1. © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient. Notice Reporting, Nexus and MFA Jeff Friedman Michele Borens May 11, 2016

2. 2 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Agenda  Nexus – What is the Rule?  States’ “Self-Help” Legislative Efforts - Economic Nexus Legislation - Use Tax Reporting Legislation - Legislation that Contemplates Immediate Challenge of Quill  Recent Nexus Decisions  Federal Nexus Legislation Update

3. 3 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Shifting Nexus Landscape  The U.S. Supreme Court has not accepted a nexus case since 1992.  Federal legislation addressing state sales tax collection is caught up in political wrangling.  States have taken action to overturn Quill. - Aggressive nexus positions - Anti-Quill legislation - Anti-Quill legislation that allows for immediate review by state courts - Use Tax reporting

4. 4 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP What is the Nexus Standard?  The nexus standard set by the U.S. Supreme Court in Quill still applies.  In order for a state to impose a sales and use tax collection obligation on an out-of-state seller, the U.S. Supreme Court has held that a physical presence in the state is required. Quill Corp. v. North Dakota (1992).  The physical presence must be more than de minimis.

5. 5 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP States’ “Self-Help” Legislative Efforts  States have taken legislative efforts to force remote vendors to collect sales tax.  State laws have contained unconstitutional provisions for many years; however, states have generally not enforced these provisions. - For example, Colorado law provides that doing business for sales tax purposes includes soliciting … by distribution of catalogs or other advertising, by use of any communications media such as the newspaper, radio, or television advertising media, or by any other means of business from persons residing in Colorado….  States are no longer exercising such restraint.

6. 6 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP States’ “Self-Help” Efforts – Alabama  Effective January 1, 2016, Alabama amended Regulation 810-6-2-.90.03 to provide that out-of-state sellers who lack an Alabama physical presence but who are making retail sales of tangible personal property into the state have a substantial economic presence in Alabama for sales and use tax purposes and are required to register for a license with the Department and to collect and remit tax when… - Seller's retail sales of tangible personal property sold into the state exceed $250,000 per year based on the previous calendar year's sales; and - Seller conducts one or more of the activities described in Section 40-23- 68, Code of Alabama 1975.

7. 7 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Pursuant to this rule, the Department asserted that an out-of-state seller with a substantial economic presence in Alabama will be required to collect and remit Alabama tax on its sales into the state, regardless of whether it has an Alabama physical presence.  Commissioner Julie Magee has publicly dared companies to ignore and has responded to assertions that the tax is unconstitutional by tweeting…."All sorts of things were constitutional or unconstitutional until they weren't anymore. Sue us." States’ “Self-Help” Efforts – Alabama

8. 8 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  On May 10, it was reported that Alabama is gearing up to join South Dakota in efforts to overturn Quill Corp v. North Dakota as it awaits challenges to its controversial sales tax nexus regulation to make their way to the state's courts.  Joe Garrett Jr., deputy co-commissioner of the Alabama Department of Revenue, stated that the department will likely issue final assessments under the regulation within the next two weeks.  There have been some discussions surrounding organized efforts to challenge the regulation, but no lawsuits have been filed. States’ “Self-Help” Efforts – Alabama

9. 9 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  On March 22, South Dakota Governor Daugaard signed into law S.B. 106.  S.B. 106 adopted an economic nexus statute for sales tax collection.  S.B. 106 was a targeted attempt by the South Dakota Department of Revenue to overturn Quill by triggering immediate judicial review of an anti-Quill sales tax collection statute. States’ “Self-Help” Efforts – South Dakota

10. 10 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Beginning May 1, 2016, S.B. 106 requires a remote seller to remit sales tax on its sales of tangible personal property, products transferred electronically, and services for delivery into South Dakota, if the remote seller meets either of the following criteria in the previous calendar year or the current calendar year: - The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000; or - The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions. States’ “Self-Help” Efforts – South Dakota

11. 11 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  S.B. 106 contains an expedited judicial review mechanism.  It permits the state to bring a declaratory judgment action in any South Dakota circuit court against “any person [that South Dakota] believes meets the criteria of section 1 of [S.B. 106] to establish that the obligation to remit sales tax is applicable and valid under state and federal law.”  South Dakota may bring the declaratory judgment action regardless of whether it “initiates an audit or other tax collection procedure.” States’ “Self-Help” Efforts – South Dakota

12. 12 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  The Legislature provided taxpayers with some protections by providing that enforcement of S.B. 106 will be “stayed by the courts until the constitutionality of [S.B. 106] has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine, or a final judgment applicable to a particular taxpayer.”  The filing of the declaratory judgment action will operate as an injunction during the pendency of the action, prohibiting South Dakota from enforcing the sales tax remittance obligation “against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.”  Further, South Dakota is barred from applying S.B. 106 retroactively. States’ “Self-Help” Efforts – South Dakota

13. 13 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  In response to the governor signing S.B. 106, the South Dakota Department of Revenue mailed notices to multiple remote sellers informing them of S.B. 106’s economic nexus provision and sales tax remittance requirements.  On April 28, South Dakota filed a declaratory judgment action in South Dakota circuit court against Wayfair, Inc., Systemax, Inc., Overstock.com, Inc. and Newegg, Inc. seeking a determination that it may require the defendants to collect and remit S.D. sales tax.  On April 29, American Catalog Mailers Association and Netchoice filed a declaratory judgment action in South Dakota circuit court seeking a declaration that S.B. 106 is facially unconstitutional and cannot be enforced. States’ “Self-Help” Efforts – South Dakota

14. 14 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Illinois – S.B. 1041 proposes to amend Illinois sales tax law to provide that - a retailer is also presumed to be "maintaining a place of business in this State" if the retailer's total gross receipts from sales occurring in Illinois in the previous calendar year is $1,000,000 or more. A retailer that is presumed to be "maintaining a place of business in this State" under this paragraph must collect and remit the tax imposed under this Act unless it can prove that it does not have nexus with this State under the Commerce Clause of the United States Constitution.  Vermont – H 873 redefines "vendor" to include - a remote seller that has engage in regular, systematic or seasonal solicitation of sales of tangible personal property in the state and has made at least $100,000 or 200 individual transactions of sales into the state. States’ “Self-Help” Efforts – Other States

15. 15 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Minnesota – H 3787 proposes to amend Minnesota sales tax law to provide that - a seller without physical presence in the state is required to collect sales tax if the seller engages in any of the following: (1) sending, transmitting, or broadcasting of flyers, newsletters, telephone calls, targeted e-mail, text messages, social media messages, or targeted mailings, (2) collecting, analyzing and utilizing individual data on purchasers or potential purchasers in this state, (3) using information or software, including cached files, cached software, cookies, or other data-tracking tools, that are stored in or distributed within the state, (4) conducting any other actions that use persons, tangible property, intangibles, digital files or information, or software in the state in an effort to enhance the probability that a person's contact with a customer in the state will result in a sale to that customer….. States’ “Self-Help” Efforts – Other States

16. 16 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Crutchfield/Newegg.com/Mason Companies v. Testa  Three companies are challenging Ohio’s bright-line test for substantial nexus under the Commercial Activity Tax (CAT) at the Ohio Supreme Court.  A taxpayer has substantial nexus for CAT purposes if it meets any of four factors, including “bright-line presence” which includes a taxpayer with at least $500,000 in gross receipts from the state during the calendar year.  The companies assert a Commerce Clause violation because neither the companies nor their representatives do any business in Ohio to establish a market in the state.  The Department based its theory of nexus, in part, on customers in Ohio accessing the company’s website from a computer or mobile device in the state, creating a “virtual” presence.

17. 17 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  On May 3, the Ohio Supreme Court heard oral arguments in the three cases.  It was undisputed that Crutchfield, Newegg, and Mason each had annual Ohio gross receipts in excess of $500,000, and therefore satisfy the CAT’s bright-line presence standard. The retailers argued, however, that they cannot be taxed because they lack the requisite physical presence under Tyler Pipe to establish substantial nexus.  The Department argued three main theories: - the retailers have physical presence in Ohio by virtue of their storage of software (e.g., HTML code and JavaScript), copyrighted images and data, and other intellectual property on customer computers located in the state; - the retailers rely on independent contractors to store software in Ohio; and - even if the retailers lack physical presence in Ohio, Tyler Pipe and Quill do not require a physical presence for taxes other than sales and use taxes. Crutchfield/Newegg.com/Mason Companies v. Testa

18. 18 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP State of Illinois ex rel. Stephen B. Diamond, PC v. Lush Internet, Inc.  Despite the continued efforts to challenge Quill, state courts are still issuing decisions consistent with Quill’s physical presence requirement.  In State of Illinois ex rel. Stephen B. Diamond, PC v. Lush Internet, Inc., an Illinois law firm, Stephen B. Diamond, PC filed an Illinois False Claims Act lawsuit against Lush Internet, Inc., alleging that Lush Internet acted knowingly or with a reckless disregard in failing to collect Illinois Use Tax on its Internet sales of products to Illinois customers.

19. 19 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Lush Internet argued that (1) that it did not have an obligation to collect and remit Illinois use tax because it did not have nexus with Illinois on Commerce Clause grounds and based on Illinois statutory nexus; and (2) that it did not knowingly or recklessly disregard an Illinois use tax obligation because it made a careful business determination that it did not have nexus after consulting with various advisors.  Lush Internet demonstrated that - it operated separately from the entity that owned and operated the Illinois retail stores because it was in direct competition with the Illinois retail stores for sales; - The retail stores could not accept returns of products purchased on the Internet, that each entity engaged in and was responsible for its own marketing efforts, that Lush Internet had separate inventory from the Illinois retail stores; and - that retail store employees were not trained on Internet products and did not refer customers to the website because of the direct competition. State of Illinois ex rel. Stephen B. Diamond, PC v. Lush Internet, Inc.

20. 20 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  The Cook County Circuit Court issued a decision yesterday, May 10, that the Relator failed to meet its burden of proving by a preponderance of the evidence that (1) Lush Internet had nexus with Illinois based on the Commerce Clause, and (2) that Lush Internet violated the False Claims Act by knowingly or recklessly disregarding an obligation to collect and remit Illinois use tax.  On the nexus grounds, the court determined that Relator failed to prove that the retail store employees “performed more than the slightest activities on behalf of Lush Internet” and failed to prove that an agency relationship existed between Lush Internet and the retail stores because the “evidence was, among other things that Lush Internet and [the retail stores] were separate entities during the FCA period.” State of Illinois ex rel. Stephen B. Diamond, PC v. Lush Internet, Inc.

21. 21 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP States’ “Self-Help” Efforts – Use Tax Notification  States continue to propose legislation that would require burdensome use tax reporting requirements on out-of- state sellers not collecting sales tax.  For example: - Louisiana H 294 requires online or catalog retailers not domiciled in Louisiana to provide notice to Louisiana purchasers that state sales and use taxes may be due on purchases.

22. 22 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Vermont H 837 would require each noncollecting vendor that makes sales into Vermont to - notify purchasers that sales or use tax is due and that the state of Vermont requires purchasers to file a sales or use tax return. - the bill also requires each noncollecting seller to send a notice to all Vermont purchasers who have made purchases totaling $500 or more listing the total amount paid by that purchaser to the noncollecting seller. Noncollecting sellers that make $50,000 or more of sales into Vermont are required to file an annual statement for each purchaser with the Department of Taxes showing the total amount paid by that purchaser. States’ “Self-Help” Efforts – Use Tax Notification

23. 23 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Direct Marketing Association v. Brohl  On February 22, the U.S. Court of Appeals for the Tenth Circuit reversed the district court’s order granting summary judgment.  The Tenth Circuit held that Colorado’s notice and reporting requirements imposed on non-collecting retailers did not violate the dormant Commerce Clause because they neither discriminated against, nor unduly burdened, interstate commerce.  The Tenth Circuit further held that the application of Quill v. North Dakota (Quill) is narrowly limited to sales and use tax collection.

24. 24 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  In its holding the Tenth Circuit considered whether the Colorado law facially discriminates against interstate commerce. The court held that, on its face, the law does not discriminate against interstate commerce because it imposes differential treatment “based on whether the retailer collects Colorado sales or use taxes,” not based on whether the vendor is located in- state or out-of-state. Unlike in cases where the Supreme Court had previously concluded that a law facially discriminated against interstate commerce, the Colorado law did not explicitly identify a geographical distinction.  The court also considered whether the Colorado law unconstitutionally discriminated by having the direct effect of favoring in-state economic interests over out-of-state interests. The court noted that “[t]he party claiming discrimination must show that the state law benefits local actors and burdens out-of-state actors, and the result must ‘alter[] the competitive balance between in-state and out-of-state firms.’” Direct Marketing Association v. Brohl

25. 25 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  The court noted that limiting the application of the reporting requirements to out-of-state sellers does not violate the dormant Commerce Clause because: - Colorado customers are required to pay sales or use tax when they purchase goods from a collecting or non-collecting retailer. Thus, “the reporting obligation itself does not give in-state retailers a competitive advantage”; - While “equal treatment requires that those similarly situated be treated alike,” the non-collecting out-of-state retailers and in-state retailers are not similarly situated because the in-state retailers are required to comply with tax collection and reporting requirements; and - Colorado notice and reporting requirements did not alter the competitive balance between in-state and out-of-state firms. DMA did not demonstrate that the Colorado law “imposes a discriminatory economic burden on out-of-state vendors when viewed against the backdrop of the collecting retailers’ tax collection and reporting obligations.”  DMA is appealing the decision. Direct Marketing Association v. Brohl

26. 26 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Summary of Federal Legislation Online Sales Simplification Act Marketplace Fairness ActRemote Transactions Parity Act SourcingOrigin-based sourcingDestination-based sourcing Small seller exemption None$1,000,000Phase out: Year 1: $10,000,000 Year 2: $5,000,000 Year 3: $1,000,000 Year 4: None AuditRemote sellers may be audited by home state. One audit per state.Audits conducted through CSPs. Generally no audits for remote sellers with under $5m gross receipts. LiabilityRemote seller liable for improperly collected tax. Remote sellers relieved from certain liabilities. Enhanced liability protection. SoftwareNo software assistance to remote sellers Free software for remote sellers. Integration costs excluded. Free software. Set-up, installation, and maintenance cost included.

27. 27 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Federal Nexus Legislation – Status  Marketplace Fairness Act - Sponsored by Michael Enzi (R-Wyo.) with 22 cosponsors (14 Democrats, 7 Republicans, 1 Independent). - Supported by National Retail Federation, Retail Industry Leaders Association, National Governors Association, numerous other businesses and national trade associations. - Opposed by National Taxpayers Union (MFA does not follow Chairman Goodlatte’s seven principles), Americans for Prosperity, NetChoice.

28. 28 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Remote Transactions Parity Act - Sponsored by Rep. Chaffetz (R-Utah) and 46 co-sponsors (24 Republicans, 22 Democrats).  Bipartisan group of senators say they will not vote for PITFA unless remote sales tax legislation is passed. - Supported by National Governors Association, National Conference of State Legislatures, Marketplace Fairness Coalition, International Council of Shopping Centers, NRF (stating that the bill stops the federal government from picking winners and losers in the marketplace). - Opposed by Sen. Wyden, Campaign for Liberty, Web Enabled Retailers Helping Expand Retail Employment (arguing the bill helps big retailers and tax collectors, to the detriment of small retailers), National Taxpayers Union. Federal Nexus Legislation – Status

29. 29 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP  Online Sales Simplification Act - Supported by Rep. Goodlatte, NetChoice (the act will treat “sales tax obligations the same, whether you entered a store by foot, by mail, by phone, or via the Internet”). - Opposed by Multistate Tax Commission (act would violate state sovereignty and interfere with principles of federalism), National Conference of State Legislatures (imposes new taxes on consumers in non-sales tax states and raises taxes on consumers who purchase products from higher sales tax states). Federal Nexus Legislation – Status

30. 30 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Questions? Jeffrey A. Friedman Sutherland Asbill & Brennan LLP 202.383.0718 Jeff.friedman@sutherland.com Michele Borens Sutherland Asbill & Brennan LLP 202.383.0936 michele.borens@sutherland.com

31. 31 This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law. 31 © 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP Connect with us!  Apple App Store  Google Play  Windows Phone Store  Amazon Appstore Download the Sutherland SALT Shaker app today: @Sutherland_SALTSutherland SALT Group