Multi-State Sales and Use Tax Attorneys
Multi-State Sales and Use Tax Attorneys
Multi-State Sales and Use Tax Attorneys
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Since Quill in 1992, states only have the power to impose taxes on businesses if they have a “physical presence” in the State. For example, in order for a state to be allowed to require a company to charge sales tax, the company must have a place of business in the State, employees in the State or have a representative in the State. However, as the economy has shifted, more and more States are enacting an “economic nexus” to impose a tax on businesses.

But, what is economic nexus?
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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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Our firm has been extremely involved with Florida’s wholesale tobacco tax for the past several years. Since Micjo in 2012, the Florida wholesale tobacco tax area has been fraught with seemingly endless litigation. In addition to the Micjo litigation, which focused on whether Florida tax applied to Federal Excise Tax (“FET”), there was another parallel of litigation which centered on a product called a blunt wrap or a cigar wrapper. Florida’s 1stDCA spoke loud and clear on April 6, 2016, by determining that the Wrap product is not subject to Florida tax, which appears to be a giant step towards putting an end towards at least 1 important issue for the industry.
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State and local governments are continually searching for ways to increase revenue through taxation of online companies conducting business within their state or county. One such way is by assessing a rental tax against online travel companies (“OTCs”).

OTCs typically facilitate the rental of a hotel room for vacationers and charge a fee for their services. OTCs play a significant role in the hotel rental business by providing consumers with a variety of choices based on price, location, and other factors. OTCs also provide benefits to hotels through promotion and advertising, and providing the ability for vacationers to rent a room at a lower price. Further, OTCs increase hotel occupancy rates and promote tourism thereby creating revenue for state and counties.
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Yet another state jumped on the band wagon to force out-of-state companies to collect and remit state tax. Specifically, South Dakota recently passed legislation adding sales and use tax collection requirements for out-of-state businesses conducting sales within the state. The legislation continues the trend of states enacting aggressive nexus statutes aimed at out-of-state online retailers.

The concept of nexus is derived from the Commerce Clause and the Due Process Clause of the United State Constitution. Essentially, these Federal limitations limit the ability of a state to tax business that takes place outside of the state. However, if a business has enough of connection to a state, then the state can force the business to abide by its state and local tax laws.

In Quill Corporation v. North Dakota (U.S. 1992), the U.S. Supreme Court held that nexus required a physical presence of the business within the state to require a business to follow a state’s state and local tax laws. The physical presence requirement has resulted in much litigation throughout the country. Essentially, there has been confusion as to how much of a connection to a state is required before a physical presence is established.

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I have been writing about the taxability of the online travel companies for some time. Recently, the Florida Supreme Court case of Alachua County v. Expedia, Inc., ruled that the local bed tax should be imposed on the amount the hotel received rather than the higher amount the customer pays the Online Travel Company (“OTC”). Similarly, the Court of Appeal of Wisconsin recently held that reservation facilitation services are not among the taxable services enumerated in section 77.52(2)(a)1, Wisconsin Statutes.

In the Wisconsin case, the Wisconsin Department of Revenue (“WDOR”) attempted to assess tax on any “internet service provider” that provides lodging throughout Wisconsin. The WDOR argued that the markup amount retained by the internet service provider is subject to tax under section 77.52(2)(a)1, Wisconsin Statutes.

However, the law worked very differently. Specifically, in Wisconsin, section 77.52(2)(a)1, Wisconsin Statutes, tax is only imposed on “the furnishing of rooms or lodging to transients by hotelkeepers, motel operators and other persons furnishing accommodations that are available to the public, irrespective of whether membership is required for use of the accommodations.” The crux of this case turns to the word “furnishing.” Is an online travel company “furnishing” a hotel room?

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A few weeks ago, I discussed the apportionment of NFL Players’ income for state tax purposes in the article “Saturday’s Challenge to Cleveland Income Tax for NFL Players.” The Supreme Court of Ohio determined that the proper allocation of an NFL Player’s salary is to take the number of work days in a state divided by the number of overall work days. For example, if a player spends 7 days in a state for work (more specifically, preparation for a game) and has 206 overall workdays, then the relative percentage of the allocated income to the state is 3.39%. As a result, each state can get their fair share of the NFL Player’s income.

Forbes Business published an interesting article claiming that if the Carolina Panthers were to win in Sunday’s Super Bowl, then Cam Newton’s effective tax rate would be 99.6%. Compare this to the outrageous effective tax rate of 198.8%. This does not even include the 40.5% Cam Newton would owe the IRS.

Taking a step back and looking a Cam Newton’s “incentivized” earnings, if (or “when” for all those optimistic sports fans out there) the Carolina Panthers win the Super Bowl, Cam Newton will earn Super Bowl winning bonuses of $102,000, add this to the mere $58,800 earned for Week 17 of the Regular Season and $71,000 of playoff bonuses to date. If Cam Newton and his Carolina Panthers lose, he will “only” earn a Super Bowl bonus of $51,000. This totals to $231,800 in earnings if Cam Newton were to win the Super Bowl compared to $180,800 if he were to lose. All of this is on top of Cam’s salary of about $10 million per season.

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In 2015, two cases highlighted important victories for athletes in personal income tax cases. Athletes often make very comfortable salaries for performing at the highest level within their profession. Along with the success of the job, comes traveling and performing in many cities. Being that professional athletes get paid on a game by game basis, state income taxes can also become somewhat complicated. Should athlete’s get paid based on their home state or city? Should they get paid based on the number of games they play in a particular city or state? Or should some different formula apply?

The City of Ohio was in the limelight in 2015. In Ohio, the city collects a personal income tax, along with the state. IN addition, Cleveland uses the “games-played” method to calculate the amount of an athlete’s income attributable to Ohio. In other words, in order to calculate Cleveland income, the athlete divides the number of games played in Cleveland by the total number of games played. As a result, Cleveland gets its fair share of the tax. Seems fair right?

As an example, take a typical NFL season with 16 regular season games and 4 preseason games or 20 total games. If an athlete only played 1 away game in a particular season, typical of an NFL season, then the ratio would be 1 game in Cleveland divided by 20 games or 5 percent of each player’s annual income allocated to Cleveland.

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Few understand or even bring up sales tax issues when they order pizza. The next time you order pizza, take a look at the receipt and see if the pizza shop charges you for the delivery. Taking it a step further, what happens if you purchase an item and pay for shipping charges? Is tax due on just the item, or is it also due on the delivery charge as well? The answer depends largely on whether the delivery charge is separately stated and if it is optional. This issue will be in center stage for a recent class action filed in Broward County against Pizza Hut.

Lauren Minniti, the class representative, purchased a pizza from Pizza Hut and had it delivered. Pizza Hut allegedly charged her tax based on the charge for the pizza and for the separately stated delivery fee instead of tax on the pizza alone. Was this correct?
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