1. Nexus for Online Purchases: Burning Issue or Extinguished Debate?
Antonio Ferachi, La. Dept. of Revenue
Matthew A. Mantle, Jones Walker LLP

2. Speakers
Antonio Ferachi – Director, Litigation Division, Louisiana Department of Revenue
Matt Mantle – Partner, Jones Walker LLP, New Orleans (SALT)

3. Agenda Background – E-Commerce
Commerce Clause Nexus – “Physical Presence” and Quill
Expansion of “Physical Presence” – Amazon laws (NY)
Other Attempts to Expand “Physical Presence”
Attempts to Contest/Remove “Physical Presence” Altogher
Attempts to Sidestep “Physical Presence” – Reporting Requirements
Federal Legislation Efforts
Current State of Things
Other Related Issues to Consider

6. Internet Commerce (“E-Commerce”)

7. Internet Commerce (“E-Commerce”)
What is E-Commerce?
U.S. Census Bureau E-Stats:
“E-commerce is defined as the value of goods and services sold online. The term online includes the use of the internet, intranet, extranet, as well as proprietary networks that run systems such as Electronic Data Interchange (EDI).”
“[E-commerce] describes transactions sold on-line whether over open networks such as the Internet or proprietary networks running systems such as Electronic Data Interchange (EDI)”
U.S. Census Bureau – 2006 Annual Retail Trade Report:
“E-commerce sales and other operating receipts are sales of goods and services where an order is placed by the buyer; or price and terms of the sale are negotiated over an Internet, extranet, EDI network, electronic mail or other online system. Payment may or may not be made online.”

8. Internet Commerce (“E-Commerce”)
What is E-Commerce?
Incudes:
Business-to-Business sales
Business-to-Consumer sales
Sales of TPP
Sales of certain taxable services
Sales of digital goods/services
Cloud computing (SaaS, PaaS, IaaS)

9. Internet Commerce (“E-Commerce”)
U.S. Census Bureau estimates:
2009 national e-commerce sales at $3.4 trillion
$145 billion in business-to-consumer e-commerce (4% of total retail sales)
Business-to-consumer e-commerce recently growing at double-digit rates

10. Internet Commerce (“E-Commerce”)
Current projection of U.S. online sales for 2017: >$440 billion.
Percentage of retail sales: 9% of retail market.
Online sales growth set to outpace brick-and-mortar sales growth in coming years.

11. Internet Commerce (“E-Commerce”)
2009 Univ. of Tennessee study:
Estimated national total state and local e-commerce = $3.92 trillion in 2012
Estimated business-to-business e-commerce = $3.66 trillion in 2012
Estimated business-to-consumer e-commerce = $264 billion in 2012
Uncollected sales taxes on e-commerce “will cost states $11.4 billion in 2012”

12. Internet Commerce (“E-Commerce”)

13. Internet Commerce (“E-Commerce”)

14. Internet Commerce (“E-Commerce”)

15. Internet Commerce (“E-Commerce”)
UAB study (Feb. 2012):
Total Alabama e-commerce by remote sellers = $34 billion in 2011
Alabama business-to-business e-commerce = $32 billion in 2011
87% of these sales exempt/excluded from tax
75-80% compliance on taxable sales
Business-to-consumer e-commerce in Alabama = $2.3 billion in 2011
Retail sales
Mostly taxable sales
Only half of retail consumers remitted any sales/use tax
$165 million in Alabama revenue losses in 2011 due to remote e-commerce

16. Internet Commerce (“E-Commerce”)
UAB study (cont.):
Previous effects of lost taxes minimal because online sales only accounted for small % of all retail sales
This is changing:
Online retail approaching 5% of all retail sales (as of date of study)
Online retail was expected to grow by % annually through 2016

17. Commerce Clause Nexus - “Physical Presence” and Quill

18. Commerce Clause Nexus
Does the remote vendor have enough contacts with the taxing jurisdiction (state or local) to be subject to the taxing jurisdiction’s sales/use tax collection requirements?
Requires analysis of U.S. constitutional law, state and local statutory laws and the operations and transactions at issue.
Focus today is on Commerce Clause Subtantial Nexus – “Physical Presence”
Framework for analysis has its roots in Quill Corp. v. North Dakota
How much and which type of physical presence is enough to subject a non-resident vendor to the taxing jurisdiction’s collection requirements?

19. Current Law Under Quill
Quill v. North Dakota, 504 U.S. 298 (1992)
U.S. Supreme Court held retailers are not required to collect sales/use taxes in states where they have no “physical presence”
No physical presence = no Commerce Clause nexus under Complete Auto Transit test
Court bifurcated nexus standards under Due Process Clause and Commerce Clause.
Due Process Clause required only “minimum contacts with taxing state.
Commerce Clause required “substantial nexus.”

20. Current Law Under Quill
Quill v. North Dakota, 504 U.S. 298 (1992)
Commerce Clause substantial nexus = “physical presence”
Court’s Reasoning:
Requiring compliance with sales tax rules of 45 states and 7,500 local taxing jurisdictions would burden interstate commerce
Doctrine of stare decisis – retailers had been relying on Bellas Hess decision for 25 years
Case concerned catalog mail-order company
Ruling subsequently applied to all remote sellers, including online retailers

21. Public Policy Arguments Against Quill
Some presented public policy arguments why Quill law needs to be changed:
Disadvantages local businesses
Online retailers have 4 to 12% price advantage over local stores
Undermines state and local governments
Reduces tax revenue for schools, police, and other services
Revenue losses will grow as internet sales continue to displace in-store sales
Makes a regressive tax more regressive
Only those with internet access, credit card, and home or workplace to accept daytime deliveries can take advantage of e-commerce
Compliance burden concern “is no longer an issue”
New software eliminates difficulty of calculating and remitting sales taxes for state and local jurisdictions

22. U.S. Congress’ Power
Quill Court noted that U.S. Congress has authority to enact legislation requiring all retailers to collect sales taxes
“Congress has plenary power to regulate commerce among the States and thus may authorize state actions that burden interstate commerce”
“[T]he underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.”
“Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

23. Expansion of Physical Presence – “Amazon Laws”

25. Expansion of Physical Presence
States are attempting to “expand” definition of physical presence
“Click-Through” Nexus (the “Amazon” laws)
Form of attributional nexus
Nexus based upon retailer’s agreements with in-state residents to refer customers via web link to retailer’s web site
Remote seller has to register as a vendor and collect sales/use tax if remote seller contracts with residents who link to remote seller’s webpage and are paid a commission resulting from an actual sale
Typically includes a de minimis provision

26. Attributional Nexus Primer
Nexus based on the activities of others
Major U.S. Supreme Court cases:
Tyler Pipe Industries v. Washington State Dep’t. Rev., 483 U.S. 232 (1987)
Scripto, Inc. v. Carson, 362 U.S. 207 (1960)
Constitutional standard:
Whether activities performed by in-state person on behalf of out-of-state company are “significantly associated with the taxpayer’s ability to establish and maintain a market in [the] state for the sales”
General advertising does not create nexus
Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954)

27. New York’s “Amazon” Law
Presumed a “vendor” (and required to collect tax) if remote seller:
enters into an agreement with NY resident “associate” for consideration;
NY resident links to remote retailer’s webpage; and
cumulative gross receipts from sales through links to NY customers exceeds $10,000
Presumption rebutted by proof resident did not engage in any “solicitation” in NY on behalf of remote seller
Rebutted if “the only activity” of in-state representatives consists of advertising
Rebutted if remote seller includes in agreements a provision prohibiting associates from engaging in solicitation and associate submits signed certification

29. New York’s “Amazon” Law
NY “Amazon” statute challenged in court
Amazon.com LLC v. New York State Dep’t. of Tax’n and Finance, 2010 N.Y. Slip Op (N.Y. App. Div., Nov. 4, 2010)
Appellate court upheld facial constitutionality of NY statute
Set of circumstances exist under which statute would be valid.
Court remanded as-applied Commerce Clause and Due Process challenges for further fact-finding
Taxpayers later withdrew their “as applied” challenges, and requested that the facial challenge continue on appeal.

30. New York’s “Amazon” Law
Amazon.com LLC v. New York State Dep’t. of Tax’n and Finance (cont.)
Subsequently, on appeal, NY Court of Appeals (highest court) upheld New York’s Amazon law (3/28/13)
Focus of court was on facial challenge only
“Plaintiffs now confront the substantial hurdle of demonstrating that the Internet tax is unconstitutional on its face.”
Court held Amazon law plainly satisfies “substantial nexus” requirement of Commerce Clause.
Physical presence is generally necessary, but it “need not be substantial.”
Physical presence requirement can be met if economic activities are performed in the state by a seller on remote vendor’s behalf.
“Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.”
“If a vendor is paying New York residents to actively solicit business in this State, there is no reason why that vendor should not shoulder the appropriate tax burden.”

31. Other Attempts to Expand “Physical Presence”

32. Attempts to Expand “Physical Presence”
Louisiana (for example):
Done by legislation.
Act 22 (2016 1st Extra. Sess.)
Expanded Louisiana’s remote seller nexus for out-of-state vendors (including online retailers) with certain business activities in the state.
Created new collection and remittance requirements on certain additional remote sellers by expanding the applicable statutory definition of “dealer.”
Applicable remote sellers now required to collect and remit state sales tax and a flat local sales/use tax (rate of 4%).
Effective April 1, 2016.

33. Attempts to Expand “Physical Presence”
Louisiana:
Nexus-creating activities:
Click-through nexus (Amazon law):
Solicitation of business through agreements with independent contractors or other representatives who are Louisiana residents, where the resident refers potential customers (by link on an internet website or otherwise) to the seller for a referral fee or some other form of consideration, and where the gross receipts generated from such business are in excess of $50,000 during the prior twelve months.
IP nexus:
Selling the same or a substantially similar line of products as a Louisiana retailer under the same or substantially similar business name, using trademarks, service marks, or trade names that are the same or substantially similar to those used by the Louisiana retailer.

34. Attempts to Expand “Physical Presence”
Louisiana:
Nexus-creating activities (cont.):
Affiliate nexus:
Soliciting business and developing and maintaining a market in Louisiana through an agent, salesman, independent contractor, solicitor, or other representative under an agreement with a Louisiana “affiliated agent” (a resident or business) where the affiliated agent, for a commission, referral fee, or other consideration, engages in activities that inure to the benefit of the remote seller to help develop business or maintain a market for the remote seller’s goods or services in the state, as long as those activities of the agent are sufficient to satisfy the sales tax nexus requirements of the U.S. Constitution.
“Substantial ownership interest” nexus:
Holding a substantial ownership interest, directly or through a subsidiary, in (or being substantially owned by) a retailer with sales locations in Louisiana. “Substantial ownership interest” is defined to mean affiliated entities where there is an ownership interest of more than 5%, whether direct or indirect, in the other entity.

35. Attempts to Expand “Physical Presence”
Massachusetts:
Done by policy directive.
Dept. of Revenue Directive 17-1 (DR 17-1)
Creates an “administrative bright line rule.”
Out of state online vendors must collect and remit tax if, during the preceding calendar year:
Seller has in excess of $500,000 in Mass. sales, and
Seller made sales for delivery into Mass. in 100 or more transacitons.

36. Attempts to Expand “Physical Presence”
Massachusetts:
Economic nexus standard (factor presence).
However, Mass. DOR states that it is not directly challenging Quill physical presence requirement
Physical presence found with internet vendors by way of :
Software apps and cookies for large internet vendors
Cites to La. Law to explain that “software is generally considered to be tangible personal property.
Content distribution networks (“CDNs”) – local servers
“Online marketplaces”

37. Attempts to Expand “Physical Presence”
Massachusetts:
Resulting litigation
American Catalog Mailers Association and NetChoice v. Heffernan (Mass. Superior Ct.)
Preliminary injunction and declaratory judgment requested
Violation of Commerce Clause and Internet Tax Freedom Act (IFTA)

38. Attempts to Expand “Physical Presence”
Massachusetts:
Mass. DOR has now revoked Directive 17-1.
See Directive 17-2
Mass DOR says it “anticipates proposing regulations” under APA requirements.
Initial draft likely to be similar to Directive 17-1.

39. Attempts to Expand “Physical Presence”
Massachusetts:
UPDATE:
Mass. legislature has now approved Directive 17-1 language in draft budget.
Sent to Governor for approval.

40. Other Attempts to Expand “Physical Presence”
Ohio:
Done via briefing in a litigation matter.
Internet nexus:
Argument introduced in a brief in lawsuit of Crutchfield Corp. v. Testa (see also Newegg, Inc. v. Testa)
Gross receipts tax case (Ohio CAT).
Quill physical presence satisfied by demonstrating retailer’s website was accessed within Ohio’s borders
i.e., when visiting computers automatically save their own copies of copyrighted software of retailer’s website, so it will load faster.

41. Other Attempts to Expand “Physical Presence”
Ohio:
Internet nexus:
Website is not maintained in Ohio
All marketing activities conducted from outside Ohio
Commissioner posits that “local interaction” through website is the “functional equivalent” of a physical presence in the state:
Digital assets such as “cached” images and cookies are downloaded by the internet user when the visit the seller’s website
Although seller forces the “cache,” the user controls his or her own cache (they can delete the entire cache, or just certain items)
Cookies identify a certain computer (versus an individual person)
Seller permits third parties to place cookies on the retailer’s website for collection and analysis for seller

42. Other Attempts to Expand “Physical Presence”
Ohio:
Ohio Supreme Court bypassed argument and issue by ruling Ohio CAT was not a sales tax; thus, “physical presence” not required.
Court looked to “economic presence” standard(s)
Case later settled while at U.S. Supreme Court.

43. Attempts to Contest/Remove “Physical Presence” Altogher

44. Attempts to Remove “Physical Presence”
Justice Kennedy’s concurring opinion in Direct Marketing Association v. Brohl, 135 S. Ct (2015):
“It is unwise to delay any longer a reconsideration of the Court’s holding in Quill … the legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”

46. Attempts to Remove “Physical Presence”
Alabama:
Done by regulation
Ala. Admin. Code
Effective January 1, 2016
Requires “out-of-state sellers” who lack a physical presence, but are making retails sales of TPP into Alabama to register and collect sales and use tax if:
“Sellers” retail sales of TPP sold into Alabama exceed $250,000 per year based on the previous calendar year’s sales, and
The seller conducts one of a number of in-state activities
Uses an “economic nexus” (factor presence) standard for sales tax purposes

47. Attempts to Remove “Physical Presence”
Alabama:
Resulting litigation
Newegg Inc. v. Dept. of Revenue (Ala. Tax Tribunal)
Litigation welcomed by the ADOR, in order to present issue to U.S. Sup. Ct.

48. Attempts to Remove “Physical Presence”
South Dakota:
Done by legislation.
S.B. 106
Requires sellers to collect sales and use tax if:
Their retail sales of TPP, digital products, or services sold into South Dakota exceed $100,000 over current or previous calendar year, or
Their sales amount to 200 separate transactions over the course of the year.
Uses an “economic nexus” (factor presence) standard for sales tax purposes

49. Attempts to Remove “Physical Presence”
South Dakota:
Resulting litigation
South Dakota sued four retailers in state court:
Wayfair, Systemax, Overstock, and Newegg
Trial court found expanded nexus statute unconstitutional under Quill
Case now before South Dakota Supreme Court (briefing ongoing)

50. Attempts to Remove “Physical Presence”
Tennessee:
Done by regulation
Rule 129
Requires “out-of-state sellers” who lack a physical presence, but are making retails sales of TPP into Tennessee to collect and remit sales and use tax if:
Seller has more than $500,000 of sales into the state during the previous 12 months
Uses an “economic nexus” (factor presence) standard for sales tax purposes

51. Attempts to Remove “Physical Presence”
Tennessee:
Resulting litigation
Rule challenged by American Catalog Mailers Association and NetChoice in state’s chancery court
American Catalog Mailers Association v. Tennessee Dept. of Revenue, No IV (Tenn. Ch. Ct. Mar. 30, 2017)
State now delaying enforcement of Rule pending final judgment of legal challenge.

52. Attempts to Remove “Physical Presence”
Tennessee:
Resulting legislation
HB 261 –
Prevents state from enforcing Rule 129 against noncomplying merchants until lawsuit is resolved and general assembly gives permission to begin enforcement.

53. Attempts to Remove “Physical Presence”
Mississippi:
Attempted legislation
HB 480
Factor presence nexus: $250,000 threshold
Attempted regulation
Similar to HB 480
Leutenant Governor pronounced HB 480 unconstitutional
Legislation died.
Proposed regulation also halted.

54. Attempts to Sidestep “Physical Presence” – Reporting Requirements

55. Attempts to Sidestep “Physical Presence”
Colorado:
Done by legislation and regulation (2010).
Remote seller “information reporting” requirement.
Imposes three obligations on retailers that do not collect sales taxes (a/k/a “non-collecting retailers”):
Send a “transactional notice” to purchasers informing them that they may be subject to Colorado’s use tax;
Send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use tax on those purchases; and
Send Colorado DOR an annual “customer information report” listing their customers’ names, addresses, and total amounts spent.

56. Attempts to Sidestep “Physical Presence”
Colorado:
Resulting litigation
Direct Marketing Association (DMA) v. Brohl
U.S. Supreme Court ruled case was not barred by the Federal Tax Injunction Act (TIA)
Court ruled case did not involve a “collection and remittance obligation;” thus, not a taxpayer attempt to “enjoin” or “retratin” the “collection of taxes”
Colorado information reporting statute was not a tax collection and remittance statute
Remanded case back to 10th Circuit (federal court)

57. Attempts to Sidestep “Physical Presence”
Colorado:
Direct Marketing Association v. Brohl (cont.)
Justice Kennedy’s famous (or infamous) concurrence:
Argues that Quill must be reconsidered.
Quill “now harms States to a degree far greater than could have been anticipated earlier.”

58. Attempts to Sidestep “Physical Presence”
Colorado:
Direct Marketing Association v. Brohl (cont.)
10th Circuit held Colorado remote seller information reporting statute was constitutional.
Court held Quill case is limited to determining whether a remote seller has sales/use tax “collection and remittance obligation.”
Quill does not apply to a “notice and reporting” law.
Physical presence thus not required.
Court held law was not facially discriminatory because it only indirectly refers to out-of-state sellers.
On whether is “discriminatory in its effects,” different treatment of in-state sellers and out-of-state sellers is not discriminatory in itself.
Difference justified based on in-state sellers having competitive disadvantage of collecting the sales/use tax.

59. Attempts to Sidestep “Physical Presence”
Colorado:
Direct Marketing Association v. Brohl (cont.)
U.S. Supreme Court denied cert.
Taxpayer won the TIA battle, but lost the “physical presence” war in this case.

60. Attempts to Sidestep “Physical Presence”
Louisiana (for example):
Done by legislation.
Act 569 (2016 Regular Session)
Effective July 1, 2017
Created additional informational reporting requirements for remote sellers who still do not fall within Louisiana’s expanded statutory nexus requirements following Act 22 (2016).

61. Attempts to Sidestep “Physical Presence”
Louisiana (cont.):
Requires information reporting from remote sellers/vendors who do not fall within requirements of a “dealer” under Act 22, but have:
“Purposefully availed themselves in any way of the benefits of an economic market in Louisiana or who have any other minimum contacts with the state” and
Generated cumulative annual receipts in Louisiana in excess of $50,000.

62. Attempts to Sidestep “Physical Presence”
Louisiana (cont.):
Uses broader “economic nexus” test to force additional remote sellers to:
Provide annual reporting/notification statement to LDR listing each Louisiana purchaser in the prior year.
Send notice to each Louisiana purchaser at time of purchase explaining purchaser’s sales/use tax requirements.
Send annual notice to each Louisiana purchaser reminding purchaser of sales/use tax obligation.
Similar to Colorado information reporting statute.

63. Attempts to Sidestep “Physical Presence”
Other Examples:
Oklahoma:
SB 2531
Remote sellers that fail to collect sales tax from Oklahoma customers must send annual notices to in-state customers informing them of their purchases and their use tax obligations.
Vermont:
H 873
Imposes Colorado-style information reporting requirement

64. Federal Legislation Efforts

65. Federal Legislation Efforts Ongoing for Years
Prior bills:
Approximately 25 years of legislative efforts post-Quill.

66. Newer Federal Legislation
Recent bills:
Marketplace Fairness Act (MFA) of 2015
Allows states to require a remote retailer to collect sales tax
“Remote retailer” is defined as any seller who makes interstate sales of products or services
Applies only to remote retailers with annual remote sales in excess of $1 million
Remote sales includes exempt sales

67. Newer Federal Legislation
Recent bills:
Marketplace Fairness Act (MFA) of 2015
The bill, S. 698, is substantially similar to S. 743, which passed the Senate in 2013.
The one notable amendment is an added provision defining when a state may begin to collect sales use taxes from remote sales under the Act.
The bill provides that a state may not begin to exercise the remote seller collection:
Before the date following one year after the date of enactment; and
During the period beginning October 1 and ending December 31 of the first calendar year beginning after the date of enactment.

68. Newer Federal Legislation
Recent bills:
Remote Transaction Parity Act of 2015 (RTPA)
Alternative to the Marketplace Fairness Act.
Would authorize each member state of the Streamlined Sales and Use Tax Agreement (SSUTA) to require remote sellers to collect and remit sales and use tax.
Non- SSUTA states may require remote sellers to collect and remit sales and use tax if they comply with certain simplification requirements, including destination-based sourcing and providing a single entity within the state responsible for all state and local tax administration.

69. Newer Federal Legislation
Recent bills:
Remote Transaction Parity Act of 2015 (RTPA) (cont.)
Unlike the MFA, the RTPA would allow for a small remote seller phase-in:
In the first year, remote sellers with gross annual receipts exceeding $10 million and remote sellers utilizing an electronic marketplace for making sales to the public would be required to collect and remit sales taxes.
In year two, the receipts threshold would be reduced to $5 million.
In year three, the receipt threshold will be reduced to $1 million.
However; in all years. sellers utilizing an electronic marketplace will be required to collect notwithstanding annual receipts.
In the fourth and subsequent years, there will be no federal exemption for small remote sellers.

70. Newer Federal Legislation
Recent bills:
Online Sales Simplification Act of 2016
Discussion draft released on August
Act adopts a hybrid-origin approach for collecting, remitting and reporting remote sales tax on products and services, including guidelines and restrictions on states that do not impose a sales tax and do not participate in a statutory state tax clearinghouse established by participating states.
A previous version of this Act was released in January of 2015; Goodlatte modified the 2016 version of the draft legislation to allow the origin state to collect tax using the origin state’s base at the destination state’s rate.

71. Newer Federal Legislation
Recent bills:
No Regulation Without Representation Act of 2017
No collection or reporting obligation unless there is “physical presence”
2017 version of bill expands the “physical presence” rule to all taxes (not just sales/use tax) and to all regulations.

72. What is the Current State of Things?

73. Current State of Things
Amazon:
In late-2000s, Amazon began contracting with states to voluntarily collect sales taxes.
Now, Amazon is set to collect sales taxes in the overwhelming majority of the states.
Last year, Amazon added 10 more states to list of jurisdictions in which it collects sales tax from in-state purchasers.
Amazon now collects sales/use tax in almost every state that has a sales/use tax.
In 2016, Louisiana signed deal with Amazon to allow Amazon to voluntarily collect sales taxes from in-state purchasers.
Will other retailers also begin voluntarily collecting sales tax from in-state purchasers?

74. So Where Are We Now?

75. 2.0

76. Amazon Tax 2.0 – Marketplace Providers
New Target - Marketplace Providers:
New York
Minnesota
1st state to enact law
Washington
2nd state to enact law
NCSL model legislation
Incoporporates “marketplace provider” requirements
MTC model (drafting in progress)

77. Other Related Issues to Consider

78. Other Related Issues to Consider
Statutory Nexus
Local-level Nexus
Cloud Computing

80. Questions?