registered or used domain names.  Accordingly, it no longer qualifies for "cutting edge" status, although it is surprising how many brand owners remain unfamiliar with it.

In the course of preparing my remarks, however, I also had occasion to delve into some of the remaining challenges in this area, and to explore recent noteworthy developments. 

For example, the increasingly widespread use of privacy or proxy shields in connection with domain name ownership threatens a number of important policy interests, and complicates the ability to police those who are habitual cybersquatters.  Many persons who register domain names now do so through third parties who hold the domain names essentially in trust, but have no real control over content or other substantive behavior that occurs on the website to which the domain name resolves.  Not surprisingly, this makes it difficult for those who are injured by the content appearing on the website to get access to the real party in interest.  In the cybersquatting area, it can also complicate the ability to prove bad faith, since one accepted method of doing so is to provide evidence of a pattern of cybersquatting behavior by the individual respondent.

Another interesting development in the UDRP decisions also relates to the concept of bad faith.  In an increasing number of cases, UDRP panels are imposing upon cybersquatters an obligation to perform some due diligence in order to determine whether registration of a particular domain name infringes the rights of a third party.  If this trend gets traction in the UDRP world, it has the potential to expand significantly the scope of registrations that might be subject to a bad faith argument.

Finally, in an interesting U.S. District Court case arising out of an Anticybersquatting Consumer Protection Act (15 U.S.C. § 1125(d)) case, a judge has reaffirmed the rule that so-called "gripe sites" are protected under the First Amendment guarantee of free speech, and in most circumstances will not be subject to a claim of bad faith.  Although not a UDRP case, the reasoning is likely to be followed by UDRP panels, at least in the United States. In Career Agents Network v. careeragentsnetwork.biz, the court held that a site which has no commercial purpose, but merely contains commentary and criticism, is protected.  The essence of the court's holding is that there needs to be some profit motive on the part of the owner of the gripe site in order for the trademark owner to prevail.   This will no doubt be disappointing to brand owners,  as gripe sites can be at best an annoyance, and at worst a significant threat to brand loyalty.

So as Starbucks goes goes the economy?

Is Starbuck's success an indicator for the economy? Bloomberg had an interesting article today suggesting just that (See Starbuck's Results Prove Recession's Over). From the piece by Dan Mitchell:

Traffic in Starbucks (SBUX) stores increased by 3 percent. And the average bill grew by 4 percent. More people are going to Starbucks, and, once there, they're spending more. This marks the first time that traffic has grown in more than three years—since before the recession began. The company's operating margins were the highest in its history, growing to 13.4 percent. Of course, that's thanks largely to massive store closings and layoffs during the recession. But it can't happen without top-line growth.

While I'm not convinced that coffee sales at Starbuck's necessarily indicate market recovery, there might be an aspect to higher sales of comfort items that does indicate healthier markets. After all, when the economy is bad, the $3-5 cup of coffee might be the first thing to go for tight-budgeting consumers. More of a luxury or discretionary item that returns when finances are better. The return of consumer spending on discretionary items seems like a good thing. No hard science here, but the idea makes sense.

- JSM

Tales of a Prospective Homebuyer

Today's news reported that the tax credit is helping boost the market for existing home sales (See Bloomberg, U.S. Economy: Tax Credit Helping). The market for existing homes was up 6.8% in March. The homebuyer incentive runs through the end of April and provides an $8000 credit for new home buyers and $6500 for some other homebuyers who meet income requirements. (See, IRS: First-Time Homebuyer Credit).

The housing market is struggling for many reasons that affect current home owners and buyers alike. We are in the market for a new home as I will be joining the faculty at St. Thomas University in Miami next school year. So, we are looking for a home in South Florida. Weston, Florida to be precise. While I don't own a home in my name, I am not eligible for the tax credit as my spouse owns a home in Boston that we now rent out. And the income requirements on the lower credit put that out of reach. But, I am not complaining about that here today. So, what is it like to purchase a home in this market?

After spending a week over spring break viewing homes and making offers on several, we haven't yet secured a home. Well, we don't really need one until August anyways, but shouldn't this be easy with a housing market in crisis? The good news is that existing home sales in Florida are also up 24% over March 2009. (See, Florida's Existing Home). But, homeowners are in crisis in South Florida, with projections that recovery will not hit there meaningfully until 2011. See, Bloomberg: Florida's Housing Market). Despite the increase in sales, prices are down 3% over last year. The number of foreclosures and short sales are high. Due to depressed prices, people who don't have to sell their homes are not entering the market.

So, what did we find? A low inventory of existing homes and not too much to look at. Many homeowners in South Florida seem to have either bought high and are under water or bought low but have taken out additional mortgages on their homes making them underwater. That all ends with even homeowners who are not in trouble with their banks having difficulty selling because they either need to find a buyer who will way overpay over market (not overly likely) or come to a home sale closing with lots of cash. We saw plenty of homes where the seller must ask an over-market price because their mortgages are high, they don't have cash to close and don't qualify for a short sale. Other home owners have cash to close but are bitter at having to spend it this way on a home that is worth much less than two years prior.

Add to all of this short sales and foreclosures. We went to see one shortsale home that was unapproved by the bank where as we walked through the home the agent told us of all the things the current owner was going to remove from the home (appliances, light fixtures . . .). Shortsales can also take months to close if they ever do. We also saw a foreclosed home where the prior owner trashed the home before leaving, taking fixtures, ac units and just doing general damage to the home probably costing $100k to fix. (See, Some Ex-Owners Trashing; Owners of Foreclosed Homes Steal Appliances). Challenges indeed as this is more than I am interested in tackling at this point in time.

I've purchased homes before and always found it a pretty easy process. Most people tend to act rationally and agreeing to a deal for a home after some negotiation. While I am sure we will secure a home before August, tackling South Florida's real estate challenges is not the same as prior home purchases. If the federal government does not extend the tax credit, we may see this little increase dissipate. There are also plenty of foreclosures still in the pipeline that will continue to depress prices and hamper the market for some time. Homebuyers can purchase, but the market is just not the same.

- JSM

Obama Weekly Address on Financial Regulation

In case you missed Obama's address this past weekend on financial regulation, here it is:

No more taxpayer bailouts because a financial company is too big to fail was one of the key messages. Can this really happen? I am skeptical, but I guess we'll have to wait and see what the politicians agree to. Obama is correct in his assertion that something has to change in order to prevent the same crisis from reoccurring. Apparently, there will be much more coming on this issue in the near term.

- JSM

Publishers Should Address State Tax Exposure Regarding the New Agency Pricing Model

As discussed in eBooknewser on April 16, and in TechFlash on April 15, Amazon is now allowing some publishers to set their own prices on e-books sold for the Kindle.  The agency pricing model creates new responsibilities for some publishers in connection with state tax.  Publishers with agency agreements with Apple and Sony, the other main players in the e-book market, also face state tax ramifications stemming from agency pricing agreements.

A publisher becomes a retail seller required to collect and remit sales and use tax on all sales of digital books in each state where digital books are taxable and in which the publisher has nexus.  At this point, of the 45 states and the District of Columbia that impose sales tax, only 24 states actually tax digital products.  But that number is likely to increase as states search for additional revenue.

Another effect of the agency model is that the publisher will be deemed to have nexus in each of the states where its agent—Amazon, Apple or Sony—has nexus in connection with its agency responsibilities of  selling and serving the sale of digital books by the publisher. See Scripto, Inc. v. Carson, 362 U.S. 207; 80 S. Ct. 619; 4 L. Ed. 2d 660 (1960).  But, not only should the publisher review nexus acquired through its arrangements with its e-book sellers, it must also consider nexus on a company-wide basis.  Under well-established U. S. Supreme Court precedent (see National Geographic Society v California Board of Equalization, 430 U.S. 551, 556; 97 S. Ct. 1386; 51 L. Ed. 2d 631 (1977), nexus is based on the activities of all divisions of a company.  Thus, even if the publisher’s activities with regard to print books are unrelated to its sales of digital books, and even though such sales are conducted by separate personnel from separate offices, the publisher will be required to collect sales and use tax on retail sales of e-books in each state in which its print division has nexus.

Other state tax issues are raised by the new digital book model, as well.  Questions include whether the company will have nexus for income tax purposes and gross receipts tax purposes, and whether the protections of Public Law 86-272 will continue to be available.

There are certainly ways to reduce state tax exposure for publishers.  Thus, knowledgeable publishers are considering ways to mitigate state tax exposure before they launch full-scale the agency model.

California Follows Colorado Down the Rabbit Hole

As we wrote last month, Colorado recently enacted legislation requiring retailers that do not collect Colorado sales tax to provide a list of their Colorado customers and the amount of Colorado purchases to the State Department of Revenue on an annual basis. Retailers must also inform purchasers of their duty to remit use tax and provide purchasers an annual statement of their purchases.

In that entry, Matt Schaefer wrote, “Voters in other states beware.” In fact, just days before Colorado’s bill was signed into law, the California Assembly introduced its own, similar legislation: AB 2078, as amended April 5, 2010. The bill is currently before the Assembly’s Committee on Revenue and Taxation. If passed in its current form, California would institute Colorado-type reporting requirements which, like Colorado’s law, are potentially in violation of Quill, discriminate against interstate commerce, and certainly invade consumers’ privacy.

The California rules are quite similar to Colorado’s, but the proposed California law requires quarterly, instead of annual, reports and provides an exemption based on sales volume. The bill provides that:

• Any retailer making sales subject to tax, that is not required to collect use tax, “shall provide notification on its Internet Web site or retail catalogue that tax is imposed…and is required to be paid by the purchaser.” Cal. Rev. & Tax Code § 6208(2) (as proposed).

• Such retailers must file on a quarterly basis “a report that sets forth the names and addresses of purchasers of tangible personal property, the sales price of the property, the date of the sale, and such other information as the board may require.” This requirement does not apply to retailers with qualified receipts of less than $100,000 in the prior year if the retailer’s qualified receipts are “reasonably expected” to be less than $100,000 in the current year, as well. Cal. Rev & Tax Code §§ 7055(7)(b)(1), (2) (as proposed).

Also similar to Colorado’s law, AB 2078 creates a rebuttable presumption that if a “controlled group of corporations has a component member that is a retailer engaged in business in [California],…[any retailer that is a part of the controlled group] shall be presumed to be a retailer engaged in business in” California. Cal. Rev. & Tax Code § 6203(1)(f) (as proposed). The bill does not provide any information about how a retailer can rebut this presumption.

Obviously, although similar in nature to Colorado’s law, the California bill potentially imposes even more onerous reporting obligations for out-of-state retailers, based on the sheer number of customers located in California and the quarterly filing requirements. Retailers also should be concerned about a legislation domino-effect. As we wrote previously, South Dakota is already informally demanding that out-of-state companies provide the State a list of in-state purchasers who may owe use tax. Which states will be next to attempt to regulate interstate commerce?

UPDATE, Aug. 31, 2010:  Please see our most recent post concerning the status of the California Bill here.

UPDATE, Jul. 5, 2011: California has enacted a new nexus law. 

New York Threatens to Discontinue Long-Standing Promotional Material Exemption

As a result of the U.S. Supreme Court’s decision in D. H. Holmes Co., Ltd. v. McNamara (486 U.S. 24 (1988)), a number of states began taxing promotional materials printed outside of the state and distributed within the state.  New York was one of those states until March 1, 1997.  At that time, New York enacted an amendment to New York Tax Law Section 1115(n) to exempt promotional materials distributed in the State.  The exemption has been broadly interpreted to include the finished product as well as mechanicals, layouts, artwork, photographs, and other pre-press services and materials, and also includes services relating to mailing lists.  In a search for revenue, New York now threatens to remove this exemption.  If passed, New York Assembly Bill - A.9710-B Budget Article VII – Part R would eliminate the exemption provided in Section 1115(n).

It is also reported that Pennsylvania is thinking of eliminating its exemption, too.  Other states, such as California, Michigan and Ohio, provide exemptions for promotional materials distributed in the state, and thus far have not sought to eliminate the exemptions.  In fact, I recently argued and won a case against the Board of Equalization at the California Court of Appeal, PeoplePC v. California BOE, in which the Court ruled that California’s printed sales message exemption applies not only to promotions printed on paper, but also to promotions printed on CDs.

As Matt Schaefer wrote in this blog last month, states have begun putting pressure on companies to collect use tax on promotional materials, even on sales to clients with no physical presence in such states.  Let’s hope that there is not also a trend to eliminate the exemption for printed sales messages where direct marketers are still protected.

Are You Selling "Children's Products"?

When Congress passed the Consumer Product Safety Improvement Act (the “CPSIA”) in 2008, it included a new definition of what constitutes a "children's product." Along with that new definition came a host of onerous testing, certification, and product design/composition standards. If the products you're selling fall into this category, your legal obligations expand dramatically to include third-party certification, substrate testing for lead, prohibitions on phthalates, product tracking labels, and more.  And so, the question of "What is a children's product?" becomes extraordinarily consequential for wholesalers, retailers, "private labelers," and importers.

As is traditionally the case with "age grading" of products, the CPSIA's definition generalizes things to the point of providing very little practical guidance on many products.  Under the new regime, a "children's product" is "a consumer product designed or intended primarily for children 12 years of age and under." While it is one thing to say roughly which products are intended for children who are two, or four, or six, or even eight, products of interest to many twelve-year-olds also appeal to older teens and even adults. Is a product primarily intended for twelve-year-olds if it broadly appeals to teenagers, for example? How closely must you parse the demographics of potential customers to figure out whether your audience is likely to be "primarily" twelve-year-olds? Coupling this with analysis of design aims and product "intentions" makes matters even more complex.

Into this analytical quagmire, the Consumer Product Safety Commission (“CPSC”) has now dropped 50 pages of industry guidance, including a brand new proposed regulation.  Once you dive in, it doesn't take long to realize that some of the products you thought were children's items may not be. Worse yet, some products that you reasonably might have concluded were "not designed or primarily intended for children 12 years" or younger may well be viewed very differently by the CPSC.  In other words, the CPSC has raised as many questions as it answers.

The CPSIA, itself, does provide some limited guidance as to "factors" to be considered in determining if you're selling a children's product. You are asked to consider: (1) manufacturer's statements (including those on labels), if such statements are reasonable; (2) whether packaging, display, promotion, or advertising present the item as appropriate for use by children 12 years of age or under; (3) whether the product is commonly recognized as being intended for children 12 years of age or under; and (4) the CPSC's own "Age Determination Guidelines" which were last published in 2002.

The problem with these "factors" is that none focus on the question of whether the product is "primarily" designed and intended for children twelve years of age or under. Moreover, the Age Determination Guidelines document from 2002 is a densely written quasi-scientific overview of cognition, motor skills, and psychological and emotional development in certain ranges of ages which offers very little practical help in close cases -- particularly at the older range of the continuum. One thing the document does is show that determining the proper age group for a product is much easier for the younger age groups, but gets very foggy for eleven- and twelve-years-olds. Indeed, the document itself notes that, at twelve, a child's thinking is more "adult-like." The Guidelines also note, problematically for any company trying to sort out the "intended age" question, that twelve-year-olds will be drawn (like a magnet, probably) to products that appeal to older teens.

What does the new guidance offer to rectify this? The regulation first divides products into two basic categories: "general use products" and “children's products.” General use products are those "not being marketed to or advertised as being primarily intended for use by children 12 years or younger and that are used by a significant proportion of the population older than 12 years of age." 16 C.F.R. 1500.92(b) (as proposed).  The second half of this definition is poorly written and makes little sense. But, I think the language is intended to mean that a significant portion of the product’s users are older than 12 years of age. Additionally, because the definition is in the conjunctive ("and"), it would appear that a product is for "general use" as long as it is not "marketed or advertised" as intended for use by children 12 years of age or younger. This would make life easy for the industry:  you can control your legal obligations by controlling your marketing.

But, the proposed definition of "children's product" muddies the water.  The test for a “children’s product” is whether the product is "designed and commonly recognized as intended for use by a significant proportion of children 12 year of age or younger," and includes in the term "use" all reasonably foreseeable "misuse." In other words, a product can be a "general use product" and a "children's product" simultaneously -- even if (1) the sole projected “use” by children twelve and under is a “misuse” and (2) the product is not advertised or marketed to that age group.

Under the proposed regulation, Sellers are expected to make an assessment of what "common recognitions" are for use of the product -- with the specific proviso that such a determination likely involves "[m]arket analyses, focus group testing, and other marketing studies..." In other words, small and large companies alike must now engage in vigorous market studies in order to limit the risk that a product may, after the fact, be deemed a children's product by the CPSC.

The regulation is helpful in that it provides a list of product categories and explains how those products would be treated under the new guidelines. Even though such categories are filled with their own caveats, they do give sellers some degree of comfort in the areas that are expressly discussed. The categories include:

• Furniture and furnishings: These are generally not considered children's products unless they are decorated with a child's theme, have play value, or are sized for a child. "Decorative items that are intended only for display, with which children are not likely to interact, are generally not considered children's products, since they are intended to be used for adults."

• Collectibles: Collectibles, even those that might otherwise qualify as children's products, can avoid this categorization if they have features that preclude use by children during play, "such as high cost, limited production, [and] display features, and [if they] are not marketed alongside children's products."

• Jewelry: The test is whether the product is generally sized, themed, and marketed to children. Factors to consider include, among other things: very low cost; play value; childish themes on the jewelry; sale with other children's products (such as a children's dresses); sales with children's books, toys, or party favors; and sale in store (or catalog/web site) that mainly sells children's products.

• DVDs, Video Games, and Computers: Logically, most computer products and electronic media devices are not considered children's products. However, handheld video games "with software intended for children...younger than 12 years" may qualify as such.

• Art Materials: The marketing and labeling of these are given high priority.

• Sporting Goods and Recreational Equipment: Regulation-sized sporting equipment and recreational equipment (like roller blades, camping gear, bicycles, and fitness equipment) are generally not considered children's items, unless they are sized for children and/or are decorated with childish themes.

This guidance indirectly underscores the broad reach of the proposed regulation -- everything from bicycles to camping gear to books to electronic equipment and more can be subject to onerous new product safety requirements.

Message to State and Local Governments: Leave Regulation of Interstate eCommerce to Congress

Two recent, related developments should serve to remind state and local government and tax officials that under our Constitution’s Commerce Clause, it is Congress ― not states and localities ― that has the power “to regulate Commerce...among the several States.”  Art. I, Sec. 8, Cl. 3.

On January 25, 2010, the Supreme Court issued its decision in Hemi Group, LLC v. City of New York, 130 S.Ct. 983 (2010), rejecting an attempt by the City of New York to use the Racketeer Influenced and Corrupt Organizations Act (“RICO”) to punish a New Mexico-based online seller of cigarettes for allegedly costing the City millions of dollars in lost sales and use tax revenue on cigarettes purchased by New Yorkers.  The City did not claim that Hemi Group was obligated to collect and remit the $1.50 per pack New York City use tax on cigarettes. Rather, the City claimed that the Hemi Group failed to comply with its legal obligations under the federal Jenkins Act (15 U.S.C. §§ 375-378), which requires out-of-state cigarette sellers to register and file a report with state tobacco tax administrators listing the name, address and quantity of cigarettes purchased by New York state residents.  The State of New York had an agreement to share such information with the City of New York.  Hemi Group’s failure to comply, the City argued, meant that it received no information from the State about cigarette purchases by City residents from Hemi Group, and therefore could not bill them for any use tax that the residents failed to self-report and pay. According to the City, Hemi Group’s violation of the Jenkins Act also constituted a RICO violation that harmed the City through the loss of use tax revenues.

In addressing the City’s claims, the Court rejected the City’s RICO argument on the ground that the City could not establish the direct causal connection required under RICO between the alleged “predicate act” (Hemi Group’s failure to report purchaser information to the State) and the City’s alleged harm (the loss of use tax revenues due from its citizens).  The Court did not opine on other potential weaknesses in the City’s case.

However, while it confined its legal ruling to the lack of required causation, the Court also noted that it was important to remember that the case was “about the [alleged] RICO liability of a company [(i.e., Hemi Group)] for lost taxes it had no obligation to collect, remit, or pay.”  (Emphasis added).  Picking up on the Court’s comment, Justice Ginsberg in her concurrence expressly called out subtext of the case: the City was improperly attempting to use RICO to “end-run” the constitutional limits on the City’s ability to impose use tax obligations on an out-of-state company derived from the Commerce Clause and the Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

In the wake of the Court’s ruling in Hemi Group, last week Congress stepped in and exercised its Commerce Clause authority to strengthen the Jenkins Act to require out-of-state sellers to collect state and local use taxes on tobacco products.  On March 31, 2010, the President signed the Prevent All Cigarette Trafficking Act (“PACT Act”), which, among a number of other provisions related to cigarette trafficking, amended the Jenkins Act to require that “delivery sellers” collect all state and local excise taxes due on cigarettes or smokeless tobacco.  Importantly, Congress stressed that there are “unique harms” associated with online cigarette sales (including the long-term health effects of using tobacco products and terrorist involvement in trafficking illegal cigarettes) that justified Congressional action. Congress therefore emphasized that the PACT Act “is in no way meant to create a precedent regarding the collection of State sales or use taxes by, or the validity of efforts to impose other types of taxes on, out-of-State entities that do not have a physical presence within the taxing State.”  (Emphasis added).

We have recently written in this blog about states’ attempts to increase use tax collection on Internet sales through “New York style” online affiliate nexus laws and “Colorado style” notice and reporting obligations imposed on remote sellers which seek to extend state regulatory authority across state lines.  No matter how dire their short-term budgetary problems may appear, and no matter how disappointed they may be that their own citizens fail to report use tax due on remote sales, state and local government and tax officials would do well to remember that more than 200 years ago, the framers of the Constitution created a common market in the U.S. by limiting state regulation of interstate commerce via the Commerce Clause.  Fortunately, it appears from the Court’s ruling in Hemi Group and the enactment last week of the PACT Act, all three branches of our federal government recognize that the Constitution reserves for Congress the task of regulating interstate commerce.

Cherry Hill at Moorpark Highlands

Cherry Hill at Moorpark Highlands

Located just North of Moorpark, California is one of the few remaining new home tracts in what is called the Moorpark Highlands. The Moorpark Highlands is a very large area of new homes which includes a number of different tract communities built by several distinguished home developers. Ranging in ascending order of size and price these include Pardee Homes - Waverly Place condominiums (sold out); KB Homes - Sterling Heights Community of single family homes (sold out) and Toll Brothers - Country Club Estates at Moorpark (sold out).

I may be missing a tract or two, tucked away among the two massive hilltop areas, but Cherry Hill by Pardee Homes appears to be the last major new home development still actively building new 3 to 5 bedroom homes.

Cherry Hill homes are built to three basic floor plans and with 5 different styles:
French, Early Californian, Tuscan, Spanish Monterey and Coastal. Contact Pardee Homes at PardeeHomes.com to download pictures and floorplans of what these styles look like. Plan 1 homes are 2600 square foot homes, Plane 2 are 2900 square foot homes and Plane 3 are just over 3100 square feet (3500 square feet with optional loft).

The homes are located in a gated community and closely spaced up the side of a large hill on maybe half a dozen streets. Many of these home sites were built with an eye to a view of the surrounding mountains. I would say the views are above average for many new home communities.

The experienced new home shopper will note that model homes are usually lavishly upgraded with all the bells and whistles and do not always closely reflect a standard new construction home. It’s also worth note, that if the developer goofed somewhere or just did something silly on a model home, then he probably did it more than once in succeeding homes.

Everyone wants to know price. These homes have dropped considerably in price. I have a price sheet from September 2008 and one from this week – March 2010. Here is what has happened in 1½ years.

Plan 1 - was $734,475 now $692,000 which is a 43K price drop

Plan 2 - was $775,400 now $689,150 which is a 86K price drop

Plan 3 - was $797,975 now $740,225 which is a 57K price drop

Wow! – kind of takes your breath away, especially if you were an original buyer. That is pretty typical of what has happened with most new construction. What an opportunity if you are just now in the market!

Along with the advantage of interest rates around 5% and both the 6.5% federal tax credits for current home owners and 8.5% state credits for current home owners buying new construction homes, makes this a very rare time for people who want to move up. It’s the perfect storm for buyers of new construction homes. Unless the federal tax credit is renewed soon, it is set to expire for new offers at the end of this month (April 30).

What is bad about these prices. They do not include the Mello Roos that comes with each home. See my blog about Mello Roos for more complete information, but this is basically a way of taxing the individual home owners for city services – which include a new school district for the homeowners – but without having to call it a tax.

The Mello Roos runs about 1.9% of the home’s purchase price per year. The good news is that the school district has seriously considered not accepting a new school site for Moorpark Highlands. I don’t profess to be an expert about the local School District politics but I do know that most school districts are hurting for money right now like everyone else. They are not inclined to want to budget for more teachers, facilities and maintenance, even when they are mostly provided for by the Mello Roos.

What does that translate to for new home owners. Something even more rare in new home construction. A break on the Mello Roos. It could be a 30% to 40% reduction on the annual Mello Roos for those new home purchasers according to the sales counselors. Not sure what that does to class size in existing schools.

How big is Cherry Hill? There will be 149 units built total. A total of 4 -5 homes are now - or will be - available by the end of June in the 3 different plan models. Counting the 4 homes available, I believe there have been a total of 92 homes already released for sale or sold. Mostly sold. That figures out to about 60% of the last new homes are built and sold. Just over 50 homes have yet to be built at Cherry Hill.


Plan 1

Plan 1 has the master bedroom downstairs and it usually opens onto the back patio. There is a second bedroom at the opposite corner of the home which would make an excellent “granny flat” or bedroom for a teenager with a loud music problem. The second bedroom has it’s own full bath and is wedged between the garage at the front, and a den or optional 3rd bedroom as you move back towards the center of the house.

The den can be an office or built as another bedroom. There already is a formal living room and another family room, so this room has many good possibilities depending on your needs.

The kitchen is one of the primary home status symbols and is of course quite nicely done. In keeping with other new home developments, the kitchen faces the family room so that Mom can enjoy conversation with her guests/family while preparing all the holiday meals. The family room and kitchen face out to the backyard through large windows, so the kids playing there can be observed without worry.

There is one upstairs bedroom with a full bath or it can be a loft/office with additional storage in what would have been the bathroom.

Things I liked.

The front entry has a closet. There are so many new homes being built without a cloakroom or front coat closet. I guess if you live in California, you aren’t expected to wear a coat.
The master bath has the bathtub oriented out from the wall so that you can enter from either side. The two vanities are separated by the tub so you don’t mix up your Rogaine with your wife’s Clarol.
The large walk-in closet has two doors, one at either end, but guys know better than to expect to use any of it.

Things I didn’t like.

The back yard is smaller than other models because there are more ground floor bedrooms for the same size lot as the other two model plans.
This home has a 2 car garage separated by the front door with a 3rd garage on the other side but facing parallel to the street. If there is any other car in the driveway, your aren’t going to get a vehicle out of that garage. Makes a nice workshop though. Also, if both garage doors are open, it makes your home look more like a downtown parking garage.


Plan 2

The ground floor of this two floor home is laid out with the entryway facing a long hallway that runs beside the staircase as you walk to the rear of the home. There is a wall that separates the home into basically a front half and a rear half. Each half contains 2 rooms which open to the central hallway.

The formal living room is followed by the dining area and then the wall. On the other side is the kichen facing to the rear of the house through the family room. At the intersection of the kitchen and family room is a hallway running off to the left side of the home where there is small bedroom and full bath. There is also direct access to the 3 car, tandem garage from this hallway. This is almost a 3,000 square foot home, so there are 2 air conditioning units at the rear of the home. They are fairly quiet but are located just outside the ground floor bedroom. I think this location is unfortunate in terms of view and noise - which isn’t bad – it just doesn’t need to be that way.

Upstairs is a spacious family room / loft area which was modeled as a family room. It can be built as a 5th bedroom. Toward the center of the home and opening directly into the family room is a full bath with double vanities for the bedrooms and loft use. To the rear of the family room / loft is a doorway opening to a side to side hallway. Along the hallway are two separate bedrooms with their own doorways. At the far end of the hallway is the upstairs laundry.

The master bedroom is quite comfortably large and looks out upon the backyard. The master bath has a separate closet for the toilet, which might be a bit tight if you are inside trying to shut the door. The double vanity is side by side with the tub and shower enclosure immediately behind the sinks. There is a large single door walk-in closet at the far end of the master bath.

Things I liked.

The loft area is upstairs away from the family room downstairs. If adults are entertaining downstairs, the kids don’t have to shut themselves away in their bedrooms, yet they are far enough away not to cause a noise distraction if they want to watch tv or play video games.
The back yard is considerably deeper than plan 1, since more of the bedrooms are upstairs in this model.
The street appeal is nicer in my opinion since you have only a 2 car garage door in front, along with a front door that is not tucked away between garages. A nice cut glass door or carved hardwood door can really enhance a home’s appearance. Also the living room window fronts the home, so it is possible to see when family or guests have arrived.
The model had a nice balcony off the master bedroom with enough depth for table and chairs to fit comfortably.

Things I did not like.

The downstairs is not as open a floor plan as the plan 1. It has a strong front and back feel to it.
The coat closet is located under the staircase or worse, around the corner in the hallway leading to the back bedroom. That only works well if you come into the house from the garage.
The upstairs loft has a full bath directly off it. A half bath would work just as well. It forces the occupants of the two bedrooms behind the family room to walk through the family room / loft in order to use the bath or shower. That would also force the family room occupants to go downstairs or to the master bath to use a bathroom.
It’s probably just me, but if you are carrying on a conversation with your spouse, while dressing/undressing in the master bedroom, it’s going to be like listening to a train going by. One of you walks away from the bedroom to the walk-in closet, which is past the toilet closet, past the vanities and tub to the far end, where you walk through a single doorway and turn either right or left to find your hangar at either end of the walk-in.
Maybe they could install a walk-in closet intercom and video monitor?! Maybe have a satellite feed to the bedroom.
Also, if you had an infant, you would want to keep the little one in their crib with you in the master bedroom. A separate nursery would be rather difficult to reach quickly from the master and way far away from anyplace downstairs. This is a better home for older kids.


Plan 3

This is a puzzle palace. Don’t get me wrong, it’s a very comfortable puzzle palace and with the optional loft it can be pushing 3,500 square feet. It just doesn’t flow. If you were in the Navy you would love it. Like a miniature cruiser, it has all these little hallways (passageways) and doorways (hatches). The upstairs bathrooms and laundry are tucked away in hidden places. You’d need movie theater lights to find your way around upstairs after dark. The bathrooms do offer better privacy and access to nearby bedrooms than the Plan 2. There is a downstairs bedroom but it is tiny and makes a better office or hobby room.

The downstairs is similar to the Plan 2 in that you have a definite front half and back half to the home, but the kitchen has a massive crescent shaped island that should have it’s own zip code. There is also a breakfast nook that has two outside walls as it pushes out a bit into the backyard. There is plenty of natural light to eat your outmeal and yogurt by, (or eggs and bacon if you wife isn’t watching).

Things I liked.

The living room is an actual room, not an area.
The kitchen has upgraded appliances and cabinet quality. The breakfast nook is fun.
The master bedroom can be built with a good sized balcony and the bedroom at the front of the house has a nice long balcony as well. Some of these homes have breathtaking bedroom and balcony views of the surrounding mountains.

Things I didn’t like.

Besides the intricate floor plan, the master bedroom is directly above the large screen tv in the downstairs family room. Most of these homes will not have the optional upstairs loft, so late night entertaining will probably happen directly under your bedroom slippers in the
family room below.


Summary

These are very comfortable homes in a very scenic location. I like the room sizes for the most part, though some of the bedrooms are merely adequate. The homes are sensibly designed so that space is more often used for practical comfort rather than to impress. Even though there is a minimum setback between homes, you have a good chance of finding at least one room in your home with a view that includes more than your neighbors kitchen clock.

The driveways are usually large enough to accommodate at least 2 cars and there is a bit of front yard for most homes. Things just aren’t as cramped as lower priced new homes tend to be and though the streets are still a bit narrow, you can safely park on them.

There is a good deal of flexibility in how you can have your home built and that adds a lot of creative individuality to the neighborhood. It doesn’t have the production line feel of manufactured homes that so many other developments have.

This is a pleasant upscale community with quality homes and with a better than average location.

The prices are still considerable and the Mello Roos doesn’t help, but if you can afford one of these homes you’ll experience a very pampered Southern California lifestyle.

Happy House Hunting
Mark Thorngren

(805) 504-0228
www.markthorngren.com

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Maine Adopts Finnigan for Determining Sales Sourced to Maine for Corporate Income Tax

Maine is a unitary state for purposes of the corporate income tax. As is true for other states (e.g., California, Illinois and South Carolina), Maine adopted the Joyce approach for sourcing of sales by entities within a unitary group that did not have nexus with Maine under PL 86-272. See Appeal of Joyce, Inc., No. 66-SBE-070 (Cal. SBE, Nov. 23, 1966). This means that Maine-destination sales by an entity without nexus would not be included in the numerator of the sales apportionment factor.

However, in recently adopted legislation, P.L. 2010, c. 571, § GG, which is effective for tax years beginning on or after January 1, 2010, Maine adopted the Finnigan approach, which was first announced by the California Board of Equalization in 1988. See Appeal of Finnigan Corporation, No. 88-SBE-022 (Cal. SBE, Aug. 25, 1988) (Finnigan I); Opin. on Pet. for Rhrg., No. 88-SBE-022-A (Cal. SBE, Jan. 24, 1990) (Finnigan II). Finnigan rejected Joyce and provided that sales by a member of a unitary group to California are included in the numerator of the combined group’s sales apportionment factor even though the entity does not have nexus with California. It is noteworthy that California later renounced the Finnigan approach and has resorted back to the Joyce approach. See Appeal of Huffy Corporation , No. 99-SBE-005 (Cal. SBE, Apr. 22, 1999). See also FTB Reg. 25106.5. What makes this result particularly severe for unitary businesses is that Maine uses only the single apportionment factor of sales.

There is an argument that Finnigan is inconsistent with Public Law 86-272 because the State is taxing a non-taxable entity. That argument, however, was rejected in Disney Enterprises, Inc. v. Tax Appeals Tribunal of the State of New York, 888 N.E.2d 1029 (N.Y. 2008), which stated that inclusion of sales in the numerator did not tax the subsidiaries but simply was a method of calculating the tax. Given the differences between the New York law and the Maine law, however, the argument that Maine’s new approach is inconsistent with Public Law 86-272 may have some force, depending on the facts and circumstances of the taxpayer.

Federal Reserve Consumer Information on Overdrafts

With its new focus on being consumer-friendly, the Federal Reserve has published a circular on what consumers need to know about the new debit card overdraft rules. Remember, as of August 15th, banks cannot include customers in their overdraft services for ATM/Debit card transactions without their opting-in. The rules apply to new accounts opened beginning July 1. The Fed has even provided a copy of the standard form disclosure that it approved for banks to use, so that consumers can (hopefully) recognize the form when they get it in the mail (see Form). With an emphasis on consumer "choice" and education, it is good to see the Fed getting the word out.

Will consumers understand what this is all about? I suspect so. Just this last week, our 20 year old baby-sitter commented that she wished her bank, Chase, would follow Bank of America and give up on overdraft fees (See Hooray for Bank America). Apparently the word has gotten out positively for BOA. She'd been hit $35 on a debit card overdraft of less than $5. Expensive lesson, yes, but just one example where the new rules will help. Better to be denied at the counter, rather than get the hefty fee. I told her not to worry, the new rules are coming soon.

- JSM