Multi-State Tax Law Blog

As many know, Amazon has been clashing with many states whether it should be required to charge, collect, and remit sales tax. Many states have taken position that Amazon’s affiliates and distribution centers created the dreaded “nexus.” If an online retailer (or any company) has so-called “nexus” it is required to charge, collect, and remit tax in that state. With millions of dollars at stake, Amazon threatened to pull its affiliate programs in those states which, in turn, would cut tens of thousands of jobs. Fearful of huge job cuts in a struggling economy, many states allowed Amazon a grace period, permitting the company to continue its program and not collect sales tax for x number of years in the future. Once the grace period expired, then Amazon would have to charge, collect, and remit tax. In return, the state would keep its jobs as well as get more tax revenue going forward. It appeared to be a win-win for all parties involved.

It was recently announced that Amazon will collect tax in North Carolina. Based on projections, North Carolina is licking its chops at the increase of an additional $20-30 million in state revenue it will receive. North Carolina’s fiscal research division estimated that city and county governments would benefit to the tune of about $10-$13 million. The revenue should begin flowing for the state as soon as February 1, 2014 and it would be an understatement to say this will be a huge benefit for the state’s economy.

Taking a national view, each year that grace period is expiring in at least three more states. In states like Indiana, Nevada, and Tennessee online shoppers will be charged sales tax by Amazon. Overall, this brings the total to 19 states in which Amazon will charge, collect, and remit sales tax. Even more eye opening, those 19 states represent about 180 million or over half of the population in the United States. The addition of the three latest states will also generate more than $50 million a year in state tax revenue.

Going back to the basics of a sales tax regime, sales tax is generally due on the sale of tangible personal property at retail in a state. Here, a newspaper is tangible property and as long as it is sold at retail within the state’s borders, then it is generally taxable. While it may seem counter intuitive, many states adhere to this general view and impose a sales tax newspaper. A few states, for public policy reasons, have determined that newspapers should be exempt, therefore, make an exception to the general rule and statutorily take newspapers out of the sales tax rule. Maine imposed a reduced sales tax of 5% on the sales of newspapers until recently.

In a recent, somewhat comical (comical from a state and local tax attorney’s perspective) piece, Businessweek reported that Maine will begin taxing newspapers at the higher rate of 5.5% beginning in October, 2013. Although usually anti-tax, Gov. Paul LePage thought it was in the state’s best interest to lift the exemption on newspapers and magazines from 5 to 5.5%.

The tax will certainly raise revenue for the state but one can only wonder the governor’s true motive in increasing taxes. The Republican governor has been on record joking about blowing up the headquarters of the Portland Press Herald, Maine’s largest newspaper. When asked if this was a direct shot at newspapers, the governor responded that buying a newspaper is “like paying somebody to tell you lies.”

I have been writing ad nauseum for the past few years on the Online Travel Company (“OTC”) debate. Being that my home state of Florida relies so heavily on the tourism industry, this has been a pressing issue for some time. It was reported this week by the Washington Post and BNA Tax that the debate has drawn national attention. Specifically, an influential task force known as the National Conference of State Legislatures (“NCSL”) examined the issue in an attempt to achieve national uniformity.

For those of you who have not been following the debate, the issue can most easily be explained by using a simple example. Consider you are going on a vacation and you find a room at a hotel, using Expedia, Orbitz, or Travelocity, for $100 online. Mechanically, how this works, is that you, the customer, purchases a room for $100. In the background, the OTC (Expedia, Orbitz, etc) has contracted with the hotel to purchase the room for $80. To keep numbers simple, let’s suppose that there is a 10% bed-tax on the room. In this simple scenario, how much should the state get? Some believe the state should get $10, the tax on the full $100 and the $10 balance is the OTC’s profit. Others believe the state should only get $8 and the OTC makes $12 profit instead of $10. The OTC’s argue that they are merely the middleman and not actually renting the room. This small discrepancy results in hundreds of millions of dollars for state and local governments, especially in high tourism states like Florida and California. Further, with slightly different statutory frameworks, states have interpreted this issue very differently.

Recently in Atlanta, the NCSL determined that the preferred method was in the states’ favor and pushed for tax on the higher price. This method has also allegedly been backed by the hotel industry. Conversely, the travel companies still maintain that this change will not only hurt them but it will also penalize the offline travel agents.

A host of problems have been created from a state and local tax perspective over the last few decades relating to sales tax on technology. Aside from the Amazon issue most are aware of, there has been a multi-state tax debate as to whether certain software charges are subject to sales tax. Under the traditional sales tax view, sales of tangible personal property are subject to sales tax. However, how is software, which may or may not be delivered in tangible form, taxed? Is it tangible personal property or tax exempt intangible information? Many states have adopted laws to capture software in the taxable base while other states depend on certain aspects of the software. Recently, Minnesota and Massachusetts have tackled different aspects of sales tax on technology.

On September 24, 2013, SAP Retail Inc. v. Comm’n of Revenue was decided. In the case, the software company not only provided taxable software products but also provided implementation services. The court was asked to address whether the consulting and implementation services were separate from the sale of the software itself, or if the services were so closely connected to the software sale that they were also taxable. Despite creative arguments on the side of the state, the court determined that the services were not fabrication services because the company did not furnish the items used to create the software. Moreover, the court determined that the consulting services were an independent and unrelated transaction because one could buy the software without the service of visa versa. Therefore, at least for the moment, consulting and implementation software services do not appear to be taxable in Minnesota.

It was also reported this week that Massachusetts voted to veto a technology tax on computer and software services. Specifically, the House voted 156-1 to repeal the tax, which estimated revenue generation of about $161 million. Massachusetts apparently did not want to send a message and discourage innovators from setting up shop in Massachusetts.

Many states, including my home state of Florida, have been unbundling the online travel company mess from a tax perspective over the last few years. Like many state and local tax issues, states have been all over the map when it comes to the taxation of new technology-type transactions. In the online travel industry, companies like Orbitz, Expedia, and Hotels.com (“OTCs”) purchase rooms at a low rate and facilitate a deal with customers to rent them from the hotel. Like many businesses tend to do, the online travel company turns a profit in this transaction. The problem that has arisen is whether the state and its counties should collect tax on the price charged from the hotel to the OTC or the higher price charged from the OTC to the customer.

One of the few states that seem to have a final determination is Georgia. Georgia is one of the few states that had the issue go up the judicial ladder to its Supreme Court. Ultimately in City of Atlanta v. Hotels.com, 710 SE 2d 766 (Ga 2011), the court ruled in favor of the city and determined that the bed tax applied to the higher amount. As an aside, many states have ruled exactly the opposite and it is worth pointing out that the counties, not the states, have been the aggressors in these cases.

After remaining dormant for a few years, the Georgia Supreme Court ruled that the case was still not closed. Apparently, in the opinion, the Georgia Supreme Court ruled in a footnote that the trial court did not rule on the city’s conversion claim, so it could not rule on the claim on appeal. The case went back to the trial level court on this issue, and the city amended its complaint to add other counts against the OTCs.

Over the past year or so, click through or affiliate nexus has dominated the sales and use tax professional community. Contrary to popular belief this is not a new a “new” tax. Rather, the issue really boils down to whether certain online companies can be forced to collect sales and use tax in states in which they have no physical presence. In March 2013, New York’s highest court ruled that a state can make a llaw that required an online retailer to collect tax in a state in which it does not have any traditional physical presence. This click through nexus applies if a company pays commission for the in-state company’s web site for generating sales for the online retailer. There were actually two such cases, against Amazon and Overstock. Both companies believe that this ruling runs contrary to the Dormant Commerce Clause of the United States Constitution and prior United States Supreme Court rulings. Therefore, on August 23, 2013, both Amazon and Overstock filed a petition to ask the United States Supreme Court to hear the case.

While technology has changed the way we live and do business, the Supreme Court has not heard a case since 1992. This has lead to difficult planning for businesses and state and local tax professionals since the invention of the internet. We get calls almost daily dealing with nexus related issues and what a company should be doing in this era of uncertainty.

Many believe SCOTUS will take the case. After all a case like this has not been heard in some 20 years. On the flip side others believe that SCOTUS has bigger fish to fry than mundane state and local tax matters. Perhaps it is still waiting on Congress to act following the lashing it delivered in 1992. It is also worth pointing out that our partner, James Sutton, has been asked to file an amicus brief asking SCOTUS to take the case. Needless to say we will be following this one closely. For a more detailed analysis please visit our firm’s wesbite.