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Effective December 1, 2017, Mississippi will be implementing a Rule requiring sellers lacking a physical presence in the state to collect sales tax if the sales into the state exceed $250,000 for the prior twelve months.

By way of background, the United States Supreme Court has held a state can only force a seller to collect sales tax if the seller has a physical presence in the state.  Here, the Mississippi Department of Revenue appears to be directly and purposefully contradicting this holding.  In fact, the Commissioner of the Department of Revenue is apparently personally aware of the contradiction but since the United States Supreme Court might overturn its position, then the Commissioner believes the Department is on solid ground.  The Department believes they have the authority to implement and immediately enforce this Rule based on the Department’s interpretation on existing statutes.

An interesting perspective comes in with regards to Mississippi House Bill 480.  This bill would have changed Mississippi’s nexus statute and been similar to the Rule being implemented by the Department.  However, the bill died in committee.  It is curious why the legislature would kill a bill that could bring more revenues into the state, unless the legislature potentially thought the bill would have been unconstitutional.  It is also perplexing why the legislature thought the bill was even necessary in the first place if the Department of Revenue already had the authority based on existing statutes.

The Rhode Island legislature has passed a bill, which has been signed into law, allowing for a limited time tax amnesty program.  Beginning on December 1, 2017, and lasting until February 15, 2018, taxpayers will have the ability to come clean on their tax liability.  While tax will still be due, interest will be reduced by 25% and penalties will be waived.  More importantly, the Department of Revenue will not attempt to impose civil or criminal sanctions against the disclosing taxpayer!

Amnesty programs are not always available.  When they do come around, you need to carefully consider whether amnesty is right for you.  While paying the back taxes can be a major drawback, it would be even worse to be charged with a crime.  Consider the pros and cons when weighing how to proceed.  It is also a good idea to figure out your exposure in the state before incurring the costs to disclose.  It could end up being more expensive to disclose than to pay whatever is assessed by the state.  Thus, you could have a good case for not disclosing based solely on costs.

Remember, some states keep their statute of limitations open for civil claims of back taxes against a taxpayer until something is done to trigger the running of the statute of limitations.  Most of the time, filing returns can trigger the statute of limitations to begin running.  Keep the statute of limitations in mind when figuring your total exposure and acceptable risk.  This framework could help you determine exactly what to do.

Pennsylvania jumped on the bandwagon of states making it difficult for businesses to continue to do business. Pennsylvania wants to place onerous requirements on remote sellers to either collect sales tax or comply with a “notice and reporting” requirement.

Interestingly enough, Pennsylvania provides a “remote seller” is someone who does not have a place of business (nexus) in Pennsylvania and makes taxable sales of tangible personal property. The reason this is interesting is because the very definition of “remote seller” contemplates federal constitutional provisions regarding nexus (i.e., a connection a business has with a state and whether the state can force the seller to collect sales tax) in providing sellers an option to collect sales tax or provide notice to the purchasers about owing tax and submitting a written report to the Department of Revenue.

With this in mind, Pennsylvania appears to be indirectly attempting to force businesses to comply with another administrative burden the business may not otherwise have to do. By making the notification to customers and reporting requirements to the Department so burdensome, Pennsylvania is hoping to force businesses, which otherwise lack nexus, to register and collect sales tax. Collecting the sales tax may be less burdensome than the administrative requirements Pennsylvania is attempting to impose. And if this was not bad enough, the law provides that if a business does not make an election, the business is “deemed” to have elected to comply with the “notice and reporting” requirements.

Texas is one of many states beginning to tax software as a service. Known as SaaS, these new impositions of tax are still struggling with practical application. Software as a service typically includes a situation in which a software company develops software to be accessed via the internet. The software company then operates or hosts the website through which the software is accessed by customers online. It is important to note that customers do not possess or own the software; rather they pay for access to it online.

To understand the difference, let’s use the example of a video game. A user can purchase a game and access it remotely online. That would be considered software as a service. However, is the game allows users to download the program, that is not software as a service because the customer ultimately has possession of the software on his or her computer. The distinguishing feature of SaaS is that the user does not own or possess the software.

The type of SaaS addressed by Texas in a a recent letter ruling is one in which a customer uses a web-based dashboard application to receive and process data, translate and store messages, and create analytic reports for the customer’s use. The Taxpayer describes and markets their business as “a better, faster way to communicate with today’s customers.” By using a dashboard application, subscribing businesses communicate and interact with their customers via text and other types of mobile messaging channels. Customers are able to text questions, orders, etc. to the business directly. The Taxpayer reconfigures the incoming message from the customer and so that it can be displayed in English on the business’s dashboard application. Following that, custom or canned replies, or both, are reconfigured and sent back to the customer. Meanwhile the analytic services provided include the generation of reports on the number of requests per day, the categories of requests, and the average response times.

The rise of internet sales has created a tax problem for states. States are having difficulty getting revenue from these sales because the sellers lack nexus. In the legal community, that nexus is known as a connection with a state which allows for it to exercise jurisdiction over a vendor. Nexus is a growing concern for internet sellers because they are not physically present and states have begun overreaching in their extension of jurisdiction over them. Last year, Oklahoma enacted the Oklahoma Retail Protection Act of 2016. The purpose of the act was to (1) expand nexus to include a presumption of its existence in cases where a vendor has certain relationships or arrangements with people who do have a physical presence in the state, and (2) require out-of-state vendors to provide annual reports to their customers acknowledging the potential use tax liability on their purchases without disclosing which particular items were purchased.

This first part, which expands the jurisdiction of Oklahoma to cover more out-of-state vendors than it did previously, ultimately only applies a presumption to vendors who fall into a particular category. That presumption can be overcome with proof that the person with physical presence who has a relationship with the vendor does not establish or maintain the sales market in Oklahoma for that vendor. But is even a presumption of nexus in those cases crossing a line? In Quill Corp. v. North Dakota, the United States Supreme Court made it very clear that physical presence must be required by a vendor for it to have nexus within a state. To extend that to “physical presence of anyone associated with the business” is, at the very least, stretching the holding in Quill.

Meanwhile, the second requirement of the Oklahoma Retail Protection Act of 2016 requires out-of-state vendors that are not required to collect tax to send records to their customers to whom sales have been made within the state. These records need to identify the total sales made by the vendor to its in-state customer without revealing the particular items purchased. As this requirement appears to be on vendors who have no physical presence whatsoever, even by a third party, it is questionable whether Oklahoma has the authority to enforce such a burden on companies who are located entirely outside of their state.[1]

Effective August 1, 2016, Pennsylvania has joined the ranks of states attempting to expand their sales and use tax jurisdiction over digital downloads. With out-of-state internet sales taking away sales tax revenue from the states in conjunction with the sharp decline in “hard copy” sales of various media, states are scrambling to expand their tax base and capture categories of items that escaped their grasp when they evolved with the internet and technology.

ACT 84 of 2016 specifically extends to items delivered to “a customer electronically or digitally or by streaming unless the transfer is otherwise exempt. This includes music or any other audio, video such as movies and streaming services, e-books and any otherwise taxable printed matter, apps and in-app purchases, ringtones, online games, and canned software, as well as any updates, maintenance or support of these items.” While e-books and videos otherwise would be printed or “hard copy” materials subject to tax, apps and certain in-app purchases have never been available through a tangible medium.

Ultimately, the Act regains a lost tax base while also adding new items to it. The question remains that if a Pennsylvania resident makes a purchase while on vacation in Florida and listens to, for example, a one-time podcast while still in Florida, then does Act 84 of 2016 extend to that purchase? In other words, if the sale and entire use occurs within Florida but the purchaser is a resident of Pennsylvania, is the sale subject to Pennsylvania tax?

On April 25, 2016 an important decision for the sports world came down from the U.S. 2nd Circuit Court of Appeals involving Tom Brady. Being a sports fan and a tax lawyer, the opinion sparked my interest. Challenging the National Football League seemed to mirror the challenges we launch against government agencies every day. While the case is not exactly analogous for a few reasons, it was not that dissimilar for a taxpayer’s challenge to a government agency.

From a procedural perspective, the case stems from the infamous “deflate gate” scandal of the 2015 AFC Championship Game. During the game Tom Brady, of the four-time Super Bowl champion New England Patriots, allegedly instructed personnel to deflate the footballs below the legal pressure level in order to enhance his ability to grip the football. Specifically, after the game in question, the NFL officials determined that all 11 of the Patriots balls were inflated below the allowable level of 12.5 PSI, while none of the Colts balls were below.
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