State and Local Taxation
Wisconsin department of revenue vs. William Wrigley Jr. co
-defined as solicitation of order -company was not operating de minimis if you take into consideration all the activities Determined solicitation limitations Protected solicitation: includes verbal requests for orders and any speech or conduct that implicitly invites an order De minimis: company does not forfeit immunity because it performed some in state activities that exceed solicitation; only if the activity creates a "nontrivial additional connection with the taxing state"
Explain the facts of the National Bellas Hess v. Illinois Department of Revenue
>NBA is located in North Kansas and incorporated in Delaware > It mails advertising "flyers" as a supplement to its twice-annual catalogs mailed via common carrier/usps > It has nos physical facilities, agents, contracts, bought advertising of any kind within the state of IL >Customers mail orders to NBA and orders are accepted in Missouri, where it has a plant
Sales tax: exemptions: sales of businesses: Texas occasional sale: what are operating assets
"Operating assets" mean those assets used exclusively by the enterprise in providing the product or service but does not mean assets maintained and used for general business purposes in addition to use by the specific enterprise.
Northwestern States Portland Cement Co. v. Minnesota
- State cannot impose taxes upon person passing through the state or coming into it merely for a temporary purpose. - Due Process Clause - Commerce Clause. - Supreme Court held that for the first time, that the commerce Clause did not prohibit a state from imposing a fairly apportioned, direct corporate income tax on an out-of-state business carrying on an exclusively interstate business within the taxing state.- Potentially gave the state's the ability to impose an income tax on an out-of-state corporation that solicited sales within a state.
Property Tax: in addition to real property, what do many states impose a property tax on
Many states also tax tangible personal property that is held for the production of income • Commonly called "business personal property" (e.g., for businesses, this means equipment, furniture, computers, inventory)
Property Tax: Where does the money from property tax dollars go
Mostly towards education Also, roads, hospitals, fire depertments etc
Sales tax: exemptions: sales of businesses: Will a stock purchase agreement contain a provision related to sales tax? will an asset purchase agreement contain a provision related to sales tax?
No Yes
Sales taxes: the true object test and commonly understood test: are either of these tests relevant when dealing with a mixed transaction?
No They only seek to determine which bucket to put the entire transaction in one category (taxable) or another (untaxable)
Business Taxes: the types of entities subject to these taxes
Note that it varies from state to state which are taxed Corporations Limited Liability Companies Limited Partnerships General Partnerships S Corporations
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: facts--the business structure at issue and the situation
Facts • The structure: • Geoffrey is a wholly-owned subsidiary of Toys R U and is incorporated in Delaware with its principal offices in that state. Has no employees or offices in South Carloina and owns no tangible property there. Geoffry gave Toys R Us the ownership of trademarks and trade names pursuant to a licensing agreement in exchange for a royalty of 1% of Toys R Us's net sales. Toys R Us was allowed to deduct those royalty payments from its income taxes, thereby reducing its federal and state income tax. It save it a lot of money. It also created "nowhere income," which is able to escape all state taxation. • Toys R Us did business in South Carolina and made paid a portion of the sales generated there in royalty payments to Geoffrey. Toys R Us wanted to deduct those royalty payments from the income taxes it paid to SC. • There was a SC statute: Imposes income tax on all corporations doing business in SC regardless of whether the only property they own there is intangible
Tyler Pipe Industries, Inc. vs. Washington
Facts: OOS corporation had local sales agents in WA. The state asserted that TP had nexus even though they had no property in the state b/c of the sales agents. Decision: SCOTUS reaffirmed its ruling in Scripto that a non-resident company is subject to taxation if it has agents in the state that help establish and maintain a market in that state. Significance: As long as reps of a non-resident company assist in establishing and maintaining a market in that state, nexus has been created.
Sales Taxes: What are the 2 questions that determine whether a sales tax is imposed on a particular item?
Has to do with two questions: • 1. What is a "taxable sale" that is subject to sales tax in the first place? • 2. Even if it is a "taxable sale," is there an exemption?
What was IL's argument in National Bellas Hess
Illinois statute to classify National as a "[r]etailer maintaining a place of business in this State," since that term includes any retailer:"Engaging in soliciting orders within this State from users by means of catalogues or other advertising, whether such orders are received or accepted within or without this State."
Property Tax: Where do they get imposed and on what
Imposed generally at the local level in every state Imposed on real property (e.g., for individuals, this means your house - land and structure; for businesses - real property, warehouses, etc.) • Imposed on individuals and businesses
Jurisdiction to tax: Constitutional Requirements: Commerce Clause: For sales and use tax collection purposes--the rule's exception
In Quill, the Court left open the question of how substantial the physical presence has to be. This is decided on a state-by-state and case-by-case basis. However, it is somewhat safe to say that a sufficient physical presence is any amount, rather than a substantial presence.—anything that is not de minimus and is measureable
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: the factors: payroll factors
Payroll Factors Payroll factor generally consists of compensation paid in state by the taxpayer in the regular course of the trade or business during the tax period • Compensation typically consists of: Wages/Salary Commissions Any other form of remuneration to employees (but sometimes does not include amounts paid to independent contractors, depends on state; sometimes compensation paid to executive officers also excluded)
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: the factors: property factor
Property factor generally consists of TP's real and tangible personal property (buildings, machinery, equipment, real estate) Some items depend on state - for example, CA includes furniture and fixtures, but Arizona does not Intangible property is usually not included in the property factor Additionally, only property used to produce business income, not property that produces nonbusiness income, is generally included in the property factor
Sales Taxes: who is the real taxpayer?
Purchasers/consumers are the real taxpayers; retailers generally responsible for collecting and remitting the taxes to the state (if nexus for sales/use tax collection purposes) However, if retailer fails to collect, taxing authority generally can go after both retailer and consumer (if retailer has nexus)
Jurisdiction to tax: Constitutional Requirements: Commerce Clause: For sales and use tax collection purposes--the rule
Quill established a bright-line physical presence test whereby an entity would only have a sufficient nexus with a state if the entity owns property there. This physical presenence must be more than de minimus, which meant more than "a few floppy disks" in Quill.
Property tax: Who does it and How do they asses the value of the property taxes
Appraisal districts determines it. Appraisal districts use three methods to value property: - Market value: What are properties similar to this property selling for? The value is an estimate of the price the property would sell for on Jan. 1; appraisal district compares property to other similar properties that have sold recently Income: What would an investor pay in anticipation of future income from the property? Cost: How much would it cost to replace the property with one of equal utility? Generally determined every 2 years
Sales tax: exemptions: sales of businesses: asset sales: are they always taxed?
Asset acquisitions can trigger sales tax, but... Inventory or non-inventory items • Inventory are usually always exempt, with a valid resale certificate • Non-inventory items may qualify for exemptions under a business reorganization exemption Few states: a merger is not a conveyance of assets by the operation of law
Sales tax: exemptions: sales of businesses: occasional sale: broad vs. narrow rules
Board would be a state that said if you're in the business of selling TPP, but not the particular type of TPP (like the gift shop selling cash register instead of candle) that would be covered.
Sales tax: exemptions: sales of businesses: what 2 types of sales are there and which has tax?
Stock sale don't get tax Asset sale usually get taxed
Sales taxes: Taxable sales: what is taxable and what is never taxable?
What is taxable? • (1) Tangible personal property • (2) certain services • ** never intangible property
Cases: Quill Corporation v. North: Holding: sub-issue 1 (did North Dakota's tax violate the Due Process Clause)
Reasoning: Quill had purposefully directed its activities at ND and the magnitude of those contacts were more than sufficient for due process purposes (the "deluge of catalogs"); and the tax was related to the benefits Quill was receiving (Court didn't really discuss this point in detail). Essentially, the Court found that Quill's economic presence in the state was sufficient !!!!!!!!!!!!because the Due Process Clause does not require physical presence for there to be a sufficient nexus.!!!!!!!!!!!!!
Complete Auto Transit, Inc. vs. Brady
picks up and delivers trucks to dealers within 48hrs >abandonment of drafting formalism as a predicate for constitutional decisions >did not create but was the first to recite the four prongs in one decision Tax will survive Commerce Clause challenge provided it meets following: Four Prong Test: 1. Is applied to an activity which has a substantial nexus with the taxing state 2. It is fairly apportioned 3.Does not discriminate against interstate commerce, 4.Is fairly related to the services provided by the state.
Jurisdiction to tax: Constitutional Requirements: Due Process Clause--the basic rule and (3) specific requirements
• "The Due Process Clause 'requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.'" Quill • The question is whether a defendant's connections with a state makes it "reasonable" to tax it. Quill • (1) Was there a purposeful availment? • (2) Did it receive benefits from the taxing state? • (3) Were those taxes related to the benefits that the taxpayer would receive from the taxing state?
Jurisdiction to tax: P.L. 86-272: Under P.L. 86-272, what are de minimis activities?
• De minimis activities are those that, when taken together, establish only a trivial connection with the taxing state • If activities are conducted pursuant to a regular company policy, on a continuing basis, then likely not de minimis • Establishing that the disqualifying activities only account for a relatively small part of the business does not per se mean de minimis
Sales taxes: exemptions: the resale exemption: the important thing to remember
• Each item should only be taxed once and it is the "end user" consumer who pays that tax • Accordingly, sales and use tax systems in Texas exempt "intermediate" sales Manufacturer, wholesale retailer (supplier), retailer, consumer It's only the consumer who should be taxed on that. No one else should be paying the sale or use tax
Jurisdiction to tax: Constitutional Requirements: economic presence and due process
• Even in jurisdictions that require only economic presence for Commerce Clause Purposes, the Commerce Clause is still a harder requirement to satisfy than Due Process because it still involves an examination of bot the quality and quantity of the company's economic presence. MBNA
Business Taxes: computing the income tax: the tax base: allocation and apportionment: Why are these rules significant?
• For determining a corporation's tax base • In addition to taking deductions, add backs, substractions, etc., you also need to determine what portion of income must be allocated and/or apportioned to the state
Sales taxes: bundled transactions vs. mixed transaction: If you were a tax advisor: From the retailer's perspective, what would the conservative approach be? Why?
• From the retailer perspective, conservative approach can be said to be "when in doubt, collect the tax" • It's looked at as being better • If they collect, they ca just give it back. But if they fail to collect, they're never going to go back and collect from their customers, so they're gonna end up paying it themselves. • The flip side is that you can end up getting sued, like Dell did. Additionally, it makes their products more expensive.
Cases: Quill Corporation v. North: Holding: primary holding & summary
• Holding: ND could not force Quill to collect the use taxes from its customers Quill won on Commerce Clause grounds, ND won on Due Process grounds, but because both requirements were not satisfied, Quill won overall.
Sales taxes: bundled transactions vs. mixed transaction: If you were a tax advisor: If you are taking a "separately stated" position?
• If you are taking a "separately stated" position, advise client to separately state the amounts on the invoice
Sales taxes: exemptions: how do exemptions factor into your analysis
• If you determine a transaction is subject to sales tax, then next step is to determine whether there is an available exemption • Remember that sales must first be taxable before you ever need to worry about exemptions
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: Discussion: Did Geoffrey present a stronger or weaker case than MBNA for assertion of jurisdiction over a non-physically present taxpayer?
• In G, they have intangible property that is present. So G presents a weaker case than MBNA. G would be less surprised because G does have something in SC. In MBNA, there weren't even intangible. MBNA didn't have anything in WV, all they did was generate interest from the use of the credit cards.
Business Taxes: computing the income tax: the tax base: allocation: 2 very important things to remember about allocation
• It is all or nothing; 100% taxed by one state • However, one state's rules do not affect another state's rules. So just because one state has allocated certain income to itself does not mean that another state couldn't do the same
Jurisdiction to tax: P.L. 86-272: the law's (3) essential elements: the activity must be limited solely to solicitation (except for de minimis activities and certain activities conducted by contractors) or things that ancillary to the solicitation
• Solicitation means speech or conduct that explicitly or implicitly invites an order; and ancillary activities, meaning those activities that serve no independent business function for the seller apart from their connection to the solicitation of orders • This could be something like bring a sample of the gum you're trying to sell
Jurisdiction to tax: Constitutional Requirements: For sales and use tax collection purposes, what is the different between the Due Process Clause and the Commerce Clause? Is one harder to satisfy than the other?
• The Commerce Clause requires a physical presence, whereas the Due Process Clause requires something less and could be satisfied by economic presence alone (as long as it rose to the level of a purposeful availment). • The Commerce Clause's physical presence requirement makes it a harder standard to satisfy than the Due Process Clause's requirement (i.e., economic presence).
Cases: Quill Corporation v. North: Discussion: What did the Court say about the benefits Quill was receiving from ND and why did it even matter whether they were receiving benefits?
• The Court did not really address this point specifically in much detail but just concluded, without explanation, that Quill was receiving enough benefits to satisfy the Due Process Clause. • If the Court seemed satisfied with the fact that ND was providing "an organized populous" to which Quill could sell its products.
Jurisdiction to tax: P.L. 86-272: P.L. 86-272 and Texas. Does it apply to the Texas Franchise act? Why or why not?
• The Texas franchise tax is imposed on Texas businesses just like corporate income tax, but the franchise tax is not a net corporate income tax. So no. • Franchise tax allows you to take some deductions, but not all.
Sales taxes: bundled transactions: what is a court determining when confronting a bundled transaction?
• The court is trying to figure out whether 100% of the transaction was subject to tax or none of it was. • The Dell computer case is about whether a portion of the transaction is subject to tax
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): Holding/Reasoning: case outcome
• The law was not facially unconstitutional but the court needed more facts to determine whether it was unconstitutional as applied to Amazon/Overstock. They eventually lost and filed a petition to the Supreme Court, which was denied
Business Taxes: computing the income tax: the tax base: apportionment: What apportionment seeks to do (in contrast to allocation) and how
• Under apportionment, there is no attempt to trace items of income 100% to the state in which the income was generated (which is what allocation seeks to do) • Instead, apportionment involves a formula to arrive at what is thought to be an adequate approximation Apportionment formulas divide a multistate corporation's tax base among the states in which it has nexus by applying a fraction representing the ratio of in-state factors to total factors
Business Taxes: computing the income tax: the rate
• Varies from state to state • However, just because a state has a low tax rate does not mean that it is a business friendly state. The amount of deductions the state allows in addition to the size of the tax base factors in as well
Business Taxes: the types of taxes imposed on businesses: (4)
(1) Corporate net income taxes (2) Franchise taxes • Usually measured by come computation involving the outstanding stock. • Texas does it totally different Does it based on "(modified) gross receipts tax" means that you get to take deductions Other • (3) special industry • like insurance • (4) gross receipts • This is how Texas does it. generally thought to be more economically harmful because what if there's a business where you generate a lot of revenue but also a lot of expenses? It's harmful because you could be taxed in a way where the tax is not commensurate with your actual income • (5) pass-through entities • Some stuff just passes through entities from one to another, but some states will tax the intermediaries
Jurisdiction to tax: P.L. 86-272: the law's (3) essential elements
(1) net corporate income tax (2) the activity must be limited solely to solicitation (except for de minimis activities and certain activities conducted by contractors) or things that ancillary to the solicitation (3) Tangible personal property
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: the factors (3)
(1) payroll factors (2) Property factors (3) Sales/receipts factors
Sales taxes: bundled transactions: what tests do you use for determining whether a bundled sale is taxable?
(1) the True Object test and its progeny (the dominant purpose test and the essence of the transaction test) (2) the Commonly Understood test
Sales taxes: exemptions: the types of exemptions
(1) the resale exemption (2) the occasional sale exemption (3) the inventory exemption?
Property tax: how does the property tax system work? (5)
1) • The value as of the date the apprials district must do their work is the amount upon which the tax is based. • They also start process of exemptions during that time (2) April-May • Land owners find out how much it was valued (3) May-July • Landowners can protest • Either the value or the disallowance of an exemption (4) August-September • They set the rate. • It fluctuates from year to year, unlike income tax where it's set in a statut (5) October • When you get your property tax bill and then you get until January fo next year.
Business Taxes: computing the income tax: the tax base: how to compute
1) Piggy-back off of federal: Federal income is the starting point, so you take your numbers from your federal return and start filling in based on that. Called line 28 and line 30 starts (indicates your starting point) Then, you either (1) add back • This adds to your tax base and increase the amount the state will be able to tax you. • Many states now require add-back to federal taxable income for certain royalty (and sometimes interest) expenses paid to related parties • These provisions were generally enacted in response to structures involving intangible holding companies • Like Geoffrey. • So states say ok, you're structure works, but we're statutorily going to do away with it by making operating company add back to its taxable income for state income tax purpose the royalty payment (2) subtractions • This lowers your state income tax base • The state is saying you start with federal number and then you're allowed to subtract certain things for state computation • Meaning, some things the corp wasn't allowed to deduct on their federal form could now deduct it for state income tax • Many times states allow things like bigger deductions for operating expenses
Sales tax: exemptions: sales of businesses: Texas occasional sale: Inventory?
6. Inventory is not an operating asset and failure of the inventory to be sold will not result in a loss of the exemption A. Example: 35 of 38 received and the missing amount invalidated the exemption to the sales tax B. 16 out of 25000 lost items maintained the exemption
Jurisdiction to tax: Constitutional Requirements: economic presence: why do some jurisdictions believe this is a better standard than physical presence
A substantial economic presence standard incorporates due process purposeful direction towards a state while examining the degree to which a company has exploited a local market." Thus, it is a better indicator of whether a substantial nexus exists for Commerce Clause purposes.
Property Tax: what else are property taxes known as
Ad valorem taxes
Jurisdiction to tax: Constitutional Requirements: Click-through nexus/ Affiliate Nexus: Amazon and Texas--summary
After Texas created a click-through nexus law, Amazon threated to leave Texas entirely and move its warehouse out of the state. However, the Texas Comptroller eventually reached a settlement with Amazon and it all just went away.
South Dakota v. Wayfair
Court held that sellers who engage in a significant quantity of business within a state may be required to collect and remit tax despite not having a physical presence in the state. Physical presence is deemed an outdated proxy for "substantial nexus" and the due process doctrine provides other methods of establishing whether a seller has substantial nexus. Quill puts businesses with physical presence at a disadvantage.
Cases: Quill Corporation v. North: court and facts
Court: United States Supreme Court Facts • Quill, a Delaware corporation, was a catalog retailer that sold a small percentage of its products to ND citizens by sending catalogs, flyers, and telephone calls. Quill had no employees in ND, used common carriers to deliver its products there, and owned almost no tangible property there ("just a few floppy disks"). Quill was not collecting sales tax from its customers in ND nor was it collecting a use tax. ND passed a statute requiring out-of-state vendors to collect tax when selling to ND customers. Therefore, ND wanted to force quill to begin collect use taxes from its customers.
Cases: Quill Corporation v. North: issue, 2 sub-issues, and summary
Issue • Would it be constitutional for ND to force Quill to collect use taxes from its ND customers notwithstanding the fact that Quill had no employees in ND, was not incorporated there, and did not really own any tangible property there? • Sub-Issue 1: Would doing so violate the Due Process Clause? • Sub-issue 2: Would doing so violate the Commerce Clause? • Summary: • Quill really has to do with who has the responsibility to collect the tax. If a business is subject to the tax, then they have to collect the tax; if not, the consumer has to pay the use tax. • Not an additional tax, just a collection issue. So if you're a state, you want it to happen.
Sales tax: exemptions: sales of businesses: stock sales: who is buying and who is selling, what is the agreement called, and will it be taxed
Sale of intangible property is not subject to sales tax, thus no tax on sale of stock, partnership or LLCs Few states may treat an LLC that is disregarded for income tax as also being disregarded for sales tax Some may use sales tax on the LLC In few states, if the sale avoids sales tax, then the stock, partnership, or LLC can be taxed The seller: the shareholders The target: the assets, the stock, AND, by operation of law, the corporation itself it will have a stock purchase agreement (SPA) partnership interest agreement or limited liability company membership interest purchase agreement
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: the factors: sales/receipts factor
Sales/receipts factor generally consists of in-state gross receipts from transactions and activities in the regular course of the taxpayer's trade or business Generally includes, but is not limited to: • Gross sales • Fees and commissions received from performance of services • Rent and lease payments received from renting real or tangible property • Proceeds from the disposition of assets • Royalties and other payments received from sale, assignment, or licensing of intangibles (patents and copyrights • Interest, dividends, other passive income This factor is always included in formulas, and sometimes is the only factor or gets extra weight State are uniform in that the formula always incudes receipts from the genral operation of your business, but state vary as to what else it includes
Sales taxes: bundled transactions: determining whether a bundled sale is taxable: The difference between the commonly understood test and the true object tests:
Some courts and authorities (the author of the text) believe the "true object" and its variant tests are not useful mechanisms for distinguishing between sales of TPP versus nontaxable services or intangibles Reason is because in virtually every transaction where you have the "inseparable mixed transaction" the "true object" is both the services or intangible content and the TPP (i.e., customer needs cannot be satisfied without having the benefit of both); so it makes little sense to identify the "true object" of the transaction Think about the difference in the evidence parties would submit In jurisdictions following the commonly understood test, evidence could be things like statements of the parties regarding their understanding of what they thought they were buying/selling
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: the schemes
Some states use all 3 factors with equal weight (this is the most common and traditional); some states only use sales; and some states use all 3 factors but weight sales extra. No states just use payroll or property
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: court
South Carolina Supreme Court
Cases: Quill Corporation v. North: Holding: sub-issue 2 (did North Dakota's tax violate the Commerce Clause)
The Court decided to retain the bright-line physical presence test from Bellas Hess for Commerce Clause purposes. Because Quill only owned a few floppy disks in ND, the Court determined that Quill could not be forced to collected taxes in ND because its physical presence there was "de minimus."
Property tax: what happens if someone's home qualifies as a homestead?
The appraised value may not increase more than 10% each year
Sales tax: exemptions: sales of businesses: who usually pays the sales tax and why?
The buyer because that's just how it usually works. however, Texas and some other states allow the seller to absorb the tax. therefore, it's up to lawyers to work this out to make sure it's 50-50
What was National Bella Hess' argument
The liabilities which Illinois has thus imposed violate the Due Process Clause of the Fourteenth Amendment and create an unconstitutional burden upon interstate commerce
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: What goes into the numerator? What goes into the denominator?
The numerator is always the amount of that factor in that state This is the most important number. The denominator is always the amount of that factor in all states
Sales tax: exemptions: sales of businesses: Texas occasional sale: what does it cover
The sales tax does not apply to the sale of "the entire operating assets" of a "business or of a separate division, branch, or identifiable segment of a business." So the sale must be of the "entire operating assets"
Sales tax: exemptions: sales of businesses: asset sales: who is selling and what are they selling, what is the agreement called, and will it be taxed
The seller: the corporation The target: just the assets The shareholders would still own the stock in the company, but the company would just no longer have any assets. If acquisition structured as asset deal: Asset Purchase Agreement (APA) WILL have provisions related to sales taxes
Sales taxes: bundled transactions: determining whether a bundled sale is taxable: the Commonly Understood test
This test just views the true object test (and its progeny) as elements and instead also looks to determine what the parties understood the purpose of the transaction to be
Sales taxes: bundled transactions: determining whether a bundled sale is taxable: the true object test
True object" test(s) two main variations of the "true object" test are called "dominant purpose" test and the "essence of the transaction" test (A) Dominant Purpose Test: If the "dominant purpose" of the transaction is the transfer of TPP, the transaction will constitute a taxable sale of TPP; If the "dominant purpose" of the transaction is the transfer of services or an intangible, the transaction will constitute a nontaxable sale (assuming service not taxable) (B) Essence of the Transaction Test: If the "essence of the transaction" is the sale of TPP, then transaction is taxable; If the "essence of the transaction" is the sale of service or intangible, then transaction is nontaxable (assuming service not taxable) For example True object is the receipt of architectural illustrations, not the architect's services Trued object of transaction was the intangible right to discounts and free products and services, not coupon books that served merely as tangible means of transmitting intangible right.
Jurisdiction to tax: P.L. 86-272: what is direct solicitation? what is indirect solicitation?
• (1) (direct solicitation) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and This is the one we are focusing on in this class • (2) (indirect solicitation) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).' § Two categories: direct solicitation (first paragraph) and indirect solicitation (second paragraph; applies in factual situations involving manufacturer/seller, local distributor, ultimate customer)
Jurisdiction to tax: Constitutional Requirements: (1) Can intangible property create a physical presence for Commerce Clause nexus purposes? (2) What is the relevant case?
• (1) According to the South Carolina Supreme Court, it can. However, that case involved corporate income taxes as opposed to the collection of sales and use taxes as in Quill. (2) Relevant case: Geoffrey, Inc. v. South Carolina Tax Commission
Cases: Quill Corporation v. North: Discussion: How have states eroded Quill's rule (3) and why were they able to do so?
• (1) Click-through nexus AKA Attributional/agency nexus • (2) Reporting requirements • (3) Economic nexus • This was possible because the Court never indicated whether Quill's holding extended beyond the collection of sales and use taxes.
Sales taxes: bundled transactions vs. mixed transaction: the test for mixed transactions
• (1) Readily separable, Separate functionality and desirability Dell: separate desirability, some people might want one or the other or both Washington: no desire to buy just the metal plate • (2) Both significant aspects of the transaction; not incidental to each other Washington: metal plate was incidental Inseparable transaction
Sales taxes: exemptions: the resale exemption: (1) when it applies and (2) what must you do when buying something for resale?
• (1) When you're buying something only to resell it, not to "consume" it • Applies when you purchase otherwise taxable items that will be resold (e.g., not consumed and used) in ordinary course of business Cannot just be incidental to or meant to induce business • (2) Issue resale certificate
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: Discussion: What did Geoffrey argue in this case regarding the Due Process nexus issue? (2)
• (1) that it did not purposefully diret its activites toward south Carolina because Toys R Us had no stores in SC when it entered into the agreement and that therefore Toys R Us's subsequent expansion into South Carolina was unilateral activity that could not create the minimum connection between Geoffrey and South Carolina But the court said that the agreement demonstrated that Geoffrey contemplated Toys R Us using the tradenames in multiple states. Moreover, Geoffrey could have prevented Toys R Us from using the trademarks in South Carolina but did not. • (2) It argued ( under the doctrine of modilia sequuntur personam)that the situs of the intangibles for tax purposes was in the state of Geoffrey's incorporation The court said that intangibles are not just located in one place for tax purposes. (i.e., apportionment). Essentially held that the trademarks exist in all the states where they're used.
Jurisdiction to tax: P.L. 86-272: P.L. 86-272 & independent contractors: to qualify as an independent contract (2)
• (1) they must represent more than one principal; and • (2) they must hold themselves out to be independent sales representatives.
Business Taxes: computing the income tax: the tax base: allocation and apportionment: two ways courts use these two methods
• Allocation and apportionment • Some states have both, whereas some states might just have apportionment • No state only has allocation
Business Taxes: computing the income tax: the tax base: allocation: what it does
• Allocation attempts to trace certain income to the state of its source and to include the item in full (100%) in the measure of that state's tax
Cases: Quill Corporation v. North: Discussion: Why does Quill care? Why doesn't Quill just collect the tax? Is it even Quill's money at stake?
• Although the money wouldn't actually have to come from Quill, if it ended up with a judgment against it, it would have to go back and collect money from its customers, which would be a burdensome task as well as a bit of a PR nightmare. • Additionally, not collecting use taxes gives Quill a competitive advantage of brick-and-mortar stores located in ND, which unquestionably have to collect sales taxes, making their products more expensive than Quill's
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): Amazon's and Overstock's activities
• Amazon and Overstock were foreign corporations that operated as online retailers and that owned no tangible property in New York. To generate sales in the state, both created "associates" and "affiliates" programs whereby the retailers paid third parties (independent contractors) to place links on their websites to direct users to Amazon's and Overstock's websites. They were paid on a commission basis in which they received a percentage of the revenue from sales generated when a customer clicked the link on the associate[s/affiliate's site. Some of these affiliates/associates where located in New York. Thousands enrolled in the programs and identified NY as their residence in their applications.
Jurisdiction to tax: P.L. 86-272: Ancillary activity vs. independent nonsoliciations: examples of activities that courts have found to be protected ancillary activities
• Ancillary activity vs independent nonsolicitation • State courts have found the following activities to be protected ancillary activities: • providing sales order forms and advertising material for a retailer's customers; 5 and • delivery in company vehicles. 6 • Distributing free samples • Training a customer to sell the product • Setting up display racks • NJ: held that TP licensing software was the sale of tangible copyrighted property and the TP activates in the state were protected by PL86-272
Sales taxes: Taxable sales: when are services taxable?
• Certain services - only if statute exists to tax it • Although most states will tax some services (or what seems to be many services - Texas), the inclusion of services as constituting a taxable sale is still considered the exception rather than the general rule Stated differently, services are presumed not taxable unless there is a specific statutory provision that imposes sales tax Always remember: what is considered a taxable service may vary from state to state, so example of where a multi-state question on this issue would require research In Texas, dry cleaning services Legal services are not subject to tax
Jurisdiction to tax: Constitutional Requirements: reporting requirements--are they constitutional
• Colorado tried to compel online retailers to collect use taxes without a physical presence. This was struck down so Colorado then decided to impose reporting requirements whereby online retailer must notify Colorado purchasers letting them know that they might need to pay a use tax and must also notify Colorado by sending it a list of purchasers including their address, amount of purchase, name, etc. • The Tenth Circuit addressed this and concluded that because the law involved reporting requirements and not the collection of taxes, Quill was not implicated. Therefore, it was constitutional.
Jurisdiction to tax: P.L. 86-272: Why did congress enact this statute?
• Congress enacted P.L. 86-272 in response to Northwestern States Portland Cement Co. v. Minnesota • In that case, a taxpayer was incorporated and headquarted in Iowa, and its manufacturing faciltiies were located in Owa • It regularly and systematically solicited order for the sale of its product in Minestota (48% of sales were made in Minnesota) • It had physical presence in Minnesota consisting of a leased sales office and serveral sales persons • Minnesota sought to apply its Minnesota Corporate income tax • SCOTUS upheld the imposition of the corporate income tax and found nexus • Because of some statements made by the Court and some other surrounding cases, some then questioned whether mere solicitation of business by a foreign corporation in a state would provide sufficient nexus for imposition of a corporate income tax • the Court did not address this fact scenario in its opinion, but interstate businesses and Congress thought this might be a natural consequence of the Northwestern States case • So, soon after Northwestern States decision was issued (about 7 months later), Congress enacted P.L. 86-272
Cases: Quill Corporation v. North: Discussion: Why did the Court decide to bifurcate the Commerce Clause and Due Process Clause analysis?
• In contrast, the Commerce Clause, and its nexus requirement, are informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy . . . It is in this light that we have interpreted the negative implication of the Commerce Clause. Accordingly, we have ruled that that Clause prohibits discrimination against interstate commerce, and bars state regulations that unduly burden interstate commerce
Business Taxes: computing the income tax: the tax base: apportionment: What if a state has both allocation and apportionment
• In states that have both apportionment and allocation provisions, it is business income that is apportioned Business income generally means income arising from transactions and activities occurring in the regular course of the taxpayer's trade or business (like the selling of services and products)
Cases: Quill Corporation v. North: Discussion: Did Quill really establish a bright-line rule?
• It attempted to, but because the Court implied that there could be some de minimus exception and did not really explain what physical presence was, it created ambiguity. Accordingly, jurisdictions differ in terms of what they considered to be a physical presence.
Business Taxes: computing the income tax: the tax base: allocation: What types of income gets allocated and the types of income (4)
• It depends on the specific state, but states that use allocation usually allocate "non-business income" It's based on the theory that non-business income is generally produced by specific property that is located in that state Gains from the sale of capital assets generally get allocated to the state where the asset is located Income from intangible property generally allocated to the state in which the commercial domicile of the entity is located • The types of income: • (1) Interest, (2) dividends, (3) royalties, (4) capital gains from the sale of property
Cases: Quill Corporation v. North: Discussion: Why did the Court care so much about the reliance of the mail order industry?
• It had grown to be a very large industry that relied on the Court's ruling in Bellas Hess that established a physical presence requirement for nexus purposes. • If this was a case of first impression (i.e., no Bellas Hess), the Court may have come out a different. It certainly considered stare decisis and the industry's reliance when the Court was deciding whether to overturn the physical presence requirement
Sales taxes: bundled transactions vs. mixed transaction: what is the distinction between the two?
• It is not always very clear cut and can be highly fact intensive. • The distinction • Unlike bundled transactions, the goods and services in a mixed transaction are distinct (not intertwined) and each is a significant object of the transaction (not one incidental to the other). You either want the whole thing or none of it and one aspect of the transaction is incidental to the other. • In mixed transactions, the separate elements of the transaction are analyzed as separate transactions for tax purposes. The tangible property aspect of the transaction is taxed and the service aspect of the transaction is not. Both components are readily separable, and have separate functionality and desirability, and both are significant aspects of the transaction, not simply incidental to each other. • For instance • Readily separable, Separate functionality and desirability Dell: separate desirability, some people might want one or the other or both Washington: no desire to buy just the metal plate • Both significant aspects of the transaction; not incidental to each other Washington: metal plate was incidental Inseparable transaction
Jurisdiction to tax: Constitutional Requirements: economic presence--relevant case and the holding
• MBNA held that a corporation's economic presence in WV, if substantial enough, will give rise to nexus for business franchise and corporate net income tax purposes. • Economic presence and Due Process
Sales tax: exemptions: sales of businesses: occasional sale: what is it?
• Many states exempt "casual," "occasional," or "isolated" sales Provisions can vary significantly amongst the states
Jurisdiction to tax: P.L. 86-272: the law's (3) essential elements: net corporate income tax--what is it and why does it matter
• Net income tax: Start with a gross number, from the sale of your product, to generate revenue it takes money, pay employees and other costs. Net income tax takes expenses as deductions from gross income • Note that not all business taxes are structured like this. Some taxes are more of a imposition of a tax on gross receipts why it matters: P.L. 86-272 will not be relevant unless the tax at issue is a net corporate income tax • Expanded definition: P.L. 86-272 protects businesses from the imposition of a net income tax while 15 U.S.C. section 383 provides that net income tax is defined as ''any tax imposed on, or measured by, net income.'' States have been adopting new tax regimes that don't fit neatly into a category of a net income tax, gross receipts tax, or anything else. For example, Ohio repealed its corporate income and franchise tax and replaced it with the commercial activity tax, a gross receipts tax imposed on receipts with minimal deductions. Michigan, New Jersey, and Texas also have implemented ''alternative'' taxes that are similar to a gross receipts tax and a net income tax.
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): Holding/Reasoning: Sub-issue 3 (Was the presumption irrebuttable) (3 reasons)
• No because (1) it was rational to presume that, given the direct correlation between referrals compensation, it is likely that residents will seek to increase their referrals by soliciting customers (including people from NY); (2) the plaintiff chose to limit review to a facial challenge; and (3) it would be less burdensome for the retailer to figure out whether the affiliates/associates were targeting NY customers than it would be for NY's taxing department to do so.
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: what do they do
• Note that they differ from state to state • Apportionment methodology merely approximates the amount of income of a corporation that should be attributed to a particular state; it is a rough approximation of the corporation's total income that is attributable to the corporation's operations in the state
Business Taxes: computing the income tax: the tax base: allocation and apportionment: where does this requirement come from?
• One of the requirements from Complete Auto is that a tax must be fairly apportioned
Jurisdiction to tax: P.L. 86-272: What does P.L. 86-272 do? (what is it, what taxes does concern, and what activities does it protect)
• P.L. 86-272 creates a nexus safe harbor for net income tax purposes for sellers engaged in interstate commerce 'if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following: (1) direct solicitation and (2) indirect solicitation
Business Taxes: computing the income tax: the two most important things
• Rate • Tax Base
Jurisdiction to tax: P.L. 86-272: What is solicitation under P.L. 86-272?
• Solicitation means (1) speech or conduct that explicitly or implicitly invites an order; and (2) ancillary activities, meaning those activities that serve no independent business function for the seller apart from their connection to the solicitation of orders • Activities that a seller would engage in apart from soliciting orders are not considered as ancillary to the solicitation of orders
Business Taxes: computing the income tax: the tax base: allocation and apportionment: when do these rules come into play?
• • If a company is doing business in only one state, then that state will generally be entitled to tax the total amount of the entity's income • If the company is doing business in more than one state, then each state will only be entitled to tax some portion of the entity's total income • This is done by way of the allocation or apportionment rules of each state
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: Holding/Reasoning: sub-issue 1 (Would SC violate the Due Process Clause by Taxing Geoffrey)
• Sub-issue 1: No • Because the agreement between Geoffrey and Toys R Us clearly contemplated the use of its trade names and trademarks in many states, Geoffrey contemplated and purposefully sought the benefit of economic contact with those state. Geoffrey knew about and benefitted from Toys R Us's use of its trademarks in SC and it could have prohibited Toys R Us from doing so but didn't. Accordingly, Geoffrey had purposefully directed its actives toward SC, Moreover, the right to receive royalties and the fact that Geoffrey had a franchise in SC constituted sufficient minimum contacts. As for the benefits Geoffrey received, they came from the orderly society the government of SC provided, which enabled Toys R Us to generate the profits that it paid to Geoffrey.
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: sub-issue 1 & sub-issue 2
• Sub-issue 1: Would SC violate the Due Process Clause by taxing Geoffrey? • Did Geoffrey purposefully direct its activity at the state's economic forum? • Sub-issue 2: Would SC violate the Commerce Clause by taxing Geoffrey ? • Did Geoffrey's intangible property in SC (i.e., it's trademarks and accompanying rights to receive royalty payments) constitute a physical presence?
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: Holding/Reasoning: sub-issue 2 (Would SC violate the Commerce Clause by Taxing Geoffrey)
• Sub-issue 2: no • The court held that the presence of intangible property alone was sufficient to establish nexus (because Quill does not apply to corporate income taxes). Therefore, by licensing intangibles for us in SC and deriving income from their use, Geoffrey had a substantial nexus.
Jurisdiction to tax: P.L. 86-272: the law's (3) essential elements: tangible personal property
• Tangible property is generally things that you can touch (i.e., chair, collegiate fleece pullovers, nautical flee pullovers) • This stands in contrast to intangible goods or services. However, the dividing line is not always clear Licensing of software was held in new jersey, under this law, to be the sale of a piece of tangible property such that it could come under the law Sales of phone directory advertisements was not sale of tangible personal property but was instead a service. • Expanded P.L. 86-272 provides protection only for solicitations of sales of tangible personal property and not solicitations of services or the licensing of intangibles. State income tax statutes and regulations generally do not define tangible personal property for corporate income tax purposes. Furthermore, tangible personal property is not defined by P.L. 86-272.
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): The law at issue--how it worked and what it did
• Taw Law § 1101(b)(8)(vi) • If an out-of-state online retailer generates more than $10,00 in gross receipts (based on preceding four quarterly periods) from sales of tangible property made to NY customers who have "clicked through" links provided on websites of in-state residents • If a retailer met these requirements, the law created a presumption that nexus existed and flipped the burden to the online retailer, which could then rebut the nexus presumption by showing that there was only a link and mere advertisement, not solicitation • If a retailer met these requirements and could not rebut the presumption, then the retailer was responsible for collecting and remitting use taxes from sales made to NY citizens.
Cases: Geoffrey, Inc. v. South Carolina Tax Commission: Discussion: What did Geoffrey argue in this case regarding the Commerce Clause nexus issue? (2)
• That it had no physical presence in the state (because intangibles don't count), so there was no substantial nexus.
Sales tax: exemptions: sales of businesses: how do you decide how to structure the sale
• The tax issues are mostly federal, but also some state tax issue • Reasons you would want to structure a given way (non-tax related issues) Depends on what side you're on If you do a stock sale, all of the liabilities follow with the sale of the stock to the buyer Lawsuits Loans Everything ' So if you're the buyer, you may want to negotiate for it to be an asset sale If you're the seller, you want all of the known and unknown liabilities to go over to the buyer • Although, most deals have indemnification clauses built in If you do an asset sale Credit agreements, lease agreements, supply agreement. With asset deals, you must get a bunch of third party consent to sell the assets. Might be a big pain for a buyer to get all of those people to consent • Federal tax reasons If structured as sale of assets The company will pay on sale of assets, then when everything is divvied out to the shareholders, it'll get taxed again If it's strutted as sale of stock, The sale will only get taxed once (not a separate tax on the dividends to the shareholders)
Jurisdiction to tax: P.L. 86-272: P.L. 86-272 & independent contractors: what can they do (in contrast to employees)
• They can complete sales in the state (like accepting orders) instead of being limited to solicitation, like employees; and • They can maintain their own sales office in the state
Business Taxes: computing the income tax: the tax base: apportionment: apportionment formulas: What do apportionment formulas result in and what do you do with it
• They result in a percentage, which is then applied to the taxpayer's tax base. Then, the state applies the tax rate to the amount of income apportioned to the state.
Cases: Quill Corporation v. North: Discussion: What if Quill had delivered the office supplies to ND residents in Quill trucks rather than by common carrier?
• This would have certainly constituted a physical presence for Commerce Clause purposes, thus giving ND the right to require Quill to collect use taxes.
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): issue: primary issue, 3 sub-issues, and summary
• Was this statute unconstitutional, facially or as applied to Amazon/Overstock? (Did it require retailers to collect use taxes that did not have a substantial nexus with NY as required by Complete Auto) • Sub-issue 1: Was the Due Process Clause Satisfied? • Sub-issue 2: Was the Commerce Clause Satisfied? • Sub-Issue 3: was the presumption irrebuttable? • Summary:• Are statutes that create a click-through nexus for sales and use tax purposes constitutional under Quill? • The real question in this case was whether the fact that the affiliates/associates were located in NY constituted a physical presence for Amazon/Overstock such that the Commerce Clause was satisfied.
Sales taxes: bundled transactions vs. mixed transaction: what is the difference between the two?
• With a bundled transaction (aka inseparable), either the entire sale is of (1) TPP, (2) service, or (3) intangible property subject to sales tax or its not • With an unbundled transaction (aka mixed), courts are able to subject only part of the transaction to sales tax. These transactions do not require the all-or-nothing approach because it is possible to unbundle the transaction into separate components, which are taxable and non-taxable in their own right. This leads to a transaction being partly taxable and partly non-taxable
Jurisdiction to tax: Constitutional Requirements: Independent Contractors: can the use of independent contractors give rise to a constitutional basis for nexus?
• Yes, for nexus purposes it does not matter whether someone is an employee or an independent contractor. Regardless, the individual(s)' activities in the state still must constitute physical presence before Quill will be satisfied. • * you couldn't circumvent the tax laws by only having independent contractors.
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): Holding/Reasoning: Sub-issue 2 (Was the Commerce Clause satisfied)
• Yes. • The court began by criticizing Quill's physical presence requirement as being outdated and called upon the Court to reconsider it. However, the NY court acknowledge that it was still bound by that decision. Even so, the court found that it was satisfied because in NY, "the presence requirement will be satisfied if economic acuities are perform in NY by the seller's employees or on its behalf." For physical presence, NY only requires something demonstrably more than a slightest presence, it need not be substantial.• Based on the same facts cited for the due process discussion, the court concluded that this "active, in-state solicitation which produces a significant amount of revenue" was more that a slightest presence.
Cases: Overstock.Com, Inc. v. New York State Department of Taxation and Finance (Amazon): Holding/Reasoning: Sub-issue 1 (Was the Due Process Clause satisfied)
• Yes. • The court noted that Due Process is easier to satisfy than the Commerce Clause. The court looked at the defendants' activities and determined that they would have "fair warning" that they might be subject to a statute like the one at issue. "An entity that is engaged in continuous and widespread solicitation of business within a state clearly has fair warning that its activity may subject it to the jurisdiction of a foreign sovereign, even in the absence of a physical presence." Moreover, because the affiliates/associates had urged their local constituents to support them by making purchases through the links and because taxpayers knew that the affiliates/associates were located in NY (per their applications) and decided to enter into the agreements with them anyway, they had purposefully directed their activities at the state.
Cases: Quill Corporation v. North: Discussion: Did the Court just punt to Congress?
• Yes. The Court declared that it was not equipped to consider all of the competing interests at play and invited Congress to overturn the Court's holding by passing legislation, which the court noted Congress has the power to do.
Sales taxes: Taxable sales: what is tangible personal property and what are some examples of intangible personal property
• You can feel it • As opposed to Intangible or realty, which are not subject to tax • Some states have imposed real property transfer tax, but that is different from sales tax and Texas does not have the transfer tax • Intangible would be contract rights, goodwill (customer relation, above the assets of company), mineral rights, trademarks, copyrights Goodwill is paying a premium value on a company • Oil and gas equipment Because it is fixed to the property, would take lots of effort to move, then the equipment becomes part of the realty
Jurisdiction to tax: P.L. 86-272: The de minimis exception--how does it work
• You must be very careful. Just because a disqualifying activity only accounts for a relatively small part of the business does not mean that the activity fits in the de minimis exception. BUT, if you do have a disqualifying activity, you should try to argue that it fits within this exception, thus allowing you to continue enjoying the benefits of P.L. 86-272's safe harbor provision
Property Tax: Is there a property tax on individual's personal property? Why or why not?
• Your personal property used for personal purposes (e.g., clothes, home furnishings) generally not taxed • Too difficult to assess the value of personal property and too difficult to keep track of
Jurisdiction to tax: P.L. 86-272: Why is solicitation significant for P.L. 86-272?
• §For the in-state activity to be a protected activity under P.L. 86-272, it must be limited solely to solicitation (except for de minimis activities, and certain activities conducted by independent contractors) • Conducting activities not falling within the definition of solicitation will cause a company to lose its protection from net income tax afforded by P.L. 86-272 unless the disqualifying activities, taken together, are de minimis
Jurisdiction to tax: P.L. 86-272: Ancillary activity vs. independent nonsoliciations: Examples of activities that courts have found to be unprotected (unless any of these are de minimis):
• • regular checks of customer inventories; • • swapping stale product; 8 • • buying or selling product; 9 • • visits by credit managers; 10 • • presence of visual merchandising coordinators who set up store signage and point-of-purchase displays, coordinate store inventory levels, and run in-store promotions; 11 • • collecting delinquent accounts; 12 • • investigating customer complaints; 13 • picking up returned merchandise; 14 • • testing, analyzing, and reviewing product performance; 15 and • • making decisions regarding defective products. 16 • Selling ad space in magazine because their activity was a service, not a sale of tangible personal property • Approving or accepting sales orders ✖ • § Making repairs • Training a sales force (with some exceptions) ✖ • § Maintaining a home office (with some exceptions) ✖ • § Collecting on delinquent accounts ✖ • § Making credit decisions ✖ • § Taking a check as a deposit ✖ • § Resolving customer complaints (with some exceptions) ✖
