Proponents of Streamlined Sales Tax Legislation Remain Unwilling To Pursue Genuine Simplification, While Exaggerating The Amount Of Uncollected Use Tax on eCommerce Sales

Earlier this month, Massachusetts Congressman Bill Delahunt introduced H.R. 5660, “a Bill to promote simplification and fairness in the administration and collection of sales and use tax, and for other purposes.”  H.R. 5660 represents the latest effort by Congressional allies of the Streamlined Sales and Use Tax Agreement (“SSUTA”) to promote legislation that would overturn the substantial nexus standards that limit states’ power to impose sales and use tax collection obligations on out-of-state sellers, as reaffirmed by the Supreme Court in Quill v. North Dakota

Sadly, H.R. 5660 represents no real promotion of simplification of state sales and use tax systems over the level of improvement introduced in prior bills which fell far short of the mark. Indeed, H.R. 5660 is nearly identical to a bill introduced by Mr. Delahunt in 2007 that endorsed the SSUTA, the shortcomings of which Brann & Isaacson senior partner, George Isaacson, explained to Congress in December 2007.  Among the fundamental steps toward true simplification that the states have still refused to adopt (and that H.R. 5660 fails to require) are a reduction in the number of state and local taxing jurisdictions, a single sales tax rate for all jurisdictions in a state, uniformity in the tax base, and uniformity in the measure of tax for like transactions, to name just a few.

Furthermore, while further simplification remains elusive, there is growing evidence that states have substantially overstated the amount of revenue they “lose” through uncollected sales and use tax on Internet and other direct marketing sales by out-of-state vendors who are not required to collect such tax under Quill.  The SSUTA contingent has long relied upon a study conducted by a group at the University of Tennessee (the “UT Study”), which was most recently updated in April 2009.  The UT Study estimates that states will fail to collect between $45-50 billion in sales and use tax on direct marketing sales during the five year period from 2008-2012.

A more recent study, prepared by Jeffrey Eisenach and Robert Litan at Empiris LLC, entitled “Uncollected Sales Taxes on Electronic Commerce: A Reality Check” (the “Empiris Study”) and published in February 2010, presents a compelling critique of the UT Study.   The Empiris Study’s Executive Summary powerfully summarizes the study's conclusions, including the fact that total potential uncollected sales tax revenues in 2008 were less than three-tenths of one percent of all state and local tax revenues.  Also, it found that more than one-third of such uncollected tax revenues are associated with small businesses that would likely be excluded from use tax collection obligations under a “small business” exemption in federal legislation.  Overall, the Empiris Study convincingly shows that the amount of projected uncollected state and local sales and use tax is far less than claimed by states or projected by the UT Study.  Indeed, the Empiris Study concludes that “the increased collections associated with overturning Quill would be substantially lower than previously thought,” and would be approximately 33% of the amount estimated by the UT Study.

Such relatively modest amounts of additional tax revenue do not justify imposing the still-significant regulatory and compliance burdens associated with state and local sales and use tax collection that, in part, motivated the Supreme Court’s decision in Quill.  The proper solution to the ongoing complexity of state and local sales and use tax systems is true simplification, which H.R. 5660, unfortunately, does not provide.

Is Amnesty Really Amnesty?

States frequently announce amnesty programs. In return for settlement of back taxes, taxpayers obtain waiver of penalties and sometimes a reduction of interest. It has now become increasingly common, however, that states provide a stick to go along with the carrot of penalty waiver. Thus, Pennsylvania completed an amnesty period on June 18 in which it provided for waiver of penalties for payment of back taxes. The Governor of the Commonwealth, Ed Rendell, has announced that in the future, an additional 5% penalty will apply to all tax delinquencies that remained after June 18. In addition, he pointed out that the DOR will begin to seek to hold corporate officers personally accountable for taxes businesses owe and take other aggressive means to enforce the taxes.

Back in 2005, California announced a similar program, by which it increased the accuracy penalty from 20% to 40% and assessed an additional 50% “interest penalty” for all those taxpayers who did not apply for amnesty. Other states have followed a similar approach.

Is an offer of relief from liability coupled with a penalty for failure to take the offer really amnesty? Webster’s defines amnesty as a pardon from an authority. The consideration by the taxpayer for such pardon is the payment of back taxes. The sort of punitive measures, however, that some states impose for failure to acknowledge liability is not a pardon. Serious questions of taxpayer fairness are raised. Why should there be an additional penalty and in some cases threat of personal liability when a taxpayer has a legitimate dispute and chooses not to seek “amnesty”? The Due Process Clause of the U.S. Constitution is designed to provide every citizen their “day in court.” Imposing a penalty for the exercise of this due process right seems to be inconsistent with the basic principle of fair dealing that should be the very foundation of our tax system.

Oklahoma (again)!

This post is not a repeat of the successful musical. Rather, it is yet another blog post on the Oklahoma tax statute to supplement our posts of June 24 and July 1. The Oklahoma Tax Commission has recently proposed emergency regulations that purport to implement the notice requirements of the recently-adopted Oklahoma statute. As reported in our blog post of June 24, the Oklahoma statute is “Colorado-like,” inasmuch as it requires notice with each sale to an Oklahoma consumer by a direct marketer that does not have substantial nexus with Oklahoma. However, the statute provides that the notice is not effective until the Tax Commission has adopted regulations implementing the statute. Hence, the proposed regulations circulated by the Tax Commission, which become effective when approved by the governor.

The regulations require that the “required notice” be included (i) on the retailer’s website or in the retailer’s catalog; and (ii) on each invoice provided by the retailer. The regulations also prescribe that if the retailer does not provide invoices, the retailer must send a confirmatory email containing the required notice. The “required notice” must include the following disclosures:(1) the retailer is not required to collect, and does not collect, Oklahoma use tax; (2) the purchase is subject to Oklahoma use tax, unless exempt; (3) the purchase is not exempt because it is made over the Internet, by catalog or other remote means; (4) the State of Oklahoma requires Oklahoma purchasers to report, by filing a consumer use tax return or disclosing the same on the individual income tax return, all use tax due on out-of-state purchases and to pay such tax with the report or return; and (5) the forms and instructions for consumers to report and pay the Oklahoma use tax are available on the Oklahoma Tax Commission web site, www.tax.ok.gov.

There are significant issues regarding the proposed regulations. They go beyond the statutory authorization. First of all, there is no requirement in the statute for email confirmation if the retailer does not use invoices. Second, the detailed specifications of the notice, as set forth in the proposed rule, go well beyond the requirements of the statute and will place significant burdens on remote sellers. Third, the statute does not appear to require both notice on the retailer’s Internet website and inclusion of notice on invoices.

In addition to the fact that the proposed regulations exceed the requirements of the statute, the regulations, in combination with the statute, present significant questions of violation of the Commerce Clause of the U.S. Constitution. These are similar to those raised by the Colorado statute and regulations. See our blog post of July 2.

Tales of a Homeowner Wanna-Be

Part of my adventure of moving to Miami, Florida to join the faculty at St. Thomas University School of Law involves the purchase of a new home. Yes, I've already written about the beginning of this journey (See Tales of a Prospective Homebuyer). That was back in April! So, what is it really like? Three months later? Well, I am just a week out of closing and don't have an "official," "final" loan approval yet for the mortgage. There was the "first application," the phone interview, the mass of financial documents for the last two years, the changing loan terms, the worry over the home appraising (this is South Florida after all).

Other parts of this adventure? I since discovered that the seller had been behind on taxes and the house was listed for auction, but was just brought current in the last two weeks. There is also a pending issue on a leaking roof that I was told was fixed, but when I had the roof re-inspected found out the broken parts were just glued together! My prospective insurance agent raised the hazard insurance premium by 50% on the spot, even though his quote was only two weeks ago (found new insurance agent!). The new challenge is the documentation on the purchase funds for the mortgage lender, which is very particular.

Seriously, the days of no-documentation loans seem to be past, as far as I can see (See, The Basics: No Doc Mortgages, MSN). So, things are naturally hard out there from a loan perspective. Perhaps they should be . . . The large number of foreclosures and short sales out there also make it difficult for home buyers, even though prices can sometimes be favorable. My limited experience in shopping around for lenders indicates that while mortgage rates might be good (See, Mortgage Rates on 30-Year US Loans Fall to Record), the lenders are being more careful than in the past making it harder to purchase even if you want to in this market. But, with the housing market plunging after the government incentives for home buyers ended in April (See, Pending Home Sales Fell off A Cliff, CNN), one might expect things to be easier on buyers.

In some ways it is easier than back in April. For instance, it was much easier to secure a contract on a home than a couple of months ago. But closing is still difficult. While I have every hope that the home will close on time, my skills as a detail, paper-collecting transactional lawyer have served me well! There is now talk of what "time of day" we might be closing, so the hope is that this homeowner wanna-be will actually be just plain homeowner soon.

-jsm

B&I Files Constitutional Challenge to Colorado Notice and Reporting Law for The Direct Marketing Association

We've blogged frequently about Colorado's new notice and reporting law (see here and here).

Since our last posts on the topic, Brann & Isaacson's George Isaacson and Matthew Schaefer filed suit in federal district court in Colorado on behalf of The Direct Marketing Association in The Direct Marketing Association v. Roxy Huber.  Filed on June 30, the suit challenges the constitutionality of the new Colorado law.

The Colorado statute, which targets out-of-state retailers, purports to require those retailers to notify Colorado customers of their obligation to self-report use tax and to require those same retailers to turn over confidential purchasing information regarding Colorado customers to the Colorado Department of Revenue. In the complaint, the DMA, the leading global trade association of direct marketing businesses and nonprofit organizations, asserts that the Colorado statute discriminates against interstate commerce, exceeds the State’s regulatory authority over out-of-state businesses, violates the privacy rights of Colorado consumers, infringes the free speech and due process rights of retailers and consumers, and exposes confidential consumer information to the risk of unauthorized disclosure.

We'll continue updating you as developments arise.

Have a safe and happy Independence Day!

Oklahoma Seeks to Expand the Definition of Nexus for Internet and Catalog Retailers

In our blog post last week, we discussed the new Oklahoma sales tax statute, which contains a “Colorado-like” reporting requirement for those Internet and catalog sellers that do not collect and remit the Oklahoma sales and use tax. As a second part of the statute, the Oklahoma legislature also expanded the definition of those companies that are engaged in the business of selling tangible personal property for use in Oklahoma; i.e. those companies required to register to collect and remit the Oklahoma sales and use tax.  This part of the statute, like the reporting requirements section, is not the model of clarity, so there is some ambiguity in the statute.

First, the statute provides for “affiliate nexus” attribution. Thus, under the new law a retailer that otherwise does not have nexus based on its own activities (an out-of-state retailer) is deemed to have nexus if it and another retailer that has nexus with Oklahoma are commonly-owned, and if: (i) the Oklahoma-retailer sells the same or a “substantially similar” line of products under the same trade name as that of the non-nexus retailer (the so-called multi-channel retailer); (ii) the facilities or employees of the Oklahoma retailer are used to advertise, promote or facilitate sales by the out-of-state retailer; or (iii) the in-state retailer has a warehouse or similar place of business in Oklahoma that is used to deliver property to the out-of-state retailer’s customers, as in a drop ship relationship. Additionally, any retailer that is part of a controlled group (as defined under the Internal Revenue Code) faces a rebuttable presumption that it is engaged in business in Oklahoma if a component member of the controlled group is engaged in any of the activities described above. The presumption can be rebutted if the retailer shows that the component member did not do any of those activities on behalf of the retailer. The foregoing provisions are more comprehensive than those of other state statutes, which have some but not all of the provisions regarding common ownership. Colorado’s statute, for example, provides for a presumption of nexus similar to that described for members of controlled groups above and Arkansas’ statute contains a similar provision to that of the first category.

The statutory definition of retailer is also expanded to now include an out-of-state company that has a “contractual relationship with an entity to provide and perform installation or maintenance services for the retailer’s purchasers” in Oklahoma. This statutory provision is similar but not identical to that in Virginia. Va. Code § 58.1-612.

Of course, even if a retailer satisfies the standard under this new law, unless the retailer has nexus under the Quill Commerce Clause test, Oklahoma would not be justified in requiring sales tax collection from the retailer. Several of the provisions in the new law raise significant constitutional law questions. Please see, for example, the recent U.S. District Court for Louisiana decision in St. Tammany Parish Tax Collector v. Barnesandnoble.com, Civ. Act. No. 05-5695 (E.D. La., March 22, 2007).