MFA Update: Rep. Goodlatte’s Seven Principles and an Interview with George Isaacson

Although the Marketplace Fairness Act (S. 743) ("MFA") has not yet progressed out of a House committee since its Senate passage last spring, it continues to make headlines. In late September, the House Judiciary Committee, chaired by Rep. Bob Goodlatte (R-Va.), released seven “Principles on Internet Sales Tax.” Brann & Isaacson senior partner George Isaacson was recently profiled by State Tax Notes discussing both the MFA and Goodlatte’s Seven Principles.

The Seven Principles outlined by Representative Goodlatte provide for:

1. Tax Relief – “no new or discriminatory taxes not faced in the offline world”
2. Tech Neutrality – brick and mortar and online businesses “should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less…than that on similarly situated offline businesses”
3. No Regulation Without Representation – taxpayers “should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement”
4. Simplicity – no “onerous compliance requirements,” “laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary”
5. Tax Competition – “Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-à-vis their foreign competitors”
6. States’ Rights – “States should be sovereign” and “the federal government should not mandate that States impose any sales tax compliance burdens” and
7. Privacy Rights – “Sensitive customer data must be protected.”

As Isaacson notes, “The keystone and common thread of these principles is the need for true simplification of the existing sales and use tax system and an assurance of fair treatment of remote sellers when compared with in-state retailers.” Isaacson goes on to describe several steps that could be taken to simplify sales tax collection, including setting a single rate (combined state and local) for remote sales into a state, creating uniform tax menus or bases, and establishing uniform sourcing rules for remote sellers.

Isaacson also calls for providing access to federal courts to address violations of remote sellers’ rights. As the MFA now stands, remote sellers must protest tax assessments made in violation of federal statutory or constitutional law through appeals before state administrative agencies and state courts that may, as Isaacson points out, “tilt in favor or state revenue departments.” Providing for federal court jurisdiction “is the only meaningful way to protect those companies’ constitutional rights and enforce statutory limitations on the scope of state taxing power.” To that end, Isaacson argues for repeal or limitation of the Tax Injunction Act (“TIA”).

We will continue to keep our readers apprised of any developments regarding the Marketplace Fairness Act.

Affiliate Nexus Law Update: Minnesota and Maine Approve New Statutes, Missouri Governor Vetoes Bill

While the Marketplace Fairness Act sits in committee in Congress awaiting hearings, two more states have enacted affiliate nexus statutes imposing tax on remote sellers. The governor of another state, however, declined to add his state to the list of jurisdictions enacting counterproductive, and arguably unconstitutional, “click through” nexus laws. Below is a quick round up of recent news in Minnesota, Maine, and Missouri:

Last week, Minnesota Governor Mark Dayton signed into law a click-through nexus bill which creates a rebuttable presumption for out-of-state retailers with in-state affiliates and which goes into effect for sales made after June 30, 2013. The new law states that an out-of-state seller is presumed to be soliciting sales in the state if it enters into an agreement with a resident for a commission or other similar consideration for referrals of potential customers, whether by a link of a website or otherwise. The presumption only applies if the seller has at least $10,000 of gross receipts in the 12 month period preceding the calendar quarter in which the sale is made. Sellers can rebut this presumption with proof that the resident did not engage in any solicitation on behalf of the seller that would satisfy the nexus requirement under the Constitution. The same bill also imposes tax on certain specified digital products which previously were exempt from sales tax.

Meanwhile, on June 5, Maine Governor Paul LePage signed into law a bill that creates a rebuttable presumption for out-of-state sellers with affiliates in Maine. Under Maine’s new law, sellers are required to register if they have an affiliate with a substantial physical presence in the state (other than a common carrier) if the affiliate sells similar products under a similar name, maintains a facility to help deliver property or services sold by the seller, shares trademarks with the seller, or provides various services to the seller’s customers. Out-of-state sellers can rebut this presumption by demonstrating that the affiliate’s activities do not help establish or maintain a market in Maine.

Maine’s new law also establishes click-through nexus for out-of-state sellers, similar to the Minnesota bill. As in Minnesota, the seller’s gross receipts must be in excess of $10,000 for the law to apply. Additionally, sellers can rebut the presumption by showing that the seller’s in-state referrer did not engage in any activity “significantly associated with the seller’s ability to establish or maintain the seller’s market” in the preceding 12 months. Proof can include signed, written statements obtained in good faith from referrers that they did not engage in solicitation on behalf of the seller. The Maine law is scheduled to go into effect on September 17, 2013.

Finally, also on June 5, Missouri Governor Jay Nixon vetoed a bill that would have added affiliate nexus and click through nexus provisions to Missouri’s tax code and would have required the Missouri DOR to enter into the Streamlined Sales and Use Tax Agreement. Legislators will have a chance to overturn the veto in September.

The Marketplace Fairness Act: Are Online Retailers Now Required to Collect and Remit Every States’ Sales Tax Even Though They Do Not Have A Physical Presence?

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act (S.743). If enacted into law, the Act would require Internet sellers (as well as catalogers and other direct marketers) to collect and remit the sales and use tax of each state (and any local jurisdictions that assess sales taxes) on all of their remote sales to the state, even if the retailer does not have a physical presence in the state. If adopted, the bill would do away with the nexus/physical presence requirement for mandatory sales tax collection described in Quill v. North Dakota.

Much of the media coverage of the Marketplace Fairness Act gives the impression that the requirement of sales and use tax collection without a physical presence will be effective immediately, now that the Senate has passed the bill. That, of course, is not the case. In order for states to have the power to require sales tax collection by companies without a physical presence, the U.S. House must pass the bill in the same form as did the Senate, and then President Obama must approve the jointly passed legislation.

While President Obama has indicated his support for the Marketplace Fairness Act, there are a number of members of the House who are opposed to the bill. Moreover, unlike the Senate which did not hold any committee hearings prior to voting, the House will hold hearings on the legislation, through the House Judiciary Committee. Importantly, House Judiciary Committee Chairman Bob Goodlatte, a Republican from Virginia, has noted his concern regarding the failure of the Marketplace Fairness Act to address many of the concerns of remote sellers. Speaker Boehner has voiced similar concerns. Thus, it is likely that even if legislation abrogating Quill is adopted by the House ― a possibility given existing bipartisan support ― such a bill will probably not be in the same form as passed the Senate. Moreover, given the significant role played by Rep. Goodlatte, Speaker Boehner, and other members of the House, chances are there will be a substantial delay before adoption of any legislation. Indeed, the House Judiciary Committee has yet to schedule hearings on the bill, and it has been reported that the Committee is drafting its own legislation. The message for any remote seller should be wait and see, at a minimum, before embarking on costly measures to implement sales tax collection in the more than 9000 jurisdictions that impose sales taxes.

It is also important to note that the Marketplace Fairness Act, as passed by the Senate, gives a remote seller some time to implement new tax collection systems. For any state which is a member of the Streamlined Sales and Use Tax Agreement (“SSTA”), the state may only impose tax on remote sellers if it first publishes notice that it intends to exercise its authority under the Act. Once the state publishes notice, the state may not impose the tax until the first day of the calendar quarter that is at least 180 days (or 6 months) after publication. At this writing, there are 22 states that are members of the SSTA. For any state which is not a member of the SSTA, the state may not impose tax on remote sellers unless it adopts legislation enacting the alternative “minimum simplification requirements” spelled out by the Act. Remote sellers will have at least six months from the date of non-SSTA states’ enactment of alternative simplification to beginning collecting tax on their remote sales.

In short, there is a real possibility that the Marketplace Fairness Act will be defeated or modified prior to enactment. Moreover, remote sellers still have time to obtain and develop appropriate collection systems.  Indeed, it may well be premature at this time to begin implementing such systems, particularly since the shape of the legislation may change.

U.S. Senate Delays Vote on Marketplace Fairness Act until May 6

On Thursday, April 24, the U.S. Senate delayed its vote on S. 743, the “Marketplace Fairness Act,” which was originally expected as early as this week, until Monday, May 6, 2013. In the final procedural vote before the Senate takes up the bill on May 6, there was growing opposition to the fact that the bill had skipped the committee process, but there appeared to still be enough votes for passage. Earlier in the week, the vote to proceed without committee action was 74–20; on April 24 it was 63–30. More senators appeared to be concerned that careful consideration via a committee hearing is imperative before authorizing states to impose the complex existing state and local sales tax system on ecommerce and remote sellers. As we have commented before, the Marketplace Fairness Act fails to include such fundamental simplification measures as one tax rate per state, uniform tax bases and exemptions, vendor compensation requirements, and the harmonization of state sales tax holidays. Readers can learn more about true sales and use tax simplification here.

The House of Representatives has yet to take up the parallel bill (H.R. 684). We will continue to follow developments on federal legislation.

Senate Approves Non-Binding Budget Amendment Supporting Imposition of State Use Tax Collection Requirements on Remote Sellers, But Genuine Simplification Still Sorely Needed

On Friday, March 22, the United States Senate approved a non-binding amendment to the Senate budget resolution, by a vote of 75-24. The non-binding amendment expresses support for the adoption of a federal bill authorizing states to impose use tax collection obligations upon out-of-state retailers without regard to whether the retailers have a physical presence in the state. The Senate did not vote on an actual bill specifying the terms on Congressional authorization for expanded state use tax collection authority.

E-commerce vendors and other remote sellers interested in the legislation should contact their representatives in Congress to ensure that any federal bill considered for adoption guarantees meaningful uniformity and simplification of existing state sales and use tax systems. The bill currently before Congress, the so-called Marketplace Fairness Act, fails to include fundamental simplification measures, such as requiring one tax rate per state and uniform tax bases and exemptions, providing for vendor compensation, implementing consistent and coherent sourcing rules for products and services, and harmonizing state sales tax holidays. Readers can find out more about true sales and use tax simplification here.

We will continue to follow developments on federal legislation.

One Month Left to File under Maine’s Use Tax Compliance Program

At the root of debate about whether Internet retailers and other direct marketers should be required to collect state sales and use taxes is the well worn complaint by state revenue departments that consumers (the folks who actually owe the tax under nearly every state’s laws) just do not self-report and pay use tax if left to their own devices. Consequently, the states’ argument goes, states should be entitled to shift the burdens of tax collection onto remote sellers (no matter how onerous), rather than requiring the state to pursue measures to promote reporting, or to boost collection. There are ways, however, for a state to educate consumers about their obligations to pay the use tax.

For example, now through November 30, taxpayers who have unreported use tax liability due to the State of Maine may remit tax under the 2012 Maine Use Tax Compliance Program. The Program, enacted by the State’s Legislature last spring, seeks to “encourage payment of previously unreported use tax and to improve compliance with the State’s use tax laws.”

The Program covers periods from January 1, 2006 through December 31, 2011. Taxpayers must report all taxable purchases for which tax has not been remitted for the entire six year period. But, taxpayers only must remit tax for the three years with the greatest amount of unreported tax due. No tax is due for the three years with the lowest amount of tax reported and all interest and penalties are waived for the entire six year period. Taxpayers who timely file returns under the Program are “absolved from further liability for unreported and unassessed use tax incurred prior to January 1, 2012, and [are] also absolved from liability for criminal prosecution and civil penalties related to those taxes for those years.”

For those individual taxpayers who lack records to support detailed reporting for the past six years, Maine Revenue Services allows filers to estimate their use tax obligations, if no single purchase in a given year exceeded $1,000. Businesses must report their actual purchases for the past six years. The estimate for individuals is based on Maine adjusted gross income and is calculated using a table provided by the State. For instance, an individual filer with $50,000 of Maine Adjusted Gross Income in 2007 is assumed to have made $1,000 of taxable purchases in that year. Obviously, for someone who makes few purchases subject to the use tax, the estimate may be on the high side.

Furthermore, taxpayers who choose to itemize should be careful in reviewing their purchases to make sure they do not over report their use tax liability. For example, out-of-state purchases sent to out-of-state recipients (a Christmas gift bought on Amazon.com and mailed directly to someone outside of Maine) and purchases from out-of-state vendors who charged Maine sales tax would not be subject to the Maine use tax and should not be reported on the form. Taxpayers should also note that if they have no unreported use tax liability, they need not file any returns or make payment under the program.

Because the reporting form only appears to permit individual filing, married taxpayers who file jointly and taxpayers whose filing status changed during the six year lookback period should consult with Maine Revenue Services or their personal tax advisors for guidance on filling out the form. Also, while the form is due November 30, taxpayers may enter into a payment plan with Maine Revenue Services to make payment, plus interest, by May 31, 2013.

Finally, while this can be a great opportunity for taxpayers to wipe the slate clean, it is a narrow one. Taxpayers who owe taxes other than the use tax might consider a broader voluntary disclosure agreement instead. Our readers would do well to contact their tax advisors and carefully weigh their options before jumping into any amnesty program, especially as many, including this one, require taxpayers to waive any right to seek a refund for monies paid under the program.

Internet Retailers and Digital Businesses Should Understand the State Tax Risks Associated with Telecommuting Employees

In the increasingly “officeless” environment of the digital workplace, Internet retailers, cloud computing providers and other remote sellers should be aware of the sometimes unexpected state tax consequences associated with employees who telecommute. Although there are few reported court decisions, a vast majority of the states assert that having employees located in the state engaged in non-sales activities who telecommute from home is a sufficient presence in the state to require a company to collect the state’s corporate income or franchise tax. It is also clear that having a telecommuting employee in the state creates meaningful sales and use tax nexus risk, but whether a telecommuting employee will create a "physical presence" in the state sufficient to require the company to collect state use tax may depend upon the nature of the employee’s in-state activities on behalf of the company.


The leading case in the still-developing decisional law on telecommuting is the recently-decided Telebright Corp. v. New Jersey Division of Taxation, 424 N.J.Super. 384, 38 A.3d 604 (App. Div. 2012). In Telebright, the Appellate Division of the Superior Court of New Jersey affirmed a Tax Court decision that the presence in the state of a software developer telecommuting on a daily basis for a Maryland company was sufficient to subject the company to an obligation to report New Jersey Business Corporation Tax (“CBT”). Id., 424 N.J.Super. at 395, 38 A.3d at 611. The employee in Telebright performed no sales functions on behalf of the company (indeed, the Tax Court noted that the company solicited no sales in New Jersey, at all), but she was involved in developing a web-based software application that the company marketed to its clients, a fact that the Appellate Division emphasized in finding that the company both was “engaged in business” under CBT statute and had sufficient nexus with the state for CBT purposes.

Of course, federal law P.L. 86-272 will still protect a company from an obligation to report a state’s corporate income tax, if the company’s in-state telecommuting employees are engaged solely in solicitation of sales for orders of tangible personal property that are approved and filled from outside the state. Many businesses that rely on telecommuting, however, are not protected by P.L. 86-272, because they sell services or computer software applications that may not be deemed “tangible personal property” under state law. Furthermore, employees telecommuting from a state engaged in activities other than solicitation (or activities strictly ancillary to solicitation), will not qualify for P.L. 86-272 immunity. Indeed, more than thirty-five state revenue departments have indicated in response to various surveys that the presence of non-sales, telecommuting employees will subject the company to an obligation to report state income tax.

With regard to state sales and use taxes a direct physical presence in a state through employees will also create a risk of use tax nexus. It is clear that if an in-state employee is engaged in sales solicitation or support activities with respect to in-state customers, s/he can create nexus under established Supreme Court precedent. See, e.g., Tyler Pipe Indus., Inc. v. Washington Dep’t of Revenue, 483 U.S. 231 (1987). Even the activities of non-sales employees, however, should be examined carefully to determine the level of nexus risk to the company when making a business decision about whether to engage telecommuting employees in the state employee to telecommute. In some states, a non-sales employee may not create nexus. For example, the California Board of Equalization has indicated in one Sale and Use Tax Annotation (SUTA 220.0256: “Telecommuting In-State”) (June 21, 1999) that a remote seller that had an employee engaged in web design who telecommuted from his home in California was not “engaged in business” in the state for purposes of California use tax because the telecommuter did not have any contact or involvement with customers in the state. Many other state revenue departments have, however, at least in response to informal surveys, taken a less permissive view. Remote sellers should consult carefully with their tax counsel to understands the use tax risks associated with particular telecommuting arrangements.