On April 4, 2013, Kentucky Governor Steve Beshear signed into law HB 440. The bill includes an amendment to Kentucky’s tax code which will impose a new requirement on every retailer that makes sales into Kentucky from outside the state and that is not required to collect Kentucky use tax. The law requires that these retailers provide a notice to their customers that Kentucky purchasers are required to report and pay use tax directly to the Kentucky Department of Revenue. A similar provision enacted in Colorado in 2010 as part of a broader notification and reporting bill was declared unconstitutional by a federal judge in Direct Marketing Association v. Huber, a case now on Appeal before the 10th Circuit Court of Appeals. Brann & Isaacson is counsel to the DMA in the Colorado litigation.
While three other states—Oklahoma, South Dakota, and Vermont—have similar consumer use tax notification requirements on the books, Kentucky’s new law is more aggressive:
First, on its face, Kentucky’s law requires retailers to use “the exact required use tax notification language” set forth in the statute concerning compliance with Kentucky law, and does not include a substantial compliance provision likes other states. According to the statute, even if a seller already has a notice provision for other states, that notice provision is only adequate for purposes of Kentucky law “if the consolidated notification meets the requirements of this section.” In other words, only the “exact” language of the Kentucky law, and not something substantially similar that a retailer adopts in response to another state’s notification law, appears to be allowed.
Second, the Kentucky statute expressly applies to “online auction Web sites.” It is not clear whether the requirement is meant to apply to the auction site itself, or whether it means that retailers selling through an auction site must arrange for display of the notice with respect to their own sales. But note that there is a small seller exemption that exempts any retailer with sales of less than $100,000 to Kentucky residents from having to comply with the statute. This may lessen the impact of the Kentucky law on Internet auction sites.
Third, while South Dakota and Vermont each provide that there can be no civil or criminal penalties for a retailer’s failure to comply with the use tax notification provision, Kentucky has no such non-enforcement clause. The Oklahoma statute is likewise silent on enforcement and, in practice, the Oklahoma notice law has not been enforced by the state’s Tax Commission. It remains to be seen whether the Kentucky Department of Revenue will bring enforcement actions, but nothing in the new law appears to prevent it.
For more details on the new Kentucky consumer use tax notification statute and how it might affect an out-of-state retailer’s website check-out screens and catalog order forms, ecommerce vendors and other remote sellers should consult their tax advisors.
Showing posts with label South Dakota. Show all posts
Showing posts with label South Dakota. Show all posts
Tuesday, April 9, 2013
Thursday, April 28, 2011
States on the Warpath
In the last few months, three states (Illinois, Arkansas and South Dakota) have enacted “nexus expanding” legislation effective on July 1, 2011. Other states are considering adopting such legislation. The legislation falls into three categories: (1) click-through nexus; (2) reporting obligations; and (3) “affiliate” or “attributional nexus.”
We have previously written about the Illinois click-through nexus law (here and here), which we believe is unconstitutional since it purports to establish nexus (with no opportunity to rebut the determination) for any retailer that contracts with a person “located in Illinois” who receives a commission from the retailer based on sales of goods facilitated by a link from the person to the retailer’s web site. We will not describe here the details as to why the statute is unconstitutional, other than to note that mere national advertising, which is what the click-through represents, has never been deemed to create nexus, as pointed out in the Quill v. North Dakota case. In addition, online retailers should carefully review the Illinois statute and its requirements before deciding whether it applies to them.
The other recently-adopted nexus click-through legislation is the Arkansas law, which, unlike the Illinois statute, creates only a presumption of nexus that can be rebutted by a showing that the person maintaining the web site that provides a link does not engage in solicitation on behalf of the retailer. The statute is modeled after the New York statute, and it is possible for a retailer to structure its program with its Arkansas affiliates so as not to be subject to Arkansas sales tax collection obligations.
I also note that there is pending legislation in several states that is similar to the Arkansas statute and not the Illinois statute. (See our recent discussion of pending legislation here.)
The South Dakota statute requires all non-collecting retailers that have annual gross sales into South Dakota of $100,000 or more to provide a “transactional notice.” The transactional notice should appear both on the retailer’s web site and in catalogs and purchase orders/receipts. Because the law applies only to non-collecting retailers, who by definition do not have a physical presence in the state and who are out-of-state retailers, it suffers from the same constitutional infirmities that caused the Colorado federal court to issue a preliminary injunction staying the enforcement of a very similar statute in Colorado.See Direct Marketing Ass’n v. Huber, 2011 WL 250556 (D. Colo. 2011).
In the final category of statutes, both Arkansas and Illinois also provide for attributional nexus for commonly-owned companies when an affiliate has a physical presence in the state. The Illinois statute provides that an out-of-state retailer has nexus with the state if it has a contract with an affiliate who both sells a similar line of products under a substantially similar name as the online retailer and receives a commission from the out-of-state retailer. The Arkansas statute provides a more expansive definition of a company required to collect sales tax and bases its requirement upon either the retailer’s use of the in-state affiliate to act on behalf of the retailer or the retailer’s use of substantially similar trademarks or tradenames as used by the in-state affiliate.
In short, much of the new legislation is constitutionally suspect. How the states choose to enforce the laws, and how the industry reacts, is a work in progress. Individual companies should carefully review their own nexus profile and circumstances to determine the applicability of this new legislation.
We have previously written about the Illinois click-through nexus law (here and here), which we believe is unconstitutional since it purports to establish nexus (with no opportunity to rebut the determination) for any retailer that contracts with a person “located in Illinois” who receives a commission from the retailer based on sales of goods facilitated by a link from the person to the retailer’s web site. We will not describe here the details as to why the statute is unconstitutional, other than to note that mere national advertising, which is what the click-through represents, has never been deemed to create nexus, as pointed out in the Quill v. North Dakota case. In addition, online retailers should carefully review the Illinois statute and its requirements before deciding whether it applies to them.
The other recently-adopted nexus click-through legislation is the Arkansas law, which, unlike the Illinois statute, creates only a presumption of nexus that can be rebutted by a showing that the person maintaining the web site that provides a link does not engage in solicitation on behalf of the retailer. The statute is modeled after the New York statute, and it is possible for a retailer to structure its program with its Arkansas affiliates so as not to be subject to Arkansas sales tax collection obligations.
I also note that there is pending legislation in several states that is similar to the Arkansas statute and not the Illinois statute. (See our recent discussion of pending legislation here.)
The South Dakota statute requires all non-collecting retailers that have annual gross sales into South Dakota of $100,000 or more to provide a “transactional notice.” The transactional notice should appear both on the retailer’s web site and in catalogs and purchase orders/receipts. Because the law applies only to non-collecting retailers, who by definition do not have a physical presence in the state and who are out-of-state retailers, it suffers from the same constitutional infirmities that caused the Colorado federal court to issue a preliminary injunction staying the enforcement of a very similar statute in Colorado.See Direct Marketing Ass’n v. Huber, 2011 WL 250556 (D. Colo. 2011).
In the final category of statutes, both Arkansas and Illinois also provide for attributional nexus for commonly-owned companies when an affiliate has a physical presence in the state. The Illinois statute provides that an out-of-state retailer has nexus with the state if it has a contract with an affiliate who both sells a similar line of products under a substantially similar name as the online retailer and receives a commission from the out-of-state retailer. The Arkansas statute provides a more expansive definition of a company required to collect sales tax and bases its requirement upon either the retailer’s use of the in-state affiliate to act on behalf of the retailer or the retailer’s use of substantially similar trademarks or tradenames as used by the in-state affiliate.
In short, much of the new legislation is constitutionally suspect. How the states choose to enforce the laws, and how the industry reacts, is a work in progress. Individual companies should carefully review their own nexus profile and circumstances to determine the applicability of this new legislation.
Monday, February 14, 2011
Maine Introduces Modified, Colorado-Style Notice and Reporting Law, Which Also Likely Violates The Commerce Clause
On February 9, 2011, the Maine Legislature introduced a bill (LD 469) which would impose upon certain out-of-state retailers a set of notice and reporting obligations that closely parallel the requirements of Colorado’s 2010 law, H.B. 10-1193. Enforcement of H.B. 10-1193 was recently enjoined by a federal judge in Denver on the grounds that such requirements are likely unconstitutional and in violation of the Commerce Clause. As we have reported in prior posts, Brann & Isaacson represents the Direct Marketing Association in the federal court challenge to the now-suspended Colorado law, after which the Maine bill is patterned.
Maine’s LD 469 includes all three of the Colorado law’s notice and reporting requirements – retailers must provide the Transactional Notice, Annual Purchase Summaries to customers, and Customer Information Reports to revenue officials – and would impose penalties on affected retailers for non-compliance with the law. Notably, however, unlike the Colorado law, the Maine bill includes no $500 annual minimum purchase threshold to trigger the requirement that an affected retailer must send a customer an Annual Purchase Summary. Similar to Colorado’s law, under LD 469 such annual summaries to customers must include, if available, “[d]escriptions of items purchased,” as well as dates and amounts. Also in contrast to Colorado, the report to Maine Revenue Services must include all of the information provided to each purchaser in the annual summary – thereby requiring that at least descriptions of the items purchased by customers of an affected out-of-state retailer be turned over to Maine Revenue Services. The Maine bill thus raises even more significant privacy concerns for Maine consumers buying from affected retailers than does the privacy-invading Colorado law.
The Maine bill also appears to differ from the Colorado law in another respect: whereas the suspended Colorado law applies, by its terms, to all out-of-state retailers that do not collect Colorado sales tax, LD 469 imposes its onerous notice and reporting obligations only upon companies that are presumed to be doing business in the state because they are members of a “controlled group of corporations” that has at least one member who is already a retailer with a physical presence in the state. The Bill Summary states that “[t]his bill requires out-of-state retailers that are not required to collect sales tax and that are part of a controlled group of corporations with a connection in the State” to comply with the notice and reporting obligations. The apparent requirement that, to be subject to the law, an out-of-state retailer must have an affiliated retailer with physical presence in Maine, means that the proposed law would not apply to as broad a group of out-of-state companies as does the Colorado law.
What the sponsors of the bill apparently fail to recognize is that limiting the notice and reporting obligations to a more narrow group of out-of-state retailers who do not collect sales tax (i.e, only those who are part of a controlled group) does not change the fact that it discriminates against interstate commerce in violation of the Constitution. The Supreme Court has made it perfectly clear that a state cannot pick and choose which out-of-state companies it will discriminate against – even state laws that have imposed disparate treatment upon only a single out-of-state company that is not imposed upon in-state companies are virtually per se invalid under the Commerce Clause.
The prospects for passage of LD 469 are, at this point, entirely uncertain, so there is still time for Maine’s elected officials to avoid following in the footsteps of their Colorado counterparts. In addition to running afoul of over 180 years of established constitutional law, LD 469 is simply bad policy – invading the privacy of Maine citizens should never be viewed as a proper approach to promoting use tax reporting.
Since the new year, several other states, including Arizona, California, Connecticut, Hawaii, Illinois, New Mexico, South Dakota, Vermont, and Texas, have introduced new notice and reporting bills, or “Amazon” affiliate-nexus legislation. Stay tuned for an update on the progress of these bills.
Maine’s LD 469 includes all three of the Colorado law’s notice and reporting requirements – retailers must provide the Transactional Notice, Annual Purchase Summaries to customers, and Customer Information Reports to revenue officials – and would impose penalties on affected retailers for non-compliance with the law. Notably, however, unlike the Colorado law, the Maine bill includes no $500 annual minimum purchase threshold to trigger the requirement that an affected retailer must send a customer an Annual Purchase Summary. Similar to Colorado’s law, under LD 469 such annual summaries to customers must include, if available, “[d]escriptions of items purchased,” as well as dates and amounts. Also in contrast to Colorado, the report to Maine Revenue Services must include all of the information provided to each purchaser in the annual summary – thereby requiring that at least descriptions of the items purchased by customers of an affected out-of-state retailer be turned over to Maine Revenue Services. The Maine bill thus raises even more significant privacy concerns for Maine consumers buying from affected retailers than does the privacy-invading Colorado law.
The Maine bill also appears to differ from the Colorado law in another respect: whereas the suspended Colorado law applies, by its terms, to all out-of-state retailers that do not collect Colorado sales tax, LD 469 imposes its onerous notice and reporting obligations only upon companies that are presumed to be doing business in the state because they are members of a “controlled group of corporations” that has at least one member who is already a retailer with a physical presence in the state. The Bill Summary states that “[t]his bill requires out-of-state retailers that are not required to collect sales tax and that are part of a controlled group of corporations with a connection in the State” to comply with the notice and reporting obligations. The apparent requirement that, to be subject to the law, an out-of-state retailer must have an affiliated retailer with physical presence in Maine, means that the proposed law would not apply to as broad a group of out-of-state companies as does the Colorado law.
What the sponsors of the bill apparently fail to recognize is that limiting the notice and reporting obligations to a more narrow group of out-of-state retailers who do not collect sales tax (i.e, only those who are part of a controlled group) does not change the fact that it discriminates against interstate commerce in violation of the Constitution. The Supreme Court has made it perfectly clear that a state cannot pick and choose which out-of-state companies it will discriminate against – even state laws that have imposed disparate treatment upon only a single out-of-state company that is not imposed upon in-state companies are virtually per se invalid under the Commerce Clause.
The prospects for passage of LD 469 are, at this point, entirely uncertain, so there is still time for Maine’s elected officials to avoid following in the footsteps of their Colorado counterparts. In addition to running afoul of over 180 years of established constitutional law, LD 469 is simply bad policy – invading the privacy of Maine citizens should never be viewed as a proper approach to promoting use tax reporting.
Since the new year, several other states, including Arizona, California, Connecticut, Hawaii, Illinois, New Mexico, South Dakota, Vermont, and Texas, have introduced new notice and reporting bills, or “Amazon” affiliate-nexus legislation. Stay tuned for an update on the progress of these bills.
Wednesday, April 14, 2010
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:
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.
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).
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.
Thursday, March 11, 2010
Colorado's HB 1193 Risks Constitutional Violations and Threatens Consumer Privacy
The assault on eCommerce by short-sighted state legislators and tax officials continues. By now, many of you have heard or read about the new Colorado law (HB 1193) enacted in February, that imposes certain sales tax notice and reporting obligations upon each “retailer that does not collect Colorado sales tax.” Under the law, most non-collecting retailers are required:
(a) beginning effective March 1, 2010, to inform their Colorado purchasers of the purchaser’s duty to remit use tax on certain purchases under Colorado law;
(b) beginning in January 2011, to provide Colorado purchasers an annual statement of all of their Colorado purchases from the retailer; and
(c) beginning in January 2011, to file annually with the Colorado Department of Revenue a list of all purchasers and the amount of their Colorado purchases.
These new obligations are backed by substantial penalties for retailers that do not comply. Amazon.com reacted to the passage of the bill by terminating all of its Colorado online affiliate relationships, angering Colorado lawmakers who had worked with Amazon and its local affiliates in removing “New York style” affiliate nexus provisions from earlier drafts of the bill.
But the tiff between Amazon and Colorado is really a side-show that masks the genuine problems with the law, including both potential constitutional violations and invasions of consumer privacy. Colorado lawmakers and revenue officials made no secret during debate on the bill that the new law was expressly intended to force out-of-state online and direct marketers to begin collecting Colorado use tax on their sales to Colorado residents, despite constitutional prohibitions against the imposition of such tax obligations under the Commerce Clause, as reaffirmed by the Supreme Court in Quill Corp. v. North Dakota.
The burdens imposed by the new law are real and discriminatory; no Colorado retailer is required to comply with them, but out-of-state online and direct marketers’ compliance is mandatory. Also, given the propensity for “copy cat” nexus legislation among the states in recent years, such laws are likely to proliferate in other state legislation soon, unless online and direct marketers (and voting consumers) trumpet the problems with such laws. Already, the South Dakota Department of Revenue & Regulation is following Colorado’s lead by informally demanding that out-of-state companies provide it a list of in-state purchasers who may owe use tax.
Consumers should take note because the new Colorado law suggests that some state lawmakers feel that the answer to encouraging increased use tax compliance by online shoppers is the systematic invasion of their privacy, on a massive scale. Under the Colorado law, every online and mail-order purchaser in Colorado will have the source and amount of his or her purchases from out-of-state sellers fully documented in Colorado Department of Revenue databases, down to the last penny. Such files are presumptively public records, and thus potentially subject to disclosure under Colorado’s Open Records Law. Furthermore, even if the Department resists the formal requests for access to such records that will inevitably come, public agencies such as the Department are typically not subject to data security laws (for example, Colorado’s data breach statute applies only to individuals and commercial entities), and thus unlike private businesses are not compelled to have meaningful data security measures in place. Little wonder the great majority of all data breaches have occurred through public agencies, including other Colorado agencies.
Voters in other states beware.
(a) beginning effective March 1, 2010, to inform their Colorado purchasers of the purchaser’s duty to remit use tax on certain purchases under Colorado law;
(b) beginning in January 2011, to provide Colorado purchasers an annual statement of all of their Colorado purchases from the retailer; and
(c) beginning in January 2011, to file annually with the Colorado Department of Revenue a list of all purchasers and the amount of their Colorado purchases.
These new obligations are backed by substantial penalties for retailers that do not comply. Amazon.com reacted to the passage of the bill by terminating all of its Colorado online affiliate relationships, angering Colorado lawmakers who had worked with Amazon and its local affiliates in removing “New York style” affiliate nexus provisions from earlier drafts of the bill.
But the tiff between Amazon and Colorado is really a side-show that masks the genuine problems with the law, including both potential constitutional violations and invasions of consumer privacy. Colorado lawmakers and revenue officials made no secret during debate on the bill that the new law was expressly intended to force out-of-state online and direct marketers to begin collecting Colorado use tax on their sales to Colorado residents, despite constitutional prohibitions against the imposition of such tax obligations under the Commerce Clause, as reaffirmed by the Supreme Court in Quill Corp. v. North Dakota.
The burdens imposed by the new law are real and discriminatory; no Colorado retailer is required to comply with them, but out-of-state online and direct marketers’ compliance is mandatory. Also, given the propensity for “copy cat” nexus legislation among the states in recent years, such laws are likely to proliferate in other state legislation soon, unless online and direct marketers (and voting consumers) trumpet the problems with such laws. Already, the South Dakota Department of Revenue & Regulation is following Colorado’s lead by informally demanding that out-of-state companies provide it a list of in-state purchasers who may owe use tax.
Consumers should take note because the new Colorado law suggests that some state lawmakers feel that the answer to encouraging increased use tax compliance by online shoppers is the systematic invasion of their privacy, on a massive scale. Under the Colorado law, every online and mail-order purchaser in Colorado will have the source and amount of his or her purchases from out-of-state sellers fully documented in Colorado Department of Revenue databases, down to the last penny. Such files are presumptively public records, and thus potentially subject to disclosure under Colorado’s Open Records Law. Furthermore, even if the Department resists the formal requests for access to such records that will inevitably come, public agencies such as the Department are typically not subject to data security laws (for example, Colorado’s data breach statute applies only to individuals and commercial entities), and thus unlike private businesses are not compelled to have meaningful data security measures in place. Little wonder the great majority of all data breaches have occurred through public agencies, including other Colorado agencies.
Voters in other states beware.
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