The Sales Tax Nexus Train Wreck has Begun!

By June 15, 2016 Uncategorized

June, 2016 marks the beginning of what could be a slow train wreck and dismantling of the current sales tax nexus standards established under North Dakota vs. Quill set by the U.S. Supreme Court in 1992.   The train wreck I’m referring to involves the movement of HR 2775 in the U.S. Congress and the initiation of a law suit challenging the new Alabama law on economic nexus.

Federal Legislation

In June of 2015, Congressman Jason Chaffetz introduced HR 2775 which is referred to as the “Remote Transactions Parity Act of 2015” or “RTPA”.  The RTPA joins the Market Place Fairness Act  “MFA”  that has also been introduced in Congress.  The RTPA has significant support from the Governor’s Association and many state Departments of Revenue.  For the most part, the RTPA allows Streamlined Sales Tax Program (SSTP) states to implement the RTPA 6 months after the bill is passed and signed into law.  States that are not SSTP members are required to adopt the SSTP provisions before they can participate in the law.  There are about 20 state currently listed as full SSTP members.

The RTPA allows states to enforce their sales tax laws on any “remote seller” that does not meet the “Small Remote Seller Phase-In” exemption.  This is a 3 year exemption effective for calendar years effective after the bill is signed.  Year 1 after the bill is signed the exemption applies to businesses with annual receipts of $10,000,000, Year 2 the exemption applies to businesses with sales of $3,000,000 or less, and Year 3 the exemption applies to businesses with sales of $1,000,000 or less.   These thresholds apply only to sales that are made directly from the company’s website.  Because businesses are entering the e-commerce space on a daily basis, it seems quite unfair to offer an exemption to existing remote sellers but not new ones.

However, if the business participates in a “electronic marketplace” then the sales thresholds noted above do not apply.  An example of an ‘electronic marketplace” would be e-Bay and probably the Amazon FBA program. As such, if the RTPA is signed, an individual located in Georgia selling $100 of property on e-Bay to a customer in Ohio, would be required to register and collected Ohio sales tax on the transaction.  The RTPA also provides a huge incentive for software companies to be deemed “certified providers” and to offer some sort of free technology for remote sellers to use.

If either the RTPA or the MFA are passed and signed into law, there would be some process (albeit chaotic) for implementing the law and businesses would have some sense of timing there would be some uniformity.

Alabama

Effective January 1, 2016, the state of Alabama implemented a very aggressive economic nexus theory that deems any company with more than $250,000 of remote sales into the state to have nexus.  No physical presence is needed.  Some businesses registered but many did not.  One business that did not register was Newegg technology company.  Newegg is a remote seller of computers, games, monitors, and software.  Making good on her promise to assess tax on any businesses that should have registered, Alabama Revenue Commissioner Magee filed an assessment against Newegg for $186,000 of tax for the months of January and February.  On June 8th, Newegg filed an appeal of that assessment.  In response to this law suit, Magee said “I’m really excited.  Let’s see if we can get something up to the Supreme Court sooner rather than later”.

The law suit claims that the Alabama statute and rule is ‘without force or effect’ claiming it collides with the commerce clause of the U.S. Constitution and is contrary to many existing court cases that are specific to this issue.

Train Wreck in Progress

Congress has been dealing with this nexus issue for almost 30 years and has made no progress at all.  However, the e-commerce landscape is changing very rapidly and the revenue needs of state and local governments are also growing.  The timing may be right for some legislative solution during the next year or so.   As outlined in the action being taken by Alabama, the states are not waiting for Congress to act.  They are looking for a fight and they now have one.

I’m speculating that the Alabama court case will move more quickly than the Congressional act.  The speed with which the Alabama case could move through the state and federal courts is unknown.  It could be a year or more before the case is ripe for review by the Supreme Court. There is also no assurance that the Court would even hear the case. (I’m guessing they would, though.)

If the Supreme Court upholds the Alabama economic theory or, even worse, just nullifies the Quill decision on reasons unrelated to the Alabama law, then each state with a sales tax would be free to adopt whatever rules it wants for the collection of sales tax by remote sellers.  There would be no requirement for uniformity and no “small business” exemption.  There could even be retroactive tax assessments by states if they believe any decision from the Court could be effective for prior tax years.

A Court ruling in favor of the states makes any federal legislation meaningless. Worse, if Congress acts at the same time the courts are reviewing the Alabama case (or other cases), then there is the potential for a huge legal conflict between what law applies and when the laws are effective.

For remote sellers and other multistate businesses, the chaos and confusion is frustrating.  20 years ago, you had the ‘brick and mortar’ stores complaining that the web stores were not collecting tax.  Now, with more webstores charging tax, you have one group of e-commerce companies complaining that their e-commerce competitors are not charging tax but should be.  The dynamics have certainly changed.

Stay tuned as these events playout.  If you are a multistate business, you will be impacted by either the federal legislation or any court decision that may be issued on this matter.

June 2016 marks the beginning of what could be a slow train wreck and dismantling of the current sales tax nexus standards established under North Dakota vs. Quill set by the U.S. Supreme Court in 1992.   The train wreck I’m referring to involves the movement of HR 2775 in the U.S. Congress and the initiation of a law suit challenging the new Alabama law on economic nexus.

Federal Legislation

In June of 2015, Congressman Jason Chaffetz introduced HR 2775 which is referred to as the “Remote Transactions Parity Act of 2015” or “RTPA”.  The RTPA joins the Market Place Fairness Act  “MFA”  that has also been introduced in Congress.  The RTPA has significant support from the Governor’s Association and many state Departments of Revenue.  For the most part, the RTPA allows Streamlined Sales Tax Program (SSTP) states to implement the RTPA 6 months after the bill is passed and signed into law.  States that are not SSTP members are required to adopt the SSTP provisions before they can participate in the law.  There are about 20 state currently listed as full SSTP members.

The RTPA allows states to enforce their sales tax laws on any “remote seller” that does not meet the “Small Remote Seller Phase-In” exemption.  This is a 3 year exemption effective for calendar years effective after the bill is signed.  Year 1 after the bill is signed the exemption applies to businesses with annual receipts of $10,000,000, Year 2 the exemption applies to businesses with sales of $3,000,000 or less, and Year 3 the exemption applies to businesses with sales of $1,000,000 or less.   These thresholds apply only to sales that are made directly from the company’s website.  Because businesses are entering the e-commerce space on a daily basis, it seems quite unfair to offer an exemption to existing remote sellers but not new ones.

However, if the business participates in a “electronic marketplace” then the sales thresholds noted above do not apply.  An example of an ‘electronic marketplace” would be e-Bay and probably the Amazon FBA program. As such, if the RTPA is signed, an individual located in Georgia selling $100 of property on e-Bay to a customer in Ohio, would be required to register and collected Ohio sales tax on the transaction.  The RTPA also provides a huge incentive for software companies to be deemed “certified providers” and to offer some sort of free technology for remote sellers to use.

If either the RTPA or the MFA are passed and signed into law, there would be some process (albeit chaotic) for implementing the law and businesses would have some sense of timing there would be some uniformity.

Alabama

Effective January 1, 2016, the state of Alabama implemented a very aggressive economic nexus theory that deems any company with more than $250,000 of remote sales into the state to have nexus.  No physical presence is needed.  Some businesses registered but many did not.  One business that did not register was Newegg technology company.  Newegg is a remote seller of computers, games, monitors, and software.  Making good on her promise to assess tax on any businesses that should have registered, Alabama Revenue Commissioner Magee filed an assessment against Newegg for $186,000 of tax for the months of January and February.  On June 8th, Newegg filed an appeal of that assessment.  In response to this law suit, Magee said “I’m really excited.  Let’s see if we can get something up to the Supreme Court sooner rather than later”.

The law suit claims that the Alabama statute and rule is ‘without force or effect’ claiming it collides with the commerce clause of the U.S. Constitution and is contrary to many existing court cases that are specific to this issue.

Train Wreck in Progress

Congress has been dealing with this nexus issue for almost 30 years and has made no progress at all.  However, the e-commerce landscape is changing very rapidly and the revenue needs of state and local governments are also growing.  The timing may be right for some legislative solution during the next year or so.   As outlined in the action being taken by Alabama, the states are not waiting for Congress to act.  They are looking for a fight and they now have one.

I’m speculating that the Alabama court case will move more quickly than the Congressional act.  The speed with which the Alabama case could move through the state and federal courts is unknown.  It could be a year or more before the case is ripe for review by the Supreme Court. There is also no assurance that the Court would even hear the case. (I’m guessing they would, though.)

If the Supreme Court upholds the Alabama economic theory or, even worse, just nullifies the Quill decision on reasons unrelated to the Alabama law, then each state with a sales tax would be free to adopt whatever rules it wants for the collection of sales tax by remote sellers.  There would be no requirement for uniformity and no “small business” exemption.  There could even be retroactive tax assessments by states if they believe any decision from the Court could be effective for prior tax years.

A Court ruling in favor of the states makes any federal legislation meaningless. Worse, if Congress acts at the same time the courts are reviewing the Alabama case (or other cases), then there is the potential for a huge legal conflict between what law applies and when the laws are effective.

For remote sellers and other multistate businesses, the chaos and confusion is frustrating.  20 years ago, you had the ‘brick and mortar’ stores complaining that the web stores were not collecting tax.  Now, with more webstores charging tax, you have one group of e-commerce companies complaining that their e-commerce competitors are not charging tax but should be.  The dynamics have certainly changed.

Stay tuned as these events playout.  If you are a multistate business, you will be impacted by either the federal legislation or any court decision that may be issued on this matter.

June 2016 marks the beginning of what could be a slow train wreck and dismantling of the current sales tax nexus standards established under North Dakota vs. Quill set by the U.S. Supreme Court in 1992.   The train wreck I’m referring to involves the movement of HR 2775 in the U.S. Congress and the initiation of a law suit challenging the new Alabama law on economic nexus.

Federal Legislation

In June of 2015, Congressman Jason Chaffetz introduced HR 2775 which is referred to as the “Remote Transactions Parity Act of 2015” or “RTPA”.  The RTPA joins the Market Place Fairness Act  “MFA”  that has also been introduced in Congress.  The RTPA has significant support from the Governor’s Association and many state Departments of Revenue.  For the most part, the RTPA allows Streamlined Sales Tax Program (SSTP) states to implement the RTPA 6 months after the bill is passed and signed into law.  States that are not SSTP members are required to adopt the SSTP provisions before they can participate in the law.  There are about 20 state currently listed as full SSTP members.

The RTPA allows states to enforce their sales tax laws on any “remote seller” that does not meet the “Small Remote Seller Phase-In” exemption.  This is a 3 year exemption effective for calendar years effective after the bill is signed.  Year 1 after the bill is signed the exemption applies to businesses with annual receipts of $10,000,000, Year 2 the exemption applies to businesses with sales of $3,000,000 or less, and Year 3 the exemption applies to businesses with sales of $1,000,000 or less.   These thresholds apply only to sales that are made directly from the company’s website.  Because businesses are entering the e-commerce space on a daily basis, it seems quite unfair to offer an exemption to existing remote sellers but not new ones.

However, if the business participates in a “electronic marketplace” then the sales thresholds noted above do not apply.  An example of an ‘electronic marketplace” would be e-Bay and probably the Amazon FBA program. As such, if the RTPA is signed, an individual located in Georgia selling $100 of property on e-Bay to a customer in Ohio, would be required to register and collected Ohio sales tax on the transaction.  The RTPA also provides a huge incentive for software companies to be deemed “certified providers” and to offer some sort of free technology for remote sellers to use.

If either the RTPA or the MFA are passed and signed into law, there would be some process (albeit chaotic) for implementing the law and businesses would have some sense of timing there would be some uniformity.

Alabama

Effective January 1, 2016, the state of Alabama implemented a very aggressive economic nexus theory that deems any company with more than $250,000 of remote sales into the state to have nexus.  No physical presence is needed.  Some businesses registered but many did not.  One business that did not register was Newegg technology company.  Newegg is a remote seller of computers, games, monitors, and software.  Making good on her promise to assess tax on any businesses that should have registered, Alabama Revenue Commissioner Magee filed an assessment against Newegg for $186,000 of tax for the months of January and February.  On June 8th, Newegg filed an appeal of that assessment.  In response to this law suit, Magee said “I’m really excited.  Let’s see if we can get something up to the Supreme Court sooner rather than later”.

The law suit claims that the Alabama statute and rule is ‘without force or effect’ claiming it collides with the commerce clause of the U.S. Constitution and is contrary to many existing court cases that are specific to this issue.

Train Wreck in Progress

Congress has been dealing with this nexus issue for almost 30 years and has made no progress at all.  However, the e-commerce landscape is changing very rapidly and the revenue needs of state and local governments are also growing.  The timing may be right for some legislative solution during the next year or so.   As outlined in the action being taken by Alabama, the states are not waiting for Congress to act.  They are looking for a fight and they now have one.

I’m speculating that the Alabama court case will move more quickly than the Congressional act.  The speed with which the Alabama case could move through the state and federal courts is unknown.  It could be a year or more before the case is ripe for review by the Supreme Court. There is also no assurance that the Court would even hear the case. (I’m guessing they would, though.)

If the Supreme Court upholds the Alabama economic theory or, even worse, just nullifies the Quill decision on reasons unrelated to the Alabama law, then each state with a sales tax would be free to adopt whatever rules it wants for the collection of sales tax by remote sellers.  There would be no requirement for uniformity and no “small business” exemption.  There could even be retroactive tax assessments by states if they believe any decision from the Court could be effective for prior tax years.

A Court ruling in favor of the states makes any federal legislation meaningless. Worse, if Congress acts at the same time the courts are reviewing the Alabama case (or other cases), then there is the potential for a huge legal conflict between what law applies and when the laws are effective.

For remote sellers and other multistate businesses, the chaos and confusion is frustrating.  20 years ago, you had the ‘brick and mortar’ stores complaining that the web stores were not collecting tax.  Now, with more webstores charging tax, you have one group of e-commerce companies complaining that their e-commerce competitors are not charging tax but should be.  The dynamics have certainly changed.

Stay tuned as these events playout.  If you are a multistate business, you will be impacted by either the federal legislation or any court decision that may be issued on this matter.

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