Ohio Tax
Workshop II
Physically Taxing:
Sales Tax Issues in a
Multi-State and Digital
Economy
Wednesday, January 29, 2014
2:00 p.m. to 3:00 p.m.
Biographical Information
Jeremy J. Schirra, Associate Attorney, McDonald Hopkins, LLC
600 Superior Avenue East, Suite 2100; Cleveland, OH 44114
[email protected]
216-348-5444
Jeremy Schirra is an Associate at McDonald Hopkins, LLC. Jeremy is a member of multiple practice groups in the
firm’s Business Law Department, including the Federal Taxation, Multistate Taxation, and Mergers and Acquisitions
practice groups. Jeremy has broad-based experience in federal, state, and local-level taxation involving
corporations, partnerships, limited liability companies, trusts, real estate investment trusts, and nonprofits. His
experience includes tax planning, tax compliance, tax controversy, and other advisory services. In addition, Jeremy
has experience in asset and equity sales of private and public companies in addition to sales, long-term leases, and
complex sales in both the nonprofit and governmental sectors. Jeremy also co-authors the Multistate Tax Update, a
weekly tax newsletter that provides insight into significant current events in state taxation.
Prior to practicing law, Jeremy worked in the financial sector as an auditor and as a financial risk consultant.
Jeremy obtained his BBA (in Accounting, Finance, and Pre-Law) from Ohio University in Athens, Ohio and his JD
from Case Western Reserve University. He is also a Certified Public Accountant.
Fredrick J. Nicely, Senior Tax Counsel, Council On State Taxation (COST)
122 C Street, NW, Suite 330 Washington, DC 20001-2109
[email protected]
(202) 484-5213
Fred Nicely is a Senior Tax Counsel at COST. His role as Senior Tax Counsel extends to all aspects of the COST
mission statement: “to preserve and promote equitable and nondiscriminatory state and local taxation of
multijurisdictional business entities.” Before joining COST, Fred served in the Ohio Department of Taxation for four
years as Deputy Tax Commissioner over Legal and for the prior seven years as the Department’s Chief Counsel.
Fred’s responsibilities at the Department included testifying before legislative committees, participating as an
alternative delegate for Ohio at Streamlined Sales Tax Project meetings, and reviewing legal documents issued by
the Department, including deciding the merits of filing an appeal. He is a frequent speaker and author on Ohio’s tax
system and on multistate tax issues generally. Fred also has extensive experience in public utility tax law, having
served as an administrator of the Department’s public utility tax division. Fred’s undergraduate degree in
psychology (with a concentration in accounting) is from the Ohio State University. He obtained his MBA and JD
from Capital University in Columbus, Ohio. He can be reached at 202/484-5213; ([email protected]).
Christine T. Mesirow, Section Chief, Taxation, Ohio Attorney General Mike DeWine
30 E. Broad St.; 25th Floor, Columbus, OH 43215
[email protected]
614-995-3753
Fax: 866-459-6679
Christine has practiced in the area of state and local taxation for more than 25 years, in both the private and public
sectors. She began her career in state & local tax as an assistant attorney general in the Taxation Section.
Christine then moved to Dallas, where she gained experience in multistate tax issues affecting technology service
providers as the state tax counsel for Electronic Data Systems Corp., representing the company in state tax
controversies throughout the country. She later was a state & local tax consultant with PricewaterhouseCoopers
and was of counsel with Bricker & Eckler LLP. Prior to her current appointment as chief of the tax section, she
served as the Chief Legal Counsel for the Ohio Department of Taxation.
Christine’s broad range of experience in both tax controversy and tax administration issues provides her with an
understanding of many issues confronted by those who must navigate the sometimes complex legal, policy and
business issues challenging government and industry in the administration of and compliance with state tax law.
Christine is a graduate of the Ohio State University Moritz College of Law.
Physically Taxing: Sales Tax Issues in a Multistate and Digital Economy
Presented by:
Jeremy Schirra, McDonald Hopkins LLC
Fredrick Nicely, COST
Christine Mesirow, Ohio Attorney General Biographical Information
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Jeremy Schirra ([email protected]) – Associate Attorney, McDonald Hopkins LLC
– Experience in state and federal tax planning, tax compliance, tax controversy, and other planning and advisory services
– Author of nationally published articles and co‐author, Multistate Tax Update
– Certified Public Accountant •
Fredrick Nicely ([email protected]) – Senior Tax Counsel, Counsel on State Taxation
– Former Deputy Tax Commissioner of the Ohio Department of Taxation
– Frequent speaker and author on Ohio and multistate taxation issues
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Christine Mesirow ([email protected]) – Section Chief, Taxation Section of the Ohio Attorney General
– Former Chief Legal Counsel for the Ohio Department of Taxation
– Over 25 years of state tax experience in the private and public sector
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Major State Taxation Issues/Criticisms in Multistate Economy
• Lack of representation while being subject to taxation and other compliance burdens
• Failure to require out‐of‐state retailers to collect sales taxes at point of sale results in disadvantage for “Main Street” retailers
• Conversely, requirement that small out‐of‐state retailers comply with onerous state sales tax laws results in high compliance costs
• Multiple taxation issues, i.e., states may source sales by different methods
• Expansion of sales tax base  Attempts to tax new activity, namely sales of intangible (primarily digital) goods and various services
• New laws to achieve nexus and/or reporting requirements with out‐
of‐state business
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Top State & Local Taxes on Business
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Due Process/Commerce Clause Comparison
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Burger King Corp. 471 U.S. 462 (1985) (Due Process Case)
• 40 years after Int’l Shoe, U.S. Supreme Court reviews Florida long‐
arm statute that extends jurisdiction to the state based on any person breaching a contract in the state
• Rudzewicz, a MI resident and Burger King franchisee, was sued in a FL district court based on him and a partner defaulting on several monthly payments owed to Burger King pursuant to a contract • The district court upheld jurisdiction; the 11th Circuit reversed finding the long‐arm statute unconstitutional – “offend[ing] … fundamental fairness”
• U.S. Supreme Court reversed the circuit court based on Rudzewicz knowing that he was contracting with a corporation based in Miami, FL – his relationship with the company cannot “be viewed as random, fortuitous, or attenuated.” (Internal quotes omitted.)
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Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (Physical Presence and Separation of Commerce/Due Process Clauses)
• Quill often cited for Court’s affirmance that a remote seller needs to have a physical presence before a state can require such seller to collect and remit its sales/use tax
• The Court in Quill also clearly noted the nexus differences under the Due Process Clause and Commerce Clause:
– Due Process Clause “Minimum Contacts”
• Nexus threshold ultimately subject to the Court’s review
– Commerce Clause “Substantial Nexus”
• Congress has the ability to supersede or modify Quill decision
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Zippo Mfg. Co. v. ZippoDotCom, Inc. (1997)
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Zippo Manufacturing Corporation brought action in Pennsylvania for trademark infringement and other claims against a computer news service that used names like zippo.com
Federal district court adopted a sliding scale test: The likelihood that personal jurisdiction can be constitutionally exercised based on an entity’s Internet activity is directly proportionate to the nature and quality of the commercial activity that the entity conducts over the Internet
Because the news service intentionally reached into PA to enter into contracts and transmit computer files to PA customers, personal jurisdiction was proper
Operating a passive Internet site that primarily provides information is not a sufficient basis
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Recent Due Process Cases
Goodyear Dunlop Tires Operations v. Brown (2011)
• Three non‐U.S. subs of Goodyear were not subject to the general jurisdiction of the N.C. court
• The subs lacked the kind of “continuous and systematic general business contacts”
• Unanimous Decision
J. McIntyre Machinery, Ltd. v. Nicastro (2011)
• The “foreseeability” opinion in Asahi “is inconsistent with the premises of lawful judicial power.... [I]t is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment”
• “The principal inquiry in cases of this sort is whether the defendant’s activities manifest an intention to submit to the power of a sovereign”
• Need purposefully directed activity towards the forum state
• 3‐3 Supporting Decision; 3 Justices dissented
- Justice Breyer raised concern with impact on Internet sales
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Recent State Tax Cases Addressing the Due Process Clause
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Griffith v. ConAgra Brands, Inc., Dkt. No. 10‐AA‐02 (W. Va. May 24, 2012)
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ConAgra Foods, Inc. established and transferred various trademarks and trade names to its wholly owned subsidiary, ConAgra Brands, Inc. ConAgra Brands also acquired various other intangibles from unrelated subsidiaries Licensed foods were manufactured outside of state but delivered into West Virginia ConAgra Brands did not have a physical presence in West Virginia, nor did it control how the licensees distributed the products bearing its intangibles West Virginia Supreme Court of Appeals held that ConAgra Brands did not have nexus with West Virginia, such that it was subject to the net income and business franchise tax in the state – Lacked purposeful direction under the Due Process Clause
– Distinguished MBNA, in that ConAgra Brands did not engage in continuous and systematic solicitation and promotion in the state
Recent State Tax Cases Addressing the Due Process Clause (cont.)
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Scioto Ins. Co. v. Okla. Tax Comm’n, 279 P.3d 782 (Okla. 5/1/2012) Scioto was a VT captive insurance company of Wendy’s Int’l and its affiliates with no physical presence in OK
Scioto holds the intellectual property (“IP”) – trademarks and operating practices – used in Wendy’s restaurants which it licensed to Wendy’s Int’l and received royalty payments
Wendy’s Int’l sublicensed the IP to Wendy’s restaurants, including ones in OK
Court held that OK had no basis on which to impose income tax on Scioto – a VT corporation with no connection to OK
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Recent State Tax Cases Addressing the Due Process Clause (cont.)
W.L. Gore & Associates, Inc., Gore Enterprise Holdings, Inc., & Future Value, Inc. v. Comptroller of the Treasury, Md. Ct. Spec. App., Dkt. Nos. 06196, 16197 (Jan. 24, 2013) • The Maryland Court of Special Appeals held that two out‐of‐state intangible holding companies were a unitary business and, thus, had nexus with Maryland for corporate income tax purposes
– Sufficient nexus exists if the economic reality is that the parent company in Maryland produced the subsidiary’s income. – Hallmarks of a unitary business present – functional integration, centralized management, and economies of scale
 Subsidiaries dependent upon parent and controlled by parent
 Parent’s expenses in MD is the subsidiaries’ income
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Recent Ohio Decisions
Kauffman Racing Equip., L.L.C. v. Roberts (2010)
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Non‐Ohio resident sued by Ohio company for publishing defamatory statements about the company’s owner and product on the Internet •
Roberts claimed that Ohio did not have personal jurisdiction because he did not direct the alleged tortious statements to Ohio or publish them in Ohio
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Ohio Supreme Court found jurisdiction because plaintiff showed that at least five Ohioans saw the comments. Thus, the comments were published in Ohio
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Even if the comments were not “published” in Ohio, jurisdiction would exist because Roberts reasonably should have expected that a person in Ohio would be injured by his comments
Eyring v. Sisson (2012)
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Ebay seller from California subject to jurisdiction in Ohio in action relating to its cancellation of delivery to an Ohio buyer, after accepting payment and shipping the product to Ohio •
Seller contended it did not direct its sales to Ohio, and cannot control where winning buyer lives
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Court found personal jurisdiction established by seller’s actions in aborting delivery here
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Due Process Clause Case Pending Before the U.S. Supreme Court
DaimlerChrysler Ag v. Bauman, Dct 11‐965 (cert. granted 4/22/13)
• Decision could impact state and local tax authority
• A Ninth Circuit Court case, the lower court held a German company with no presence in CA could still be sued in CA for alleged human‐rights violations based on the German company having a subsidiary in CA that distributes its cars in the state • Many amicus briefs filed supporting DaimlerChyrsler Ag
• Oral arguments held on October 15, 2013; questions raised about impact on state taxation
• Court held Daimler’s affiliations with CA were not “continuous and systematic” to subject Daimler to CA’s general jurisdiction
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Click‐Though Nexus
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Arkansas
California
Connecticut
Georgia
Illinois (PMA)
Kansas
Maine
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Minnesota
Missouri
New York North Carolina
Pennsylvania (ruling) Rhode Island
Vermont (not effective until 15 states have adopted click‐through nexus)
Note: Ohio Gov. vetoed provision in Am. Sub. H.B. 59
NY “Click‐Through” Nexus Challenge
Amazon.com, LLC v. New York Dep’t of Taxation and Finance (Case 34); Overstock.com, Inc. v. New York Dep’t of Taxation and Finance (Case 33) –
NY Court of Appeals, both issued 3/28/2013
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Amazon.com and Overstock.com waived right to challenge “as applied” commerce clause and due process clause claims
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New York’s top court only addressed whether the “click‐through” provision was “facially” unconstitutional under the Commerce and/or Due Process Clauses
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With one dissent noting the affiliates were only passively advertising, the New York Court of Appeals upheld the law as being facially constitutional – Due Process Clause – purposeful directed activities
– Commerce Clause – more than slightest presence w/website links
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Petition for cert. denied by the U.S. Sup. Court on 12/2/2013 – “cyber Monday”
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Discussion of the Court’s Desire to Address Commerce Clause Tax Cases
United Haulers Association, 550 U.S. 330 (2007)
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Counties’ requirement that all waste haulers bring trash to public owned waste management facility did not violate the Commerce Clause
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Chief Justice Roberts ‐ Delivered United Haulers opinion – what about the National Healthcare (“Obamacare”) decision?
Justice Scalia – Concurring opinion ‐ the negative commerce clause is an unjustified judicial invention
Justice Thomas – Separate concurring opinion ‐ negative commerce clause has no basis in the Constitution
Justice Alito ‐ ? – dissented in United Haulers – law discriminates against interstate commerce
New Justices – Sotomayor and Kagan ‐ ?
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IL “Click‐Through” Law Challenge
Performance Marketing Ass’n v. Hamer, Dkt No. 114496 (Ill. Sup. Ct. October, 2013)
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In 2011, Illinois passed an “Amazon” law that imposed sales and use tax registration and collection obligations on:
⁻ “[A]ny retailer that has a contract with a person located in Illinois where the person displays an advertisement on its website that links the Internet user to the retailer’s website in return for compensation”
Cook County Circuit Court held Illinois’ “Amazon” law violated the Commerce Clause and the Internet Tax Freedom Act (ITFA)
DOR appealed directly to the Illinois Supreme Court, which granted the appeal and heard the case IL Sup. Court held provision’s restriction to only apply to Internet transactions violated the ITFA (discriminates against electric commerce)
ITFA expires 11/2014
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Permanent Internet Tax Freedom Act of 2013
• H.R. 434 & S. 31, introduced 1/2013
• The bills would make permanent the existing ban on state or local taxes on internet access and on multiple or discriminatory taxes on e‐commerce – retained grandfathering provisions • The most recent extension of ITFA is scheduled to expire on November 1, 2014
• Senate refused to add proposed ten‐year extension to MFA
• S. 1431 introduced 8/1/2013 – same bill but adds “Findings of Congress” for enacting permanent ban
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Affiliate Nexus Laws
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Alabama
Arkansas
California
Colorado
Georgia
Idaho
Illinois
Iowa
Kansas
Maine
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Missouri
Nevada
New Jersey
New York
Oklahoma
South Dakota
Texas
Utah
Virginia
West Virginia (unitary)
Notable Affiliate Nexus Decisions
Bloomingdale’s by Mail v. Com.Dept. of Revenue (1989) (PA) •
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No nexus found for remote seller based on existence of affiliated stores in state
Must show activity by agent(s) in the state
SFA Folio Collections v. Tracy (1995) (OH)
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No nexus found for remote seller with affiliated stores in Ohio
Affiliated stores displayed or provided catalogs on a limited basis to customers
Stores accepted returns of Folio merchandise for attempted sale at the stores
New Mexico Tax Dept. v. Barnesandnoble.com (2013)
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Remote bookseller with sister retail entities in New Mexico
Stores displayed remote seller’s web address on gift cards; sold memberships in loyalty programs used by both; shared customer email addresses; accepted returns from .com. Both used parent’s trademarks
Retailers’ presence and activities in the state sufficient basis for nexus over bn.com
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Use Tax Reporting
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Colorado – customer notice and 1099‐like annual notice to state and customer
– DMA Case – U.S. Court of Appeals dismissed case 8/21/13 based on the federal tax injunction act; en banc hearing denied 10/1/2013
– Initially the DMA indicated it was likely to file suit in state court; however, recently, it now indicates that it will file for SCOTUS review
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Oklahoma – customer notice of use tax when ordering
South Carolina (limited)
South Dakota – customer notice of use tax when ordering
Tennessee (limited)
Vermont (repealed once click‐through becomes effective in 15 other states)
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Utah – A Different Tack
• H.B. 300; effective January 1, 2014
• Authorizes remote seller who voluntarily collect sales and use tax to retain percentage of sales and use taxes collected that seller would otherwise would have to remit to the state
• Remote seller keeps 18% of taxes collected
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Marketplace Fairness Act
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Legislation (S. 743; S. 336; HR 684) introduced
Senate cloture motion passed on 4/25/2013 (S. 743)
Senate passed legislation on 5/6/13 by vote of 69 to 27
Provides two alternatives for states that affirmatively choose to exercise such authority: – (1) SSUTA member states (so long as SSUTA contains minimum simplification requirements and the state publishes its intent to collect tax with 180 days notice), or
– (2) Non‐SSUTA states that enact legislation and meet the minimum simplification requirements (begins no earlier than 6 months after enactment starting on the first day of a calendar quarter)
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Actions in Anticipation of MFA
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SSUTA Governing Board and MTC (apparently working separately) drafting model language implementing the notice and simplification provisions required by the bill before a state can exercise authority
Colorado enacted legislation simplifying collection of state taxes (historically home‐rule state)
Virginia has enacted legislation indicating it will automatically conform to the federal requirements – separation of powers concern (unconstitutional delegation of authority)?
Ohio will require any “new” revenue to be used to reduce state’s personal income tax rates
Rep. Goodlatte, R‐6th, Chairman of the House Judiciary Committee, released seven “principles” on September 18, 2013 – (1) Tax relief (nondiscriminatory taxes), (2) Tech neutrality, (3) No regulation w/out representation, (4) Simplicity, (5) Tax competition (keep rates down), (6) States’ rights, and (7) Privacy rights
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Marketplace Fairness Act
• Some Issues
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Tax base for remote sellers different than for nexus sellers
“Remote sale” not clearly defined
Retains nexus debate over whether a person is a remote seller
What “free” computer software do the states have to provide?
• Taxability matrix, filing returns, etc.
– How do the states provide exempt sale information?
– Central registration/filing of tax returns available?
– Uniform administration and acceptance of multistate exemption certificates?
– Is there enough time – 1/3 of Senate and 100% of the House up for reelection 11/2014 – Are remote sellers stuck collecting even if a state is not compliant with the MFA? Does T.I.A. apply to block access to federal court?
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Estimated Online Retail Share among Top Retailers $160,000,000,000
70.0%
$140,000,000,000
60.0%
Total sales volume ($) $120,000,000,000
50.0%
% share of national online sales
$100,000,000,000
40.0%
$80,000,000,000
30.0%
$60,000,000,000
20.0%
$40,000,000,000
10.0%
$20,000,000,000
0.0%
$‐
Top 10
Top 25
Top 50
(sales > $2.7 (sales > $1.2 (sales >
bil)
bil)
$440MM)
Top 100
(sales >
$189MM)
Top 250
Top 500
(sales >
(sales >
$49.9MM) $13.3MM)
Top 750
(sales >
$5MM)
Top 974
(sales >
$1MM)
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Broadening Sales Tax Base
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Professional Services
Importance steadily increasing due to shift from manufacturing to services
Are these services a final product, or ultimately a cost of a tangible product?
Difficulty determining what part of a service belongs in which state
In 2013, 27 bills were proposed in 15 states
Ohio (failed) – heavily opposed by service industry organizations
3 states (Florida, Michigan, and Iowa) enacted and then swiftly repealed law
Massachusetts – tax on computer and software services; enacted then swiftly repealed law
– Hawaii, New Mexico, and South Dakota impose such sales taxes
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Digital goods
– “iTunes” taxes on digital streaming subscriptions (e.g., Netflix), digital media (music, movies, etc.), phone/tablet app downloads, e‐books
– Issues of sourcing where goods were purchased/where seller is located
– For example, many states base taxes on the billing address of the customer, but customer who is a resident of State A and downloads while traveling through State B could end up paying two sales taxes
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Problems with Taxing B2B Services
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COST/EY Study ‐ Problems Taxing Business Services: April 4, 2013
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Arbitrary and hidden differences in effective sales tax rates on different goods and services that distort consumer choices (tax pyramiding);
Distortions in how firms are structured and operate;
Violations of horizontal and vertical equity principals;
Detrimental impacts on a state’s business tax competiveness; and
Extremely difficult compliance, sourcing and definitional burdens for taxpayers and tax administrators alike.
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70‐80% of taxes on new services would likely be imposed on business inputs
12 states presently derived 50% or more of their sales/use tax revenue from business inputs
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Lowest state – Idaho is about 35%, Highest state – Washington is greater than 55%, Ohio > 50%
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Cloud Computing
• Tennessee – Virtual computing and remote storage generally not subject to sales tax; fees for online access to prewritten software may be subject to sales tax
• Ohio
– Tax online automatic data processing, computer services, or electronic information services (Ohio Rev. Code §§ 5739.01(B)(3)(e) and 5739.01(Y)(1); Ohio Admin. Code §5703‐9‐46)
• South Carolina – tax access to and use of software online
• Texas ‐ most cloud‐computing services are taxed as data‐
processing services (computerized data and information storage or manipulation)
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Three Primary Approaches to Taxation of Digital Goods/Software
• Sales tax law silent, remain unchanged or largely unchanged in response to rise of digital goods
– Apply existing sales tax on tangible goods to digital goods by Revenue Ruling(s) or legislature amends definition of “tangible property” to include digital goods
 Creates sourcing and other issues due to inherently different characteristics of these transactions
– Many states presume such sales are nontaxable unless reduced to a tangible medium
• Express enactment of tax laws applicable to digital goods
• Express exemption of or other exception for digital goods
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Software/Subscription Services
Thompson Reuters v. Michigan Dept. of the Treasury
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Issue: Does Thompson Reuters’ Checkpoint research and information service constitute “prewritten computer software”?
Court of Claims determined that it does, reasoning that a similar product was previously provided on tangible storage media and the Internet was merely an alternative means of delivering the same thing
Consequence: use of virtually any paid‐for information service on the Internet would constitute a taxable use in Michigan
Minnesota – Tax on subscription streaming services, such as Netflix, Hulu, Spotify and others
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Wisconsin
– Taxes digital goods, which include streaming video/audio
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Washington
– Taxes computer software (regardless of delivery method), digital goods, digital automated services (cloud storage, etc.)
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Digital Taxation Map
Source: Download Fairness Coalition, 2012 State Survey
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Marked Increase in App Revenue
Source: Download Fairness Coalition, 2012 Estimate, http://www.downloadfairness.com/wp‐
content/uploads/2012/04/DFC‐Fact‐Sheet1.pdf 34
Digital Goods and Services Tax Fairness Act of 2013
• Introduced in Senate 7/25/2013, S. 1364
• Introduced in House 12/12/2013, H.R.3724
• Would regulate state taxation of downloaded music and movies and online services
• Provides uniform sourcing rules for digital goods
• Goal is to prevent “multiple and discriminatory” taxation of digital goods
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Federal Proposals that Provide Greater Uniformity • If the MFA passes, will there be a compromise with other federal proposals that provide for greater uniformity?
• Business Activity Tax Simplification Act (BATSA), H.R. 2992
– Codify physical presence for Business Activity Taxes – Expand P.L. 86‐272 protection to apply to services
• Mobile Workforce, H.R. 1129, S. 1645
– Greater than 30‐day presence before state can impose an income tax on nonresidents
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Questions?
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