Unclaimed Property Laws Often Go Overlooked by E-Marketers, But Many States Are Aggressively Enforcing Them

One set of legal obligations that are often overlooked by Internet sellers arise under states’ “unclaimed property” laws, sometimes referred to under the arcane label of “escheat.” Black’s Law Dictionary defines escheat as “the preferable right of the state to an estate left vacant, and without there being any one in existence able to make a claim thereto.” Although dense, the definition, once parsed, describes a relatively simple concept: under the laws of nearly every state, a business that is holding property on behalf of a third-party (called the “owner”) is obligated to report and turn over the unclaimed property to the state, after passage of a prescribed “dormancy” period.

Unclaimed property includes customers’ unredeemed gift certificates and gift cards, merchandise credits, and uncashed refund checks. It also includes accounts payable, payroll and benefits, shareholder dividends, and even workers’ compensation funds, among other things. Indeed, any third-party obligation that goes unredeemed may be subject to escheat. For Internet retailers, unredeemed gift obligations can be substantial (although fortunately some state laws include exemptions for gift certificates). Retailers should be aware that expiration dates on gift certificates and gift cards do not apply to states’ right of escheat and that there is no statute of limitations on escheat obligations under most states’ laws.

Essentially, as such property becomes “abandoned” under the applicable dormancy period, the holder of the property (i.e., the retailer) must pay such amounts to the state. As a general rule, the holder is obligated to remit the funds to the state of the last known address of the owner; if the retailer does not have address information for the holder, then the retailer typically must remit the funds to the retailer’s state of domicile (typically, where the retailer is incorporated).

Many states aggressively enforce their unclaimed property laws as a source of revenue. (Among the most active states for unclaimed property audits are Arizona, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, Nevada, Rhode Island, and Tennessee.) Indeed, a number of states are increasing the number of unclaimed property audits they conduct on the belief that there are billions of dollars of unreported unclaimed property. State laws typically impose interest and penalties for failure to report, as well.

Note that there is no nexus rule that limits a state’s constitutional authority to seek to collect unclaimed property from a remote seller. Multi-state audits are common. In addition, many states are now using outside auditors, paid on a commission basis, to pursue collection. Not surprisingly, such “hired-gun” auditors have an incentive to think creatively and to conduct wide-ranging, time-consuming audits that examine records going back decades.

There are strategies for managing unclaimed property obligations and reporting. If you believe your company faces unclaimed property reporting requirements which have not yet been addressed, consult legal counsel for advice on the various solutions available.

Storm Clouds on the Horizon for Direct Marketers Regarding Required Use Tax Collection

After the introduction in July 2011 of the “Main Street Fairness Act” by three senators from the Democratic Party, federal legislation intended to eliminate the Quill physical presence requirement for state sales and use tax collection has gathered increased support. A group of 10 Senators from both sides of the aisle introduced the “Marketplace Fairness Act” on November 9, 2011. The new bill, S.1832, is sponsored by Senators Mike Enzi (R-WY), Richard Durbin (D-IL), Lamar Alexander (R-TN), Tim Johnson (D-SD), John Boozman (R-AR), Jack Reed (D-RI), Roy Blunt (R-MO), Sheldon Whitehouse (D-RI), Robert Corker (R-TN), and Mark Pryor (D-AR).  On October 13, 2011, Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) introduced in the House a similar, but not identical, bill called the “Marketplace Equity Act.”

As we wrote in our post on August 8, the Main Street Fairness Act, which was sponsored by Senators Durbin, Johnson, and Reed, does not provide meaningful measures to simplify the arduous burden of sales and use tax collection. The Marketplace Fairness Act (and its House counterpart) would provide even less simplification than does the Main Street Fairness Act. It is ironic that despite the unfairness of this proposed legislation to catalogers, online retailers, and other direct marketers, the Marketplace Fairness Act is more likely to pass than prior legislative efforts, because of the increased number of sponsors from both political parties, as well as the coalition of states, industry groups, and big retailers (including e-commerce giant Amazon.com), that have announced their support for this new bill. Thus, the alarm bells should be ringing loudly for Internet and other direct marketers.

Critical Additional Feature of the Marketplace Fairness Act

The Marketplace Fairness Act would extend collection obligations well beyond the Main Street Fairness Act to authorize any state that has not adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”), but has adopted negligible simplification measures, to require tax collection by remote sellers.

If adopted, the Main Street Fairness Act would permit states that become members of the SSUTA to require companies without a physical presence in the state to collect sales and use tax in the states. (There are 24 states that are members of the SSUTA). The Marketplace Fairness Act, on the other hand, incorporates this authorization and then expands it to permit any state that implements (in the language of the proposed legislation) “minimum simplification requirements” to require catalogers, online retailers, and other companies that have national annual sales greater than $500,000 to collect the state’s sales tax on sales to residents of the state.

The Marketplace Fairness Act is Anything But Fair

Although the SSUTA provides some protection to remote sellers from the burden and expenses of sales tax collection, the “simplification requirements” of this new bill provide even fewer benefits to catalog and e-marketers, and increased burdens.

There simply is nothing in this new bill that provides meaningful simplification for remote sellers. In other words, there is no provision for uniformity in sales tax laws among states; the simplification is only within the state, and the term “simplification” even within the state is a misleading term, at best.

We have discussed the SSUTA in various posts, which is incorporated, in effect, into that Act. As we have written previously, the SSUTA does not provide significant relief from administrative burdens and expenses of sales tax compliance. Just as under the SSUTA, the Marketplace Fairness Act does not ease the tax burden by requiring common exemptions throughout the states, uniform treatment for shipping and handling charges, and a consistent definition of the selling price for determining the amount subject to sales tax.

Similarly, like the SSUTA, the Marketplace Fairness Act permits the imposition of many combined (state and local) rates within a state based on the destination of the sale, thus potentially permitting a large number of different tax rates on sales to residents of the state, in addition to the thousands of tax rates a remote seller would be required to impose on its sales throughout the country. While the Marketplace Fairness Act specifies that a state must provide adequate software and services to identify the destination local rate and to hold harmless remote sellers from liability for mistakes made by a provider of sales tax administration services, this clause does not eliminate the administrative burden, expense, and risk to a remote seller of billing for, and collecting, sales and use taxes at different rates on its sales throughout the country.

Moreover, the Marketplace Fairness Act adds another layer of complexity that is not even present for the SSUTA. The SSUTA does provide for common definitions of some terms to be used in the sales tax statutes of the member states. The SSUTA also requires uniform rules among the member states for the deduction by a retailer of bad debts. The Marketplace Fairness Act does not require states to adopt such definitions and uniform rules regarding bad debts. The result is that if this new Act were adopted, a remote seller would be potentially subjected both to the definitions and bad debt rules of the SSUTA states and the differing and varying definitions and bad debt rules set forth in the statutes of the more than 20 non-member states.

There is a Real Possibility that the Marketplace Fairness Act Will be Adopted

Unlike prior state efforts to persuade Congress to enact laws eliminating the Quill physical presence test, there is increasing support from both Democrats and Republicans and from diverse industry groups for the Marketplace Fairness Act.

Over the past 20 years, the states have repeatedly caused legislation to be introduced in Congress to abolish the nexus physical presence requirement. The likelihood of successful adoption of the Marketplace Fairness Act, however, differs from prior legislative efforts for several important reasons:

• There is significant support from both Democrats and Republicans in Congress.
• The states are facing large financial problems (including mounting and huge pension costs), while federal funding for the states is drying up because Congress is not receptive to providing funding to assist the states at the expense of other federal programs or increased taxes.
• The legislation is supported by big box retailers.
• Well-funded associations such as the National Retail Federation and the International Council of Shopping Centers support the law.
• Amazon had been one of the most vigorous opponents of prior legislation. Now, Amazon is offering the service of collecting tax on behalf of other retailers for a fee of 2.9% of the taxes collected.

The only ray of light in this gloomy picture is that Senators Wyden (D-OR) and Ayotte (R-NH) and Representatives Lungren (R-CA) and Lofgren (D-CA) have introduced resolutions in Congress opposing mandatory collection by online retailers of sales and use tax.

A perfect storm has developed to permit passage of anti-Quill legislation. The current legislation being considered does not provide significant protection to industry members. It is up to direct marketers to let their positions be known.

MEDIA RELEASE: TOWNSVILLE REAL ESTATE MARKET BUOYED BY INTEREST RATE DROP

Townsville buyers have expressed record registrations for today’s Auction Extravaganza at Condon as the Reserve Bank of Australia announced a .25 percentage drop in interest rates. “Townsville’s property market is showing clear signs that buyers are returning to the bidders circle”, Rapid Realty Townsville Principal Director Mr McLeod said. “The perception of buyers is the market has reached the bottom of the property cycle”, Mr McLeod said.

Townsville auction clearance rates have been languishing below 50% but increasing enquiries, offers and pre-auction registrations are clear signals that buyers are expressing a more confident mindset. With further interest rate easing expected by the RBA over the coming reporting period in addition to the .25 percentage points drop on Melbourne Cup Day, it is an anticipated more buyers will return to the more stable property market. This return of property market confidence could be influenced by the equity markets continuing to behave with inconsistent uncertainty and US and Europe financial markets continue to show signs of imploding.

Radio Talkback Host and Rapid Realty Townsville’s Auctioneer, Mal Charlwood said; the “Auction Extravaganza will have a festive atmosphere with high pre-auction registrations and cashed up buyers are excited about winning a successful bid under the hammer”.

Today’s Auction Extravaganza at Condon includes a fund raising event for the Queensland Cancer Council with prizes being offered by Townsville building contractors, mortgage lenders, wealth advisors and real estate professionals. The pre-auction activities kick off at 3.00pm and the main auction of the 4 bedroom house on large block of land at 39 Teal Street Condon will start at 4pm.

For more information or enquiries please ph 4771 3600

Grand 6 Bedroom Home with Pool

This grand 6 bedroom 2 level Queenslander is located conveniently to schools and shops in Mysterton only 5 minutes to the City.

Situated directly opposite childcare and church, this unquie home would be suitable for an academic or professional family. This gorgeous property is fit for a queen featuring:

Upstairs
* Large master bedroom with en-suite and walk through robe
* Sewing room/change room
* 4 guest bedrooms with built-in robes all air-conditioned
* Main guest bathroom with spa bath
* Front breezy deck and splayed staircase
* High cathedral ceilings and designer architraves

Downstairs
* Large 2nd bedroom with spa en-suite and built in robe
* Large open plan kitchen, dining and lounge opening to swimming pool
* Library/waiting/study room
* Study nook and book repository
* 3rd shower and toilet
* Large internal laundry
* Split system air-conditioning
* Polished timber floors throughout
* Internal polished timber stairwell
* In-ground swimming pool
* Entertainment area and patio
* Large yard and established gardens
* Double lockup sheds
* Carport accommodation for 4 vehicles
* Fully fenced

With such an abundance of lifestyle features so close to shops, schools and transport, this grand lady of Queenslanders is treasured asset in the Mysterton area of Townsville.

Nexus of Subsidiary Not Automatically Attributable to Parent Company

Recently, a number of states have adopted statutes providing that an out-of state retailer is presumed to have nexus in the state by virtue of ownership of a subsidiary that does business in the state. See California (ABX 1, but note its implementation was delayed by AB 155); Colorado (Colo. Rev. Stat. § 39-26-102(3)(b)(II)); and Arkansas (Ark. Code Ann. 26-52-117(b)). While each of these state statutes provides that mere ownership creates only a presumption of nexus, which a retailer can rebut, some commentators have interpreted these laws as attributing the nexus of in-state affiliates to related out-of-state companies.

But an out-of-state retailer’s mere ownership of a company without the company acting as an agent or representative of the retailer will not create nexus for the retailer under the constitutional standard. Quill and a number of cases decided both before and after Quill stand for the proposition that mere ownership of another company that has an in-state presence does not create nexus for the parent, absent the in-state subsidiary engaging in activities on behalf of the parent to create a market in the state for the parent. We wrote an article back in 1996 that discusses the case law. See Defending Against Affiliate Nexus in Sales and Use Tax Collection Liability Cases, State Tax Notes (March/April 1996). In other words, the subsidiary must be acting as an agent or representative of the parent company in the state for the nexus of the subsidiary to be attributed to the parent.

The constitutional standard has not changed since we wrote the article in 1996. In fact, recent position statements issued by the Tennessee Attorney General and the staff of the California Board of Equalization agree that ownership of an in-state company alone does not create nexus for the out-of-state company. The Tennessee statute (Tenn. Code Ann. § 67-6-102(25)(G)), which has been on the books for a number of years, provides that an out-of-state retailer that “maintains, or has within this state, directly or by a subsidiary, sales room or house, warehouse, or other place of business distributing facility or warehouse,” has nexus with Tennessee. Cal. Rev. & Tax Code § 6203(c)(1) similarly provides that “[a]ny retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse . . . or other place of business” is required to collect and remit the California use tax.

In Opinion No. 11-71 (dated October 3, 2011), the Tennessee Attorney General opined in a response to a request from the Legislature to interpret the statute that the mere ownership by Amazon.com of a subsidiary that operated a distribution center in Tennessee would not establish nexus for Amazon.com in connection with its sales of products. Something more needs to be established. According to the Attorney General, “nexus is established only if the subsidiary’s in-state activities are significantly associated with the retailer’s ability to establish and maintain a market in Tennessee for sales.” The Attorney General’s opinion cites Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232 (1987). In Tyler Pipe, the out-of-state company contracted with sales representatives that conducted in-state solicitation activities on its behalf. These activities, according to the Supreme Court, created nexus because they helped “to establish and maintain a market” in the state. The Tennessee Attorney General’s opinion notes that “the current Supreme Court jurisprudence in this area does not firmly establish whether a subsidiary’s ownership or maintenance of an in-state distributing center or warehouse would be sufficient to create nexus where the subsidiary is not engaged in actual solicitation activities.” See Attorney General’s Opinion No. 11-71 at p. 2.

Similarly, in an October 14, 2011 discussion paper regarding proposed revisions to Sales and Use Tax Regulation 1684, Board of Equalization staff commented on the state of common ownership nexus. The staff agrees with the Tennessee Attorney General that mere ownership does not establish nexus, citing Current, Inc. v. State Board of Equalization, 24 Cal.App.4^th 382 (1994) (a case that we commented on in our 1996 article), and the more recent case of Borders Online, LLC v. State Board of Equalization, 129 Cal. App.4^th 1179 (2005), in which the Court of Appeals held that the activities conducted on behalf of the retailer must “enhance the retailer’s sales to California customers and significantly contribute to the retailer’s ability to establish and maintain a market in California.” See Discussion paper at 5. (We disagree with staff’s conclusion that the standard of performing “services in this state in connection with tangible personal property to be sold by the retailer” satisfies Quill.)

In short, as we wrote long ago, the ownership of a subsidiary alone will not create nexus. The in-state subsidiary must be engaged in activities on behalf of the out-of-state company (parent) in order to create the necessary nexus for the out-of-state company. The law has not changed since we wrote the article. The recent wave of legislation does not alter the test in Quill.

FISHERMAN’S RETREAT BEACH HOUSE

Make and Offer to Purchase - Situated only 45 klm to the heart of Townsville City and a short stroll to the beach and waterfront, this tidy, clean and cool 2 bedroom beach house is located in a quiet and friendly fishing village only 400 metes to the water.

As a priceless lifestyle opportunity, the vendor is not able to decide on a suitable price and was wondering if a serious buyer could get the discussion started with an offer.

Positioned on a slightly elevated block, this property could be an excellent lifestyle for the adventurous traveller seeking peaceful retirement or an urban professional looking for a great weekend getaway for the kids and family to enjoy on the door step to the seaside fishing and boating playground.

When you are tired and exhausted from the beach and water, you can return to your own comfortable home and relax on your breezy front veranda with BBQ and coldie or lay back in the air-conditioned living room for a good night’s rest.

With a generous size block, you have plenty of room to grow your own tropical fruit just like the massive paw paws ripening and ready to eat as we speak.

The dwelling itself is serviced by town water, bitumen road and electricity and is constructed from steel with 2 bedrooms, open plan kitchen, dining and lounge with bathroom.

Fulfil your dream today and contact your friendly agent Aaron for more information on 0414 590 110. A Sustainability Declaration is available upon request.
www.rapidrealty.com.au

For Sale - Fresh Renovated 2 Bedroom Unit

3/90 DEARNESS STREET GARBUTT - Auction Sat 29-Oct-2011 4pm
This freshly renovated ground floor unit is located only minutes to the Strand, City and Airport, close to shops, schools and parks. With such convenience to everything, owning your own tidy and spacious unit is an excellent achievement for the first home buyer and lifestyle investor.

The lovely property features:

* 2 bedrooms with built-in wardrobes
* New kitchen and appliances
* New floor coverings throughout (tiled living areas)
* Tasmanian Oak feature wall
* New split system air-conditioning to living and ACs in the bedrooms
* Private courtyard with shade cover and lawn
* New bathroom and toilet fittings
* Lock up garage with secure internal access
* Internal storeroom and laundry
* Convenient guest parking

This contemporary design home would be suitable for the professional person or couple or fly in fly out worker.

Contact your local agent Aaron on 0414 590 110 for a viewing today.

Offers will be considered before Auction.

What is in a Name? Revised Article 9's Treatment of Individual Debtor Names

While Article 9 of the UCC is one of the most recently amended articles of the UCC having just undergone revision in 2001 (the “2001 Revision”), the complexity of the code and changing practices in commerce have necessitated further revision. The ALI and ULC have now approved amendments which the states will now adopt toward an effectiveness date of July 1, 2013 (the Revision). All is well on the adoption front, but what does this really mean on key issues? As I am teaching a Commercial Law Survey Spring 2012, I've started to think about what hurdles the the Revision will set up for our students and practicing attorneys.

One of the issues that led to the Revision was disagreement about how a creditor should best specify the name of the debtor on the financing statement, with states such as Texas passing non-uniform amendments to address the problems. See, e.g., TEX.. BUS. & COM. CODE ANN. § 9.503 (2011); TENN. CODE ANN. § 47-9-503 (2011). Section 9-503 generally provides that a financing statement is not seriously misleading if it lists the name of the debtor indicated on the public record or the debtor’s jurisdiction for organizations or simply the name of the individual debtor. The model form provided in section 9-521 added merely that this be the “exact full legal name.” While this might initially appear sufficient guidance, it became apparent that issues remained, such as the inclusion of trade names and how to identify an individual’s name where the individual is commonly known as more than one name. Creditors who incorrectly identified the debtor soon found that their financing statement was ineffective because it was seriously misleading. Quite simply, these name errors can be fatal to the creditor’s attempted filing of a security interest. See, e.g., Peoples Bank v. Bryan Bros. Cattle Co., 504 F.3d 549 (5th Cir. 2007)(Cornerstone Bank obtained a security interest in the cattle, but failed to file a financing statement in the legal name of the debtor, “Brooks L. Dickerson,” having instead named “Louie Dickerson” as the debtor on the financing statement.)

To alleviate this problem with respect to individuals, the rules of the Revision allow for two alternatives. Revision § 9-503(a)(4)-(5) (2011). Alternative “A” sets up a hierarchy for individual names which requires a creditor to use the name on the most recent driver’s license, if the debtor has one. In the event the debtor has no driver’s license, then the creditor can use the individual name or surname and first personal name. Alternative “B” allows the creditor more flexibility in listing the individual debtor’s name, allowing the creditor to identify the debtor on the financing statement by the individual name, the surname and personal name, or the name on the debtor’s most recent driver’s license. Under this alternative, no one name designation takes precedence. Comment 2(b) explains that when driver’s license is required, but contains an error, the creditor must still use the name on the license in full when it is required, despite the error. The challenge that creditors which operate in more than one state will now face with individuals is getting the rules correct such that if the state uses Alternative A, the creditor must use the driver’s license if the individual has one and should not rely on the other manners in which names might be equally acceptable in Alternative B states.

Irrespective of Alternatives A or B for individuals, the use of the most recent driver’s license in the state where the financing statement was filed does not eliminate the potential pitfalls for creditors. First, has the debtor indeed provided the most recent driver’s license, rather than a replaced or expired one? Will creditors be able to search the driver’s license records to make sure the name is the most recent? Second, the name on the driver’s license may not in fact even be the debtor’s correct name, such as errors on the driver’s records or in the case of persons who change their name for marriage or other reasons. This may lead to confusion when later creditors search records. Third, driver’s license names are changed from time to time by the individual. Tying debt records to driving status may not be the most hassle free solution for creditors. Will creditors have to inquire into the marital status of women frequently to guard against name changes that either have or have not been made in driving records? For individuals that don’t have driving records, the Revision has not really changed the rules to address nicknames and similar issues.

When it comes to individuals, it seems that Alternative A and B would pose a potential pitfall for creditors operating in more than one state, unless the creditor simply makes it a practice to use a driver’s license in all instances. The challenges of ensuring that the creditor has the debtor’s correct drivers licenses may pose problems to ensuring a valid filing. Even under Alternative B, determining the debtor’s name and surname can pose difficulties, particularly with surnames comprised of multiple names. Creditors should not attempt to automatically rely on the name on a birth certificate, as the debtor may have changed names and foreign birth certificates sometimes contain different ordering of names. Moreover, filings for unincorporated business entities that are debtors will have the same issues as those for individuals. The pitfalls for individuals is heightened here as creditors will have to get the name correct (often the driver’s license of multiple individuals). Choosing the correct name for a financing statement is not a mechanical task. See, Revision 9-503 cmt. d.

Whether the Revision will ultimately alleviate a substantial amount of litigation in this area over time is uncertain, but the new rules will help resolve some outstanding issues regarding debtor names. Despite any criticisms of the Revision regarding debtor names, the rules at least give some further guidance that should eliminate some of the litigation in this area.

-JSM

Commercial Law has been nominated a top business law blog

The LexisNexis Business Law Community has nominated Commercial Law as one of its top 25 business law blogs for 2011. Commercial Law very much appreciates the nomination and hopes that its readers will post a comment in support of this honor.

Time to Stop Using Your Debit Card Part II

In August, I wrote about the prospect of banks charging fees on debit cards that are used in non-ATM transactions (see Time to Stop Using Debit Cards). With several banks testing $3 fees, I predicted there was no way it would end at that. Bank of America has now jumped on the bandwagon announcing a $5 monthly fee beginning next year for all bank customers that use their debit card for purchases. There will be no fee for ATM use. Of course, this is in addition to any other fees already charged on the bank account. The discussion now suggests that debit card use fees are the industry "norm." Wow! Even before the banks implement these new fees, the media is reporting them as the new standard.

Way back when banks first rolled out debit cards as a replacement for the traditional ATM card, I asked to send mine back. My worry, of course, was that there would surely be fees associated with the cards. And, would I know the fee was coming before the bank charged me. Well, it has taken some time for the fees to hit directly on user accounts (rather than indirectly through interchange fees), but welcome to the new world.

NPR ran a piece this week about the ability of small banks to lure new customers as these new fees hit. See Smaller Banks Use Free Checking. My suspicion is that many bank customers will not even notice the new fees . . . at first, but will be unhappy when they find out. Others who keep lower balances at some times during the month will not notice the fees until they've overdrawn their account. Then the bank may collect a $35 additional fee if the customer is enrolled in the bank's debit card overdraft protection program.

As for me, when these fees hit, I will not use my debit card for over the counter purchases. I can write a check at the grocery store or use a credit card for gas. After all, do you really think it will stop at $5 a month?

- JSM

There May Yet Be Life In The Quill Due Process Prong

In February 2011, we wrote about a case (Gordon v. Holder), in which the federal Court of Appeals for the District of Columbia Circuit vacated the denial of preliminary injunction against the enforcement of the federal Prevent All Cigarette Trafficking Act (PACT Act), P.L. 111-154 (2010). The PACT Act mandates state sales/use tax compliance by “delivery sellers” of tobacco products, regardless of whether the seller has a physical presence in the state. In vacating the denial of the preliminary injunction, the D.C. Circuit also advised the lower court to address on remand the issue of whether the PACT Act’s imposition of “potentially disparate burdens on ecommerce” violates the Due Process Clause of the United States Constitution (even though Congress has the authority to impose such burdens under the Commerce Clause). It appears that the Gordon case remains on remand before the district court as of this writing.

The Second Circuit Court of Appeals has now also ruled that a federal law must satisfy a minimum standard under the Due Process Clause before it may purport to authorize the imposition of state use tax collection by remote sellers. Red Earth LLC v. Holder, __ F.3d __, 2011 WL 4359919 (September 20, 2011). In Red Earth, the Second Circuit upheld the granting of a preliminary injunction against the PACT Act’s state tax collection provisions as they apply to certain Native American “delivery sellers” of tobacco products, on the grounds that the Act may be in violation of basic Due Process standards. Although, as the Court noted, the Due Process Clause does not require that a retailer have a “physical presence” in a state before a use tax obligation may be imposed, the Court found that the district court did not err in ruling that PACT Act likely violates the Due Process Clause because it “requires a seller to collect based on its making of [only] one delivery” in the state.

Both the DC Circuit’s February remand order and Second Circuit’s September 20 ruling confirm that a federal law that purports to impose (or allow) state use tax collection obligations on remote sellers must be consistent with the dictates of the Due Process Clause. This mandate includes ensuring that such obligations do not run afoul of the requirement that a retailer must “purposefully avail[] itself of the benefits of an economic market in the state” before it may be subjected to the state’s taxing power. See Quill Corp. v. North Dakota, 504 U.S. at 307-08. Although the Supreme Court in Quill held that the retailer in that case had sufficiently targeted the North Dakota market to eliminate any Due Process concerns, the Supreme Court has recently had reason (in the context of challenges to personal jurisdiction over a defendant in a tort case), to re-evaluate Due Process standards as they apply to companies with no physical presence in the state. See, e.g. J. McIntyre Machinery, Ltd. v. Nicastro, 131 S.Ct 2780, 2792 (2011). It remains to be seen how constitutional Due Process standards may impact federal laws that purport to authorize the imposition of state use tax collection obligations on remote sellers. Stay tuned.

California Governor Signs (Possibly Temporary) Affiliate Nexus Law Repeal

As we wrote recently, on September 9, the California legislature passed AB 155, which repeals (for at least the next year) the affiliate nexus provisions of the affiliate nexus law (ABX 1-28) enacted in June. The repeal may be only temporary, because the new law provides that if federal legislation overturning Quill Corp. v. North Dakota is not adopted by July 31, 2012, or if such legislation is adopted, but California does not implement the federal law’s requirements by September 14, 2012, then the affiliate nexus provisions of the repealed law, with some modifications described in our prior post, will kick back in on January 1, 2013, under the terms of AB 155.

Although Governor Brown reportedly had some misgivings regarding AB 155, he signed the bill into law earlier today. The law is effective immediately, so for now, California no longer has an affiliate nexus law. Whether federal legislation will be enacted and whether California will implement any such law’s requirements remains to be seen…

MEDIA RELEASE: RADIO REAL ESTATE HITS THE AIR IN TOWNSVILLE

MEDIA RELEASE: RADIO REAL ESTATE HITS THE AIR
Radio Real Estate went to air today on Townsville Radio 103.9 Four Triple T . Mal Charlwood, who is a Licensed Real Estate Agent and Auctioneer, has commenced a live talk back show to allow the listeners to phone in and ask questions regarding all aspects of buying and selling real estate.

Mal said “ the show aims to separate the facts from the myths about buying and selling real estate”.

The educational forum is softened with some humorous reflection by Mal of his experiences in the world of listing and selling real estate over the past 40 years.

Anyone who might have any interest in real estate should not miss this informative and free community service.

The first show this morning was well received with the phone running hot even after Radio Real Estate had finished.

Four Triple T radio station compare Clive Simpson said; “We believed that the show would be successful but the response was overwhelming”.

The show will air every Saturday morning straight after the News at 9.00am.

Contact Mal (pictured) at www.rapidrealty.com.au

British Columbia Repeals HST in Voter Referendum

As we have written previously, in 2010, both Ontario and British Columbia entered into agreements with Canada to harmonize the Goods and Services Tax (“GST”) and their Provincial Sales Taxes (“PST”) into a single Harmonized Sales Tax, or “HST.” The HST went into effect July 1, 2010, in both provinces.

But, the HST proved unpopular in British Columbia, and on August 26, a majority of voters in British Columbia passed a referendum aimed at extinguishing the HST and reinstating the PST. The transition back to the PST is expected to take “a minimum of 18 months." The reason for the long transition is that the province must develop and pass legislation and regulations to re-implement the PST and put in place systems to administer it, and the federal government and the province must pass transitional rules to return the province to the GST. Additionally, British Columbia must determine how it will refund to the federal government the $1.6 million provided to the province to aid in its initial transition to the HST.

As a result of the transition, British Columbia will again be subject to the 5% federal GST and the PST will return to its former 7% rate. Because the HST was 12% (5% federal component and 7% provincial component), British Columbians and retailers carrying on business in British Columbia will not see any change in the tax rate. However, retailers should be aware that the tax base for the reinstated PST will likely differ from the tax base for the GST. British Columbia anticipates providing quarterly updates as to the re-implementation of the PST and until implementation is complete, the HST will continue to apply.

No similar voter referenda appear to be on the horizon in any of the other harmonized provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, and Ontario), but we will continue to keep track of and inform our readers of any developments as they arise.

California Affiliate Nexus Law Repealed (At Least Temporarily) In Deal With Amazon

As we have previously reported, on June 28, California enacted an affiliate nexus law (ABX 1-28). Under the California law, an out-of-state retailer that has contracts with California affiliates to publish online advertisements linking consumers to the retailer’s website would have been required to collect California sales tax (or use tax) on all of its sales to California purchasers, if: (1) the in-state publishers also engaged in solicitation of customers in the state on behalf of the retailer through other means (such as by flyers, telephone calls, or e-mails) targeting California consumers; (2) the publishers of the advertisements were compensated based on sales made by the retailer; (3) over a 12 month period, the retailer realized at least $10,000 in cumulative sales to consumers accessing its site through such online ads; and (4) the retailer had California sales of at least $500,000 during such 12 month period.

Amazon.com responded to ABX 1-28 by supporting a campaign to repeal the new affiliate nexus law by citizens’ referendum, which was reportedly well on the way to gathering the necessary signatures to get the repeal measure on the ballot next year.

Now, political maneuvering between Amazon and the California General Assembly has resulted in a compromise. On Friday, September 9, the General Assembly enacted AB 155, which will become law immediately if Governor Brown signs the bill (as he is expected to do, despite some reported misgivings). AB 155 repeals, at least for a year (on the conditions described below), the California affiliate nexus law (i.e., ABX 1-28 described in the first paragraph), and also provides that the law will not be enforced for the period between June 28 and the effective date of AB 155. The bill also repeals (on the same conditions) the “controlled group” of corporations provisions of ABX 1-28. Those provisions purported to require use tax collection by any out-of-state retailer that is part of a group of corporations that includes a member that performs services in California in connection with tangible personal property to be sold by the retailer.

The repeal of the California affiliate nexus law is contingent upon the enactment by Congress of federal legislation to overturn the “physical presence” nexus requirement of Quill Corp. v. North Dakota, which prohibits a state from imposing a sales/use tax collection obligation on a remote seller or Internet retailer without a physical presence in a state. Amazon has reportedly agreed to lobby for such federal legislation and, in a press statement, said: “This [California] legislation will allow us to continue to work with Congress and the states to obtain a federal resolution to the sales tax issue as soon as possible.”

Here’s how the repeal works (if signed by Governor Brown):

• The California affiliate nexus provisions of ABX 1-28 enacted on June 28 are repealed and no longer of any effect, and also will not be enforced with respect to the period from June 28 through the effective date of AB 155 (i.e., the date Governor Brown signs the bill);

• If no federal legislation is adopted over-ruling Quill before July 31, 2012, then the California affiliate nexus provisions (as re-stated in AB 155, with one important change, noted below) will become law on September 15, 2012;

• If federal legislation overturning Quill is adopted by July 31, 2012, and California does not implement the requirements of such a federal law by September 14, 2012, then the California affiliate nexus provisions (again, as restated in AB 155, with the change noted below) take effect January 1, 2013; 

• If federal legislation over-turning Quill is adopted by July 31, 2012, and California implements the requirements of such a federal law by September 14, 2012, then the affiliate nexus provisions of AB 155 will NOT take effect.

Note that the affiliate nexus provisions of AB 155 that may later take effect ― in the event that Congress either does not enact federal legislation overturning Quill or California does not act to implement such federal legislation ― have been modified under AB 155 to increase the minimum sales threshold, so that they now will apply only to retailers that have in excess of $1,000,000 in cumulative sales to California residents in a 12 month period (although only $10,000 of those sales need to come from sales referred by in-state web affiliates).

This is a lot to take in, and remote sellers making sales to California residents should consult their legal advisors with any questions. At a high level, as a result of AB 155, e-commerce businesses and direct marketers that engage in online advertising through California affiliates get a temporary reprieve of at least 12 months from the effects of the California affiliate nexus law, and can continue to use California publishers of online advertisements during that period. But, they will likely need to scrutinize their California web affiliate relationships again before September 2012 and keep track of federal and California legal developments until at least January 2013.

The larger issue confronting each remote seller, however, may be whether the compromise struck in California is consistent with their own company’s goals and interests, and with the continued development of e-commerce more generally. Affected online retailers and publishers should stay informed and engaged regarding developments affecting the authority of all states to impose use tax collection obligations on out-of-state businesses. The time for sitting on the sidelines and watching the contest play-out between retail behemoths and the states has passed.

Business Lawyer Seeks Additional Editors

The Business Lawyer (TBL) plans to appoint at least one additional editor beginning with Volume 67. The responsibilities of an editor will be to:

(i) edit approximately sixty manuscript pages of each of the four issues that TBL publishes in each volume;

(ii) ensure that each statement of fact has an accurate citation that supports it;

(iii) conform all citations to the Blue Book; and

(iv) make sure that manuscripts satisfy TBL Author Guidelines.

Over the course of a volume, each editor should expect to work on a combination of articles, reports, and surveys that are published in TBL.

Since Volume 64, Professor Gregory Duhl of the William Mitchell College of Law has been responsible for all style editing, cite-checking, and Blue-Booking of TBL. Professor Duhl is the current Associate Editor-in-Chief, and the editors would work in collaboration with him, the Editor-in-Chief, who rotates yearly, and the Production Manager, Diane Babal, to ensure that TBL maintains its high quality and timeliness. The editors would also work closely with the Associate Editor-in-Chief to update the TBL Author Guidelines to maintain consistency in the journal.

TBL seeks editors from all business law disciplines, who have experience editing an academic publication, a keen attention to detail, and an ability to meet deadlines. Each editor would receive an honorarium upon completion of his or her work for that issue. If interested in this position, please e-mail a resume to Diane Babal, at Diane.Babal@americanbar.org. Any questions about the position can be addressed to Professor Duhl at Gregory.duhl@wmitchell.edu.

- JSM

Chase and Wells Fargo Waiving Some Fees

In a world where bank fees are on the rise, Chase Bank and Wells Fargo are waiving overdraft, late payment and other fees for customers in states impacted by Hurricane Irene (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont and Virginia). For instance, customers who can no longer get to a Chase ATM might have to use one from another bank.



Nice customer move.

- JSM

St. Thomas University Looking for Corporate/Commercial Faculty

ST. THOMAS UNIVERSITY SCHOOL OF LAW in Miami, Florida, invites applications from experienced and entry-level candidates for tenure-track positions beginning in the 2012/2013 academic year. The Law School especially seeks candidates in the areas of Wills & Trusts, Business Associations, Commercial Paper, Secured Transactions, Family Law, Constitutional Law, and Professional Responsibility. Applicants must possess a distinguished academic record, a dedication to excellence in teaching, and a demonstrated commitment to scholarship. Consistent with the Law School’s tradition of diversity, members of minority groups and women are especially encouraged to apply. Applicants should send a letter of application and a resume. CONTACT: Professor Tamara Lawson, Chair of the Faculty Recruitment Committee, St. Thomas University School of Law, 16401 NW 37th Avenue, Miami Gardens, Florida 33054. Email: tlawson@stu.edu. Fax: (305)623-2390.

Performance Marketing Association Suit Challenging Illinois Affiliate Nexus Law Now in State Court

On July 27, the Performance Marketing Association (“PMA”) filed a complaint in the Illinois Circuit Court for Cook County, challenging the new Illinois “affiliate nexus” law (“HB 3659”). In the complaint, the PMA asserts the same claims first raised in its complaint filed in the United States District Court in Chicago on June 1. As detailed in the complaint, the PMA alleges that HB 3659 violates the Commerce Clause and impermissibly discriminates against electronic commerce in violation of the Internet Tax Freedom Act (“ITFA”).

In connection with filing the suit in state court, the PMA has voluntarily dismissed the federal court action.  The voluntary dismissal will prevent a protracted dispute with the Defendant, the Director of the Illinois Department of Revenue, regarding whether the federal court has jurisdiction over the case. Brann & Isaacson attorneys George Isaacson and Matt Schaefer are counsel to the PMA in the case.

Practical Payments Tidbits

I like to give my first year contracts students a bit of practical knowledge about commercial transactions and consumer issues whenever possible. So, I've taken to putting up articles on the overhead screen at the beginning of class. Sometimes we have a little discussion, other times right onto contracts doctrine. Today, we began class with this little MSN news piece on 5 places to never use your debit card!

• Rental or security deposits. This goes to the heart of what a debit card does, it takes money from your checking account. Using a credit card for car rental and similar transactions, these deposits are not charged so you are not out the money at the time.



• Restaurants and bars. Just to much risk of fraud with so many people around. And, your card is likely to leave your presence leading to a greater possibility of card skimming. Again, the money comes out of your checking account, so harder to get it back in the event of theft compared to handling potential losses on credit cards. Or use cash . . .



• Regular payments. What companies do you really want to have your financial information permanently on file with an ability to hit your checking account at will. Consumers have greater rights under the Truth in Lending Act if you use your credit card. Alternatively, pay them on an automated payment out of your checking account yourself. Of course, some businesses do demand the regular payment system and you might have to give in if it is the only way to secure a wanted service.



• Wi-Fi hot spots. Quite simply, unsecured access to your account numbers.



• Any retail outlet where you choose the "credit" option. This one doesn't bother me, but the article mentions the less rapid clearing and risk of overdrafts as reasons not to use the debit card.

For my part, it is always nice to see a little consumer education on a regular basis. The big reminder here is while debit cards look like credit cards, the attributes are not the same. Consumers are wise to keep this in mind.

- JSM

What is a BitCoin? Where did Mybitcoin go?

On the way into St. Thomas University this morning, I heard an NPR piece about the Bitcoin. We live in a world where the value of money is uncertain, so some are looking for alternatives to the dollar, right? See, IMF Calls for Alternatives to the Dollar. The aim is to lessen volatility associated with the dollar as a currency and payment device, those economic and political. Some investors have rushed to gold as the easy alternative causing a rise in the value of gold, only to find that gold also has market swings tied to the dollar. See, WSJ, Gold Ends Lower on Dollar's Strength. I understand the goal. An electronic wallet, no intermediaries, completely anonymous.



So, what about the Bitcoin? A Bitcoin is simply a made up cash in an online universe. You use an online exchange in order to trade dollars for Bitcoins. Apparently, some restaurants in New York city will even accept Bitcoins in payment for lunch. Not so fast, though. "Hackers" allegedly hit MyBitcoin back in June, making off with $500,000 in funds. And now, MyBitcoin itself is processing claims to liquidate the remainder of the accounts. Apparently, that will be somewhere around 49% of their deposits. In the NPR piece, Ron Mann commented (correctly of course) that he would not expect Bitcoin to be around in 5 to 10 years. Well mostly correct, as at least mybitcoin was gone a mere months after the original interview. Perhaps others will take up the space left by mybitcoin, but how secure is any payment system?



Here is the story of one mybitcoin user who lost a substantial amount of money from his e-wallet:

As I advise my students, be wary about any new (or even existing) payment device . . . scammers . . .or anywhere you park your money for that matter. There are no quick fixes or easy roads to avoid market volatility and economic instability.

- JSM

After An Earlier Veto, Texas Enacts Nexus-Expanding Legislation In Response To Dispute With Amazon Over Distribution Center

As many readers may be aware, last October, the Texas Comptroller issued a $269 million assessment against Amazon.com for uncollected use tax for the period December 2005 to December 2009. News reports indicated that the assessment was based primarily on the grounds that a related entity, Amazon.com KYDC LLC, operates a distribution center in Irving, Texas (near the Dallas/Forth Worth airport). Amazon disagrees with the assessment, and later sued to obtain the Comptroller’s audit file containing information regarding the basis for the assessment.

July 19 marked the latest volley in the battle between Amazon.com and the State of Texas. Other e-commerce sellers and direct marketers should now ensure that they do not suffer collateral damage.

In response to the contentious dispute that had developed between the State and Amazon, the Texas legislature introduced a number of bills in its 2011 legislative session intended, in effect, to make clear that Amazon.com is obligated to collect and remit Texas use tax. One version of such legislation made its way to Texas Governor Rick Perry in late May, only to be vetoed by the Governor, who has expressed opposition to Amazon nexus legislation. The Texas legislature, however, re-inserted the nexus-expanding language from the bill Perry vetoed into a broad budgetbill, SB 1, which passed in late June.

Governor Perry, after waiting until the final day on which he could act, signed SB 1 on July 19. The bill includes various revisions to the Texas Tax Code that appear to be intended to subject a retailer to an obligation to collect Texas use tax if the retailer uses a distribution center in the state which is maintained by a related company (or even an agent of the retailer), such as was the case for Amazon. The new provisions are broadly-written and arguably redundant in many respects, suggesting that the legislature wanted to be certain that the new law encompasses any conceivable legal arrangement between a retailer and distribution company. (Or, perhaps more cynically, the legislature wanted to be certain that the law covers whatever legal arrangements Amazon, specifically, may have with its distribution center.) Thus, the law provides that a retailer is “engaged in business” in the State, and thus obligated to collect use tax, if the retailer:

• maintains or uses in the state, either directly or indirectly, or through a subsidiary or agent, a distribution center or any other physical location where business is conducted;


• derives receipts from the sale of tangible personal property situated in the state;


• holds a substantial (50% or greater) ownership interest in, or is owned in substantial part by, a person who maintains a location in the state from which business is conducted, if:


• the retailer sells a similar product line under a similar trade name as the in-state entity; or


• the in-state entity promotes or facilitates sales or otherwise assists the retailer in maintaining market in the state, including by receiving returns; or


• holds a substantial ownership interest in, or is owned in substantial part by, a person that maintains a distribution certain or similar facility in the state and delivers property sold by the retailer to consumers.

See Texas Tax Code § 151.107(a)(1), (3), (7), (8). SB 1 also amends the definition of “retailer” to include a person who, under an agreement with another person, (A) is entrusted with possession of tangible personal property in which the other person has title and (B) is authorized to sell the property without additional action by the person having title.Id. § 151.008(b)(6).

While apparently drafted in a manner intended to target Amazon, Internet retailers and direct marketers that contract with a Texas business or use a Texas location, particularly for distribution purposes, should review the law and consult with their counsel to determine if they may be affected by new definitions. Given the high stakes battle between Amazon and the State, other companies could be caught in the cross-fire or even be targeted themselves. Best not to become an unwitting victim.

Time to Stop Using Debit Cards?

While my gripe about debit cards used to be the tricky overdrafts, apparently there is a new fee in town. . . . The debit card usage fee. Now that we've moved to a very cashless society, some banks are now looking to charge customers who want to use a debit card. Wells Fargo is now testing a $3 monthly debit card fee and JP Morgan has already tested the $3 fee! Ouch. Just $3 right? But overtime . . . And, we all know that $3 would just be the start. Surely, I am a cynic.



Banks argue that these new fees are in response to the Fed's cap on the fees they can charge retailers on card transactions. An Associated Press survey, though, says that 61% of consumers will find another way to pay if banks charge for using the debit card. Way to go consumers! I wonder, though, if this will turn out to be a tricky fee. For instance, do you get the monthly fee if you use your card in your own bank's ATM? In other ATMs?



At least at this point, Bank of America has not yet jumped on the debit card fee bandwagon.

Tax Agencies Should Read the Language of the Statute and May Not Expand the Law’s Requirements

As some of our readers are aware, on June 28, 2011, California’s Governor Brown signed into law a bill (ABX1 28) that provides for “click-through nexus” under certain circumstances. This law is similar to “click-through nexus” legislation adopted in New York, Rhode Island, North Carolina, and Arkansas (which we have written about extensively in the past), inasmuch as it creates a rebuttal presumption of nexus if a company’s annual sales to California exceed $500,000 and if the company’s California sales exceed $10,000 from links or other referrals from companies (“affiliates”) who receive a commission from such referrals.

Unlike the Illinois and Connecticut statutes, which automatically create nexus in the event that sales from affiliates exceed the threshold, the California law provides that the retailer can rebut the determination of nexus based on affiliate relationships. Nevertheless, in a recent notice issued by the California Board of Equalization (Notice L-284, issued July 2011), the Board states that there are only two conditions to a finding that a retailer must be registered for sales and use tax collection: (1) that sales from affiliates exceeded $10,000 in the last 12 months; and (2) that the retailer’s total sales to California exceed $500,000 in the last 12 months. According to the Board, if a business meets the foregoing requirements and is not already registered with the Board, it must complete a “California Certificate of Registration—Use Tax.”

The Board is simply wrong. It misses two sections of the newly-enacted statute. Section 6203(5)(E) provides as follows: “This paragraph shall not apply if the retailer can demonstrate that the person in this state with whom the retailer has an agreement did not engage in referrals in the state on behalf of the retailer that would satisfy the requirements of the commerce clause of the United States Constitution.” This is similar (but not identical) to the clauses in the New York statute that permit the retailer to show that the affiliates do not engage in any solicitation in the state. Similarly, Section 6203(5)(C) provides that “an advertisement on a web site will not create nexus if the person entering the agreement with the retailer also directly or indirectly solicits potential customers in this state through use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in this state.” Many affiliate relationships are based on advertisements placed on web sites.

In short, it is important to read not only the notices you may receive from a state tax agency, but also to review the underlying legislation and regulations. State tax agencies simply cannot expand a law. Legislatures and Governors adopt laws. State tax agencies are entrusted with enforcing the laws, not creating them.

Bills Introduced in Congress to Override Quill in Favor of Streamlined Sales and Use Tax Agreement

On July 29, 2011, the so-called “Main Street Fairness Act” was introduced in both houses of Congress. The bills, introduced as H.R. 2701 in the House of Representatives and as S. 1452 in the Senate, are identical. Under the proposed law, Member States in the Streamlined Sales and Use Tax Agreement (SSUTA) would be authorized to require remote sellers (i.e., Internet retailers and other direct marketers with no physical presence in the state) to collect and remit state and local sales and use taxes notwithstanding the substantial nexus standard established by the Supreme Court in Quill Corp. v. North Dakota. There are currently 24 full and associate member states in the SSUTA, representing approximately 36% of the population of the United States. Many larger states, including California, Florida, Illinois, New York, Pennsylvania and Texas are not SSUTA members.

Similar bills have been introduced in past sessions of Congress, including in 2003, 2006, 2007 and 2010. Brann & Isaacson Senior Partner, George Isaacson, has testified with regard to such prior legislation in 2003, 2006, and 2007 that the SSUTA has not achieved the goal of genuine simplification and uniformity of states sales and use tax systems.  The requirements imposed on states by the current Congressional bills are substantially identical to prior versions and, in some respects, are even less demanding for states. In addition, H.R. 2701 and S. 1452 contain no express minimum level or “small seller” exemption that would protect smaller retailers from the obligation to collect use tax in all member states. Instead the bills defer to small seller exemptions established by the SSUTA states themselves.

We will keep you apprised of further developments regarding the bills.

Enforcement of Intercreditor Agreements In Bankruptcy

Enforceability of pre-petition Intercreditor Agreements in bankruptcy has drawn more attention with the increase in restructurings in bankruptcy in the wake of a troubled business climate. Of course, both first priority lenders and second priority lenders both desire protection during a restructuring. Not surprisingly, many lending arrangements involving multiple lenders take into account the potential of disputes and bankruptcy. Section 510(a) of the Bankruptcy Code upholds these arrangements providing that "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law." When it comes to subordination agreements during bankruptcy reorganizations, though, this provision must be read alongside the power of the bankruptcy court to confirm plans under §1129, approve sales under §363(b) and the mandate that the court appoint examiners in certain cases under §1104(c). Accordingly, whether, and to what extent, an intercreditor agreement falls under the protections of 510(a) and the authority of the bankruptcy court under other provisions has been the subject of several recent cases illustrating the limits of parties’ abilities to make arrangements prior to bankruptcy.

In one recent case, the Bankruptcy Court for the Southern District of New York acknowledged that a second priority lender had standing to object to a proposed sale of assets despite the existence of an intercreditor agreement, but concluded that a secondary lender could not prevent a sale of assets that is supported by “good business reason[s].” In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)(concerned a proposed sale of assets in bankruptcy of a power plant that provides electricity to the Boston, Massachusetts area to a buyer who would take the assets free and clear of creditors’ claims). See also, In re GMC, 407 B.R. 463, 498 (Bankr. S.D.N.Y. 2010)(“[t]his is hardly the first time that this Court has seen creditors risk doomsday consequences to increase their incremental recoveries, and this court – which is focused on preserving and maximizing value, allowing suppliers to survive, and helping employees keep their jobs – is not of a mind to jeopardize all of those goals.”). Ultimately, the court determined that “[t]he Debtors’ assets are simply being sold; the First Lien Lenders will receive most of the proceeds in accordance with their lien priority; and the remaining consideration will be subsequently distributed under a plan."

In another recent case, the the United States Bankruptcy Court for the District of New Jersey held that a court can irrespective of a prepetition subordination agreement confirm a nonconsensual bankruptcy reorganization plan that meets the requirements of §1129(a). In re TCI Holdings, LLC, 428 B.R. 117 (Bankr. D.N.J. 2010)(when “the requirements of section (a) and (b) of [1129] are met with respect to more than one plan, the court shall consider the preferences of creditors and equity security holders in determining which plan to confirm.”). Essentially, the bankruptcy judge acts as a tiebreaker where the parties to the dispute are unable to negotiate an agreement among the competing interests at stake.

The treatment of intercreditor agreements by courts has important implications for lenders when it comes to drafting these agreements. Basically, attorneys should be mindful that general contract principles control issues such as interpretation of agreements and waiver even in the context of bankruptcy. See, e.g., In re Erickson Ret. Cmtys., LLC, 425 B.R. 309, 316 (Bankr. N.D. Tex. 2010)(“Michigan Retirement System Entities are sophisticated commercial entities who knowingly waived all legal and statutory rights that would be in conflict with their obligation to "standstill" until the Ashburn and Concord Project Lenders' indebtedness is paid in full.”). The In re Boston Generating court’s holding that a second lien holder has standing to object to the sale of assets in bankruptcy is a reminder to counsel that if a waiver of such rights is desired, it should be expressly and clearly stated in the agreement. Notwithstanding this holding, bankruptcy courts will enforce waivers when clearly stated in the intercreditor agreement. In re Erickson Ret. Cmtys., LLC, 425 B.R. at 316.

These cases as a whole serve to remind us that these disputes during bankruptcy typically revolve around creditors seeking to enhance returns even in the face of an intercreditor agreement that states otherwise. Pre-bankruptcy lender agreements are typically designed to ensure that lenders obtain specified restructuring benefits. The cases demonstrate that despite the involvement of legal counsel, agreements between lenders are commonly ambiguous and create interpretation issues which can lead to the delay of reorganization plans of the debtor, sales of assets and other bankruptcy decisions that preserve the value of the debtor’s assets. As I remind my students often, clarity in contract language at the outset, when possible, will speed up the resolution of disputes later.

- JSM

MEDIA RELEASE: BLIGH PULLING WOOL OVER FIRST HOME BUYERS

The State Government while assisting the ailing building industry to recover from partly self-inflicted poor economic and political conditions, Premier Bligh and Treasurer Frazer is pulling the wool over the eyes of First Home Buyers.

Despite the seemingly generous increase in first home buyer grants and concessions in the new building market, first home buyers should be aware of higher building costs and steady market price conditions that may cause an unfavourable net saving to the buyers over buying existing homes.

Rapid Realty Townsville’s Principal, Aaron McLeod is encouraging first timers to carry out proper due diligence before buying property and consult with their solicitor, finance broker, accountant and real estate professional.

New homes purchased 2-3 years ago being sold again today as existing homes are fetching discounts of up to 10-15% while the general market has seen a more modest easing in median prices.

Existing housing sellers, landlords and buyers will be worse off under the State Budget 2011-2012 announcements, while the new building sector should experience increasing enquiries and sales due to these changes.

It is true however that Townsville’s First Home Buyers have exercised resurgence to the property market since the Queensland Government announced changes to first home buyer grants and transfer concession rates in the State Budget 2011-2012.

Housing finance data released last week by the Australian Bureau of Statistics (ABS) for May 2011 shows that as a proportion of all owner occupier finance commitments, first home buyers accounted for just 15.4% of the market.

During the month of May there was a 17.2% increase in new home loan commitments by first home buyers across the Country from the previous month (RP Data Property Pulse, July 2011)

Rapid Realty Townsville Principal, Aaron McLeod said; "Like the increases in national statistics, first home buyer enquiries in Townsville have increased since the grants and concession rates were announced in the State Budget 2011-2012.

These changes take affect from the 1st August 2011 and are designed to encourage first home buyers into building a new home. Both the building first home buyer grant and concession rates will improve while concession rates for the first home (non building) grant will be abolished and transfer duty concessions will increase.

The Federal Government's $7,000 first home buyer grant will be available for both new building and existing new home buyers.

This is another strong case for "buyer beware".

Townsville Real Estate Blog
www.rapidrealty.com.au

REAL ESTATE BUYERS STIMULATED BY RATES

MEDIA RELEASE

The Australian Economics Weekly published last Friday by the ANZ Bank reports that the RBA is not expected to raise interest rates before early 2012 due to slowing growth in the economy, particularly jobs growth. In fact a possible interest rate fall has been factored in by the markets.

Rapid Realty welcomes the forecast reduction in interest rates. It stimulates buyer enquiry in the property market. A sustained reduction in the cash rate could see broader buying activity as households adjust their financial risk appetite and adopt a more confident outlook. Buyers should keep an eye on the interest rate scenario to detect a trend indicator for the inevitable return of positive growth in property demand.

With a predicted rebound in economic growth in 2012 of 3.3% from the current growth pattern of 0.9%, Townsville's Real Estate buyers and investors may have 6-12 month window to make their property investment decisions if maximising capital growth opportunities is the investment driver for buyers.

To stay in touch with the Townsville Property Market, contact one of our licensed agents at www.rapidrealty.com.au

WILLOWBANK 4 BEDROOM FAMILY HOME

31 GUILFOYLE CIRCUIT KIRWAN

Located within walking distance to the Willows Golf Club, 5 minutes to Willows Shopping precinct and Dairy Farmers Stadium, living in peaceful enjoyment within a modern community development in your own beautifully presented home is more then a dream when you see this 4 bedroom home for yourself.

Whether you are a true home buyer or astute investor, this property has lots to offer a growing family with:

* 4 bedrooms all air-conditioned
* Large en-suite bathroom to master bedroom and walk in robe
* Built-in robes to guest bedrooms
* Cathedral ceilings with split air-conditioned to living
* Modern kitchen with large corner panty
* Tiled floors throughout
* Tiled entertainer patio off kitchen and living areas
* Remote double lock up garage
* Security screens
* Side vehicle access
* Room for a shed
* Walk to golf course, parks and bus service

Currently tenanted on fixed term til August 2011. Contact Aaron on 0414 590 110 for a viewing today.

A sustainability declaration is available upon request.

Potential Unit Development Site - Large Block with 3 Bedroom Colonial Style House

190 BOUNDARY STREET RAILWAY ESTATE - AUCTION ON SITE 6TH AUGUST 2011 4PM

Located within 5 minutes to the proposed Cruise Ship development, City, restaurants and cafes on Palmer Street, shops and schools, this large mixed residential zoned block offers an excellent investment and multiple unit development opportunity.

The property includes a 3 bedroom colonial cottage house featuring:

• Large homestead veranda
• Polished timber floors
• Renovated kitchen and bathroom
• New carpet in bedrooms
• Fresh paint throughout
• Air-conditioning to main bedroom
• Internal laundry
• 2 car carport
• Fully fenced
• Established gardens

The property is currently tenanted til October 2011 yielding a gross return of $18,200 PA.

Contact Aaron on 0414 590 110 to arrange an inspection.

A sustainability declaration is available upon request.

4 x 2 Bedroom Executive Investment

50 QUEENS ROAD HERMIT PARK $750,000 Neg

Located within 5 minutes to the City, 2 minutes to the Hermit Park Shopping precinct, this block of four 2 bedroom executive flats offer a premium investment opportunity currently returning a combined gross rental of $59,280 PA.

Already configured for possible strata development, each flat offers modern and bright fittings with built-in wardrobes, spa bath and two way bathroom, split air conditioning throughout, arch ceilings and bulk heads upstairs, kitchen complete with electric stove and oven, open plan living and dining, combined patio/deck and laundry and feature security screens and fans throughout.

Each flat is accessible by security door and screens. The top two flats, with private balcony and deck, are accessible by internal polished timber stairs. Carports, storeroom and laundry with dryers are features of each flat also. The property is landscaped with garden edging and irrigation, fully fenced with security gate at the front driveway which is hard stand concrete to the carports located at the rear of the block.

An excellent opportunity for the astute investor, this premium set of flats present a solid rental return and an asset in very good condition to maximise your net earnings with capital growth potential.

• Block of four 2 bedroom executive flats with spa bathrooms
• All feature 2 bedrooms, 1 two-way bathroom, 1 car accommodation and storage
• Opportunity for new owner to strata title
• Currently returning gross rental of $59,280 PA
• 809 sqm allotment, 317.44 sqm under roof area, 69 sqm carports and 54.4sqm outdoor
• Close to transport, parks, shopping precinct and 5 minutes to City

A copy of the Sustainability Declaration is available upon request.

Contact Aaron on 0414 590 110 for more information.

California Adopts New Nexus Statute

On Tuesday, Governor Jerry Brown signed into law California’s new nexus legislation.  The law, which took effect immediately, expands the scope of activities requiring out-of-state retailers to collect and remit California sales and use tax by expanding the definition of “retailer engaged in business” in California.

The newly amended section 6203 of the California Revenue and Tax Code provides that a retailer engaged in business in the State includes any retailer that:

• has substantial nexus with the State within the meaning of the Commerce Clause;

• is a member of a commonly controlled group of corporations that includes another member which performs services for the out-of-state retailer in California (including the design and development of TPP sold by the out-of-state retailer or the solicitation of sales on behalf of the out-of-state retailer); or

• enters into an agreement under which a person in California refers potential customers to the out-of-state retailer via the internet or other means in exchange for a commission or other consideration.

Similar to other state’s so-called “click-through” laws, California excludes from the definition of retailer out-of-state retailers that do not meet certain referral and sales threshold requirements.  In California’s case, an out-of-state retailer will only be considered a retailer engaged in business in the State if all sales by the retailer from in-state referrals exceed $10,000 for the preceding 12 months and if the retailer has at least $500,000 in total sales to California customers.

However, unlike other states, California’s click-through law actually applies to affiliate referrals regardless of the channel through which the out-of-state retailer receives its referrals.  While states like Illinois only include internet referrals in their nexus statute, California’s statute covers referrals from internet, television, radio, print, and other media in making the determination as to whether an out-of-state retailer is engaged in business in the State.

Also, unlike other state statutes, California’s new law states that, in the case of click-through, web-based affiliates, the in-state affiliate will only create nexus for the out-of-state retailer if, in addition to placing a link on its website, the affiliate also directly or indirectly solicits sales on behalf of the retailer through in-person, print, or electronic solicitation specifically targeted to potential California customers.

Finally, unlike other click-through states (with the exception of Illinois and Connecticut), the California statute does not specifically refer to any presumption of nexus which may be rebutted by the out-of-state retailer.  However, the statute does make it clear that the affiliate nexus provisions will not apply if the out-of-state retailer can show that its affiliates made no referrals in the State sufficient to satisfy the Commerce Clause.

Keeping in mind the statute has already gone into effect, retailers should make sure to consult with their tax advisors soon.  With that said though, we also advise our readers to have a safe and festive July 4^th holiday!

FED Issues Final Debit Card Rules

The Dodd-Frank financial reform legislation required the Federal Reserve Board to regulate debit card merchant fees. Over the past year, the FED has taken comments, issued proposals, delayed the announcement of a final recommendation, and unsuccessfully sought to change or delay this difficult task. This week, the Board adopted a staff recommendation that is in the truest sense a compromise that like most successful compromises is unlikely to please any of the players involved. The result is also an example of administrative law making at its most creative, interpreting the statutory language to most effectively achieve Congressional intent while minimizing the economic risks that the Act's proponents likely did not understand or anticipate.

Section 920(a)(2) of the Act required the FED to limit debit card interchange -- the portion of merchant card acceptance fees that are paid to the card issuer -- to an amount that "shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction."

A fee meeting this standard, the Act asserted, should include "the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction," but should not include "other costs incurred by any issuer which are not specific to a particular electronic debit transaction."

Early on the FED staff concluded that it should set the fee based on costs for a representative issuer and transaction. Basing fees on the actual costs of particular issuers would impose undue compliance burdens. The Board decided to set a fee cap based on the average per-transaction cost, excluding fraud losses, of the issuer at the 80th percentile based on a survey of the large banks covered by the statute. Each issuer would be permitted to receive interchange fees not exceeding the cap without demonstrating its actual per transaction costs.

Initially, the staff read the statute to permit the Board to take account only of variable per transaction costs. That led to the initially proposed fee cap of $.12 per transaction. Issuers objected that fees at that level would not come close to covering their actual costs of operating a debit card system. The staff responded to those concerns by creatively reinterpreting the statute to include a third type of cost that was neither an "incremental cost" of a debit transaction, nor a cost of the system that was "not specific to a particular transaction." This third type of cost, the staff reasoned, consisted of fixed costs of a debit program that are nonetheless specific to particular transactions. And since the statute did not explicitly require or prohibit including these costs in the regulated fee, the Board could exercise its discretion.

The staff concluded that prohibited costs of a debit system included corporate overhead (e.g., executive compensation, human resources, the issuer's branch network); establishing account relationships; general debit program costs (e.g., production and delivery); marketing; research and development; and network membership fees. Conversely, non-incremental costs that are specific to particular debit transactions -- and that could thus be included in the regulated fee at the Board's discretion -- included (1) network connectivity; (2) software and hardware for processing transactions; (3) operational labor; (4) network processing fees; (5) transaction monitoring costs; (6) reward programs; (7) handling cardholder inquires; and (8) non-sufficient funds handling.

Ultimately, the FED adopted a regulation including the first five of these costs, but not the last three, resulting in a cap of $.24 per transaction. In addition, the FED determined that transaction monitoring as a means of fraud protection also fell within the discretionary category of fixed costs attributable to specific transactions. Because losses vary with the size of the transaction, the regulation permits a fee of up to 5 basis points on top of the $.24 flat fee per transaction.

Finally with respect to fees, the legislation permitted an adjustment for investments in fraud prevention, and the Board included a 1 cent per transaction bonus for issuers that meet the FED's standards to help offset the costs of implementing activities that are effective at reducing fraud looses.

The legislation also required the FED to adopt regulations prohibiting network exclusivity so that merchants had choices with respect to the network on which to process a transaction. The FED required that each card provide access to at least two unaffiliated networks, but it did not require that each card link to multiple networks for both PIN and signature access.

The FED also excluded from the regulation three-party networks that did not have separate entities issuing cards and signing up merchants. American Express, for example, is not covered by the fee limit.

The fee regulation provisions are to go into effect on October 1, 2011, followed by the network exclusivity rules on April 1, 2012. You can read the Board's full report on the regulations here.