Indirect Taxation - USA

1. FROM PRINCIPLES TO PLANNING Indirect Taxation - USA

2. U.S. Sales and Use Tax Tony Buffkin CMI, Dixon Hughes Goodman LLP

3. Sales and Use Tax – Getting More Attention Why are we hearing so much about sales tax recently? The Internet has brought sales and use tax to the forefront. Under current rules, many online retailers do not collect sales tax. Brick & mortar counterparts complain that they are at a competitive disadvantage The National Retail Federation estimates that states and municipalities are losing out on $25 billion in uncollected sales tax There are currently more than 10,000 sales tax jurisdictions in the US with the number growing every year, and they all want their share In an effort to raise revenue, States are increasing their collection efforts and expanding their definition of nexus beyond traditional physical presence U.S. Sales and Use Tax

4. Nexus – The Current Landscape Quill Corporation v. North Dakota (504 U.S. 298, 1992) Contacts were more than sufficient for due process purposes However, the ND tax violated the Commerce Clause since it placed an undue burden on interstate commerce since Quill’s only contact with ND was the dissemination of catalogs, flyers, telephone calls and shipment by common carrier No substantial physical presence under the Commerce Clause test Carson v. Scripto (362 U. S. 207, 1960) Scripto had no offices in Florida but used 10 wholesalers (or brokers) to solicit sales from within Florida. These brokers were not full-time employees of Scripto, but were independent contractors paid on a commission basis. The Court ruled that Florida could require Scripto to collect use tax on sales made in Florida The use of contractors was “ without constitutional significance” Tyler Pipe Industries, Inc. vs. Washington (483 U.S. 232, 1987) The “crucial factor governing nexus” is whether the activities performed by the independent contractor are “significantly associated with the taxpayer’s ability to establish and maintain a market in the state for the sales.” U.S. Sales and Use Tax

5. Different Approaches to Nexus Expansion States are taking 3 primary approaches to require remote sellers to collect and remit sales and use tax Click-thru (Amazon) legislation Affiliate or Attributional nexus Notification requirements Rapidly changing landscape – needs to be followed closely Out-of-state retailers that previously did not have nexus now may be subject to collection responsibility U.S. Sales and Use Tax

6. Click Through (Amazon) Nexus “Amazon”, or click-thru, nexus laws enacted in AR, CA, CT, GA, IL, CA, TX, NY, NC, VT and RI Nexus presumption for remote sellers that: Enter into agreements with residents for Web site referrals or links Pay commissions or fees for those referrals based on sales; and Generate total gross sales of at least $10,000 ($5,000 in some states) during the past 4 quarterly periods Most states offer “Rebuttable Presumption” Must demonstrate that in-state resident with whom seller has agreement did not engage in solicitation activities on behalf of seller that would satisfy the US Constitution during the period in question CT and IL laws provide no method to rebut nexus presumption PA adopted Amazon-like nexus standards through a Dept. Bulletin H.B. 14 was introduced but failed to pass General Assembly in 2011 DOR Bulletin issued in December 2011 concluded that the existing statutes supported this nexus standard after all Remote sellers could register by Sept 1 and avoid potential liability for prior periods – based on informal DOR advice U.S. Sales and Use Tax

7. Affiliate and Attributional Nexus Affiliate nexus generally requires existence of common ownership or control between in-state taxpayer and out-of-state company Attributional nexus is a broader concept – states may assert sales tax nexus based on activities of related or unrelated entity engaging in in-state activities on behalf of out-of-state company KEY QUESTION - Is in-state company performing activities that are significantly associated with creating or maintaining a market in the state for the out-of-state company (e.g., advertising, accepting merchandise returns, sales solicitation, marketing, etc.) U.S. Sales and Use Tax

8. Affiliate and Attributional Nexus Use of identical or substantially similar business names, trademarks, goodwill or sells similar products (Examples – AL, IL, NM, NY) In-state affiliate has facility or employee to facilitate or promote sales In-state affiliate has warehouse or distribution center (Example – OK) In-state affiliate performs repair or maintenance services (Dell Catalog Sales L.P. v. N.M. Tax’n & Revenue Dept., 199 P.3d 863 - 2008) In-state affiliate is part of out-of-state entity’s controlled group (CO, SD, CA) U.S. Sales and Use Tax

9. Streamlined Sales Tax Agreement Formed with the goal of simplifying US sales tax compliance for remote sellers Currently there are 22 full member states and 2 associate member states but a number of states with more complex rules have not joined Possible Federal legislation – Marketplace Fairness Act U.S. Sales and Use Tax

10. Streamlined Sales Tax – At A Glance

11. Introduced in Senate and House – appears to be moving forward in the Senate States must either join SSUTA as a full member or enact minimum simplifications including: A single state-level agency to administer all sales and use tax laws, a single audit, and a single return. A uniform sales and use tax base among the State and local taxing jurisdictions. Require all sales and use taxes on remote sales to be collected according to the destination rate; intrastate sales not affected by these sourcing rules. States must provide software and services to remote sellers to facilitate collection, and states must adopt certification procedures for single and consolidated providers to broaden collection software and service options for sellers. Relieve sellers from liability for incorrect tax collection if errors are made in reliance on information provided by the State, and hold sellers harmless for any errors or omissions made by a single or consolidated provider. Provide 90 days notice of state or local rate changes. If a State fails to provide notice then it must hold the sellers harmless for a 90 day period. Small seller exception - $1,000,000 in US sales in previous year U.S. Sales and Use Tax

12. What To Watch For Based on the apparent bipartisan support and the backing of companies such as Amazon, Wal-Mart and trade groups such as National Retail Federation, Performance Marketing Association and others, it appears to have gained traction and legislation may be likely to pass at some point this year Supporters have worked to overcome the idea that these are “new” taxes which was a key roadblock in the past. The states need funds and feel they cannot rely on the federal government for help. In fact, it is likely that the federal government will shift an even greater burden to the states. Efforts have strong support from a number of governors, both Republican and Democrat. U.S. Sales and Use Tax

13. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. IRS Circular 230 Disclosure

14. Questions?

15. Contact Information Tony Buffkin CMI, Dixon Hughes Goodman LLP tony.buffkin@dhgllp.com