Sales Tax 2013 Representatives, Whistleblowers, Class Actions and Federal Legislation

Insights December 9, 2013
State and local taxes include a variety of taxes – income, franchise, sales, use, gross receipts, hotel occupancy, real property transfer, telecommunication and myriad other excise taxes imposed by thousands of jurisdictions.  In this four-part series, we focus on the most prevalent of these taxes – sales and use taxes.  Here, we alert Rimon’s clients to three significant developments affecting businesses nationwide.  Clients wanting to know more about these or any other state tax issues should contact David Fruchtman or the Rimon partner generally responsible for their legal services.
1.       Amazon Laws.  Over the last five decades, two United States Supreme Court decisions have dominated the sales and use tax landscape by requiring remote sellers to have a physical presence in a state before they are responsible for collecting the state’s sales and use taxes.[1]  However, over the last five years the states struck back by enacting laws leveraging another, even older, Supreme Court decision treating independent contractors as creating tax presence for out-of-state vendors.[2]  During 2013, three high-level courts issued decisions regarding the validity of these laws, with the following results: In Colorado, qualifying remote vendors are required to collect and disseminate sales and use tax information but are not required to collect the taxes.[3]  In New York State, qualifying remote vendors must collect and remit sales and use taxes.[4] And in Illinois, the state’s attempt to impose a collection and remittance responsibility on Internet sellers was ruled unconstitutional and ineffective.[5]  Approximately 20 other states have similar laws on which state and federal courts have not yet ruled.[6]  Practical Tip: Considering the courts’ inconsistent decisions, businesses would do well to plan to avoid the issue.  For example, in some states, businesses can avoid such tax collection responsibility by compensating “representatives” on a non-commission basis.
2.       Whistleblower Actions and Class Action Lawsuits.  Some 20 states and localities have False Claim Acts (“Acts”) that are applicable to taxes.[7]  Under these Acts, whistleblowers can initiate lawsuits if they have non-public information indicating that a business is under-collecting or under-paying taxes.  As one example, a whistleblower’s alert led New York State to sue Sprint-Nextel Corporation for $300 million due to an alleged under-collection of sales taxes.  Such actions, as well as the states’ frequent imposition of liability on retailers for under-collection of sales taxes, can cause businesses to collect tax on all of their retail sales without regard to the actual taxability of the sale. Unfortunately, businesses that over-collect sales tax (e.g., by collecting tax on nontaxable sales of goods and services) are increasingly being sued by class action lawyers under another application of the Acts. Hundreds of these class action lawsuits have been filed nationally.   Practical Tip:  Multistate businesses are especially vulnerable to these lawsuits because of the difficulty of tracking tax treatments for hundreds of products and services in thousands of state and local tax jurisdictions.  A business that receives notice of a class action lawsuit should immediately alert counsel.
3.       Federal Legislation.  In May, 2013, the United States Senate passed legislation permitting the states to impose sales tax collection obligations on remote retailers meeting a sales threshold of $1 million annually (S. 743). The Bill was sent to the House of Representatives (as H.R. 684), where it has since stalled in the House Judiciary Committee.  However, this Bill has an unusually high profile for tax legislation, and has the support of the states, main street retailers, big box retailers, shopping center owners and Amazon.com.  It therefore seems likely that the House will vote on the Bill during 2014.  Practical Tip: Look for the House to greatly increase the minimum amount of sales required before a retailer is required to collect and remit taxes in remote jurisdictions.
In our next State Tax Alert: State and local taxation of cloud computing
[1]  National Bellas Hess v. Department of Revenue of the State of Illinois, 386 U.S. 753 (1967) and Quill Corporation v. North Dakota, 504 U.S. 298 (1992).
[2]  Scripto, Inc., v. Carson, as Sheriff of Duval County, Florida, 362 U.S. 207 (1960).
[3]  Direct Marketing Association v. Brohl, Executive Director, Colorado Department of Revenue, 12-1175, (U.S. Court of Appeals, 10th Circuit, Aug. 20, 2013).
[4]  Overstock.com, Inc., v. New York State Department of Taxation and Finance, et al., 20 NY3d 586 (Ct. App., March 28, 2013).
[5]  Performance Marketing Association, Inc., v. Hamer, Director of Revenue, 2013 IL 114496 (Ill. S.Ct., Oct. 18, 2013).
[6]  Formulation and Enforcement of “Amazon” Taxes, G. Yu, State Tax Today (February 4, 2013).
[7]  Survey of State Law Regarding Tax Class Action Refund Claims, MTC Uniformity Committee, Sales and Use Tax Subcommittee (July 12, 2013).
This State Tax Alert (“Alert”) is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert.© 2013 David A. Fruchtman