Michele Borens
Todd Lard
Seattle Tax Executives Institute
September 16, 2015
Federal Legislation and Quill
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Agenda
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What is Nexus?
Quill Corp. v. North Dakota (1992)
State’ “Self-Help” Legislative Efforts
Marketplace Fairness Act of 2015
Remote Transactions Parity Act of 2015
Online Sales Simplification Act of 2015
Summary of Federal Legislation
Federal Nexus Legislation Status
©2015 Sutherland Asbill & Brennan LLP
What is Nexus?
• Nexus is the creation or establishment of a connection with a
state.
• The state tax nexus standards for income and transaction
taxes differ.
• For income tax purposes, state statutes and state courts
generally provide or have held that only an economic
presence is required to create an income tax filing
requirement in the state. This standard has been applied
more aggressively to:
 Trademarks and intangibles
 Financial institutions
• Federal law provides some protection from the imposition of
income taxes by states to sellers of tangible personal
property through PL 86-272.
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What is Nexus?
• For sales, use, and other transactional tax purposes, more of
a connection with the state is required.
• In order for a state to impose a collection obligation on an
out-of-state seller, the U.S. Supreme Court has held that a
physical presence in the state is required. Quill Corp. v.
North Dakota (1992).
• The physical presence must be more than de minimis.
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Quill Corp. v. North Dakota (1992)
• In North Dakota, Quill engaged in the following activities:
 Solicited business through numerous catalogs and flyers, advertisements
in nationally distributed “card packs,” advertisements in notional
periodicals and trade journals, and telephone solicitation of existing
customers (amounted to more than 230,000 separate pieces of mail,
weighing more than 24 tons, sent annually by Quill);
 Delivered merchandise to customers by mail or common carrier from
locations outside of North Dakota;
 Provided an unconditional 90-day guaranty on merchandise purchased;
 Held title to a few floppy diskettes located in the state; and
 Licensed a computer software program to some of its North Dakota
customers that enabled them to check Quill’s current inventories and
prices and to place orders directly, but Quill maintained all rights in the
software and the right to terminate the license without prior notice and
without cause.
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Quill Corp. v. North Dakota (1992)
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State argued that Quill’s “economic presence” in the state
established a physical presence in the state.
The Supreme Court rejected North Dakota’s argument that Quill’s
“economic presence” in North Dakota depended on services and
benefits provided by the state and therefore generated “a
constitutionally sufficient nexus to justify imposition of the purely
administrative duty of collecting and remitting the use tax.”
Court instead held that a “substantial nexus” is required and that
Quill’s activities did not meet the physical presence nexus
standard.
 “Although title to a few floppy diskettes present in a State might
constitute some minimal nexus, we expressly rejected a ‘slightest
presence’ standard of constitutional nexus. We therefore conclude
that Quill’s licensing of software in this case does not meet the
‘substantial nexus’ requirement of the Commerce Clause.”
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©2015 Sutherland Asbill & Brennan LLP
What We Know From Quill…
• “Substantial nexus” entails some level of physical
presence; i.e., more than a de minimis physical
presence may result in substantial nexus.
• What constitutes “physical presence”?
 More than slightest presence:
 Employees working in the state
 Employees performing activities in the state
 Lease or ownership of tangible property
 Lease or ownership of real property
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©2015 Sutherland Asbill & Brennan LLP
State “Self-Help” Legislative Efforts
• State efforts to force remote vendors to collect sales tax:
 Use Tax Information Reporting: (CO and NC)
 Click-Through Nexus Statutes: Agreement with resident to
refer customers via an Internet link or otherwise creates a
rebuttable presumption of nexus
 Affiliate (i.e. Related Party) Nexus Laws
 In-State Delivery Arrangements: Arrangements, with other than
a common carrier, to facilitate delivery of property to in-state
customer at an in-state location
 Indiana 2014 proposed legislation (did not pass)
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State “Self-Help” Legislative Efforts
• States’ efforts to force remote vendors to collect sales
tax:
 Use Tax Notification: Requirement to notify customers of
requirement to report use tax (e.g., CO, KY and OK)
 Warranty Nexus: In-state contractors performing warranty &
repair work
 Marketplace Facilitator: New York (recently rejected) and
Washington (HB 2224) have proposals to attribute nexus if
sales made through a facilitator (e.g. E-Bay). Washington
would also include use of credit card or other payment
facilitator plus factor nexus ($267k in sales)
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©2015 Sutherland Asbill & Brennan LLP
State “Self-Help” Legislative Efforts
• States are questioning the continued applicability of
Quill:
 Alabama – DOR recently proposed rule which would
allegedly establish economic nexus for sales and use tax
purposes
 Connecticut – In 2013, DOR revoked a 1992 special notice
providing guidance on Quill
 Oklahoma – HB 2359 (2010), which required use tax
notification, stated that the legislature found that the tax
system “does not pose an undue burden on out-of-state
retailers and provides sufficient simplification to warrant the
collection and remittance of use taxes by out-of-state
retailers…”
 Effectively stated that Quill is no longer applicable
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©2015 Sutherland Asbill & Brennan LLP
Crutchfield/Newegg.com/Mason
Companies v. Testa
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Three companies are challenging Ohio’s bright-line test for
substantial nexus under the Commercial Activity Tax (“CAT”) at the
Ohio Supreme Court.
A taxpayer has substantial nexus for CAT purposes if it meets any of
four factors, including “bright-line presence” which includes a
taxpayer with at least $500,000 in gross receipts from the state
during the calendar year.
The companies assert a Commerce Clause violation because
neither the companies nor their representatives do any business in
Ohio to establish a market in the state.
The Department based its theory of nexus, in part, on customers in
Ohio accessing the company’s website from a computer or mobile
device in the state, creating a “virtual” presence.
©2015 Sutherland Asbill & Brennan LLP
Marketplace Fairness Act of 2015
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Previously, the 113th Congress introduced various bills (SB 743;
SB 336; HR 684) addressing sales tax collection on remote sales
transacted.
SB 743 would have granted states the authority to compel remote
sellers to collect sales tax after simplifying their sales tax laws.
On May 6, 2013, the Senate passed the MFA by a vote of 69 to 27
but it did not pass the House.
On March 10, 2015, Sen. Mike Enzi (R-Wyo.) introduced the
Marketplace Fairness Act of 2015 (S. 698).
 The bill was read twice and referred to the Committee on
Finance.
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©2015 Sutherland Asbill & Brennan LLP
Marketplace Fairness Act of 2015
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The MFA provides two alternatives for states that affirmatively
choose to exercise such authority:
 (1) SSUTA member states – So long as SSUTA contains minimum
simplification requirements and the state publishes its intent to
collect tax with 180 days notice, or
 (2) Non-SSUTA states – Required to enact legislation satisfying the
minimum simplification requirement; authority commences no
earlier than six months after enactment starting on the first day of a
calendar quarter.
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Additionally, a state cannot collect tax from remote sellers prior
to one year after the enactment of the MFA and during October
through December of the first year beginning after the date of the
MFA’s enactment.
A remote seller would not be required to collect tax if its gross
annual receipts in remote sales do not exceed $1,000,000.
©2015 Sutherland Asbill & Brennan LLP
MFA Simplification Requirements
• A single agency in the state that is responsible for all state and
local sales and use tax administration, return processing and
audits for remote sales;
• A single audit of a remote seller for each state and localities
within the state;
• A single sales and use tax return that will be used by remote
sellers for each state and localities within the state;
• A uniform sales and use tax base for each state and localities
within the state;
• Destination sourcing rules and principles for all interstate sales;
• Provide “free” software and certification procedures for such
providers; and
• Liability relief for remote sellers and certified software providers
if incorrect information provided by state
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©2015 Sutherland Asbill & Brennan LLP
MFA: Discussed Issues
• Different levels of simplification between SSUTA and nonSSUTA states
• Tax base for remote sellers different than for nexus
sellers
• Who will police compliance?
• Retains nexus debate over whether a person is a remote
seller
• What “free” computer software do the states have to
provide? Can every state be different?
• Uniform administration and acceptance of multistate
exemption certificates?
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Remote Transactions Parity Act of
2015
• On June 15, 2015, Rep. Jason Chaffetz (R-Utah) introduced
the Remote Transactions Parity Act of 2015 (H.R. 2775).
 The RTPA was referred to the House Committee on the
Judiciary.
• On July 1, 2015, the RTPA was referred to the
Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.
• The RTPA is modeled after the MFA.
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©2015 Sutherland Asbill & Brennan LLP
Remote Transactions Parity Act of
2015
• The RTPA provides two alternatives for states that
affirmatively choose to exercise such authority:
 (1) SSUTA member states – So long as SSUTA contains
minimum simplification requirements and the state publishes its
intent to collect tax with 180 days notice, or
 (2) Non-SSUTA states – Required to enact legislation satisfying
the minimum simplification requirement; authority commences
no earlier than 180 days after enactment starting on the first day
of a calendar quarter.
• The RTPA offers additional simplifications and
protections to remote sellers and certified service
providers.
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©2015 Sutherland Asbill & Brennan LLP
RTPA – Small Seller Exemption
• The RTPA’s small seller exemption differs from that of
the MFA
• The RTPA offers a phase-out of the exemption
 Year 1: $10,000,000 gross annual receipts
 Year 2: $5,000,000 gross annual receipts
 Year 3: $1,000,000 gross annual receipts
 Year 4 and later years: No small seller exemption
• Exception for sellers using an electronic marketplace
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©2015 Sutherland Asbill & Brennan LLP
RTPA Protections
• The Remote Transactions Parity Act provides
enhanced protections, including:
 Barring audits of registered remote sellers with under $5
million in annual gross receipts, except in instances of the
reasonable suspicion of intentional misrepresentation or
fraud;
 Barring audits of remote sellers conducted by contingent fee
auditors; and
 Protecting against class action refund suits for sales tax
over-collection and qui tam suits for under-collection.
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©2015 Sutherland Asbill & Brennan LLP
Online Sales Simplification Act of 2015
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On January 13, 2015, Rep. Bob Goodlatte (R-Va.), Chairman of the House
Judiciary Committee, floated draft legislation entitled “Online Sales
Simplification Act”
The Act would allow states to impose origin-based sourcing on remote
sales if the state:
 (1) Is the origin state for the remote sale, and
 (2) Agrees to be a part of a Distribution Agreement that creates a
Clearinghouse to collect sales tax on remote sales calculated by the origin
state’s tax rate and base.
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The Clearinghouse then forwards each Participating Destination State its
proportional share of the revenue, determined using the “proven
clearinghouse method”
Recent proposed tweak would use destination rate applies to origin base.
States must have one rate per state.
©2015 Sutherland Asbill & Brennan LLP
Hybrid Origin Sourcing – Basics
Buyer
Nexus
State
Collect Tax
Based on
Home Rate
Buyer No
Nexus
State
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Collect Tax
Based on
Destination
Rate
Seller
Collect Tax
Based on Flat
Rate
Buyer
NOMAD
State
©2015 Sutherland Asbill & Brennan LLP
Hybrid Origin Sourcing – Distribution
Remote No Nexus
Remote NOMAD
Nexus
Clearinghouse
Destination
States
Participating
States
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Hybrid Origin Sourcing Details
• Business purchasers can be treated as a direct pay
purchaser in the destination state
• Not applicable to goods like aircraft, vehicles and vessels
already governed by existing interstate sales tax regimes
• Remote sellers may only be audited by the Origin State
• Participating States must organize commission to operate
the Clearinghouse and resolve disputes. Each state sends
four representatives
• No Destination States may impose “any additional tax” on
property or services for which the remote seller already
remitted sales tax to the Clearinghouse
• Clearinghouse may keep tax collected by its remote sellers
on sales to zip codes in non-participating states
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©2015 Sutherland Asbill & Brennan LLP
Treatment of NOMADs
• Remote sellers in NOMAD states have a choice:
 Report the sale (the buyer’s name, address and sale amount)
to the Clearinghouse, or
 Collect at a flat “collection rate”
 NOMAD states bound by “common exemptions” established by
participating states
• Collection rate calculation: the “lowest combined rate
within any of the contiguous 48 States that do impose a
sales or use tax”
• “A method shall be established” to audit remote sellers in
non-participating NOMAD states by a Participating
Destination State when the seller declines to participate
willingly in the audit
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©2015 Sutherland Asbill & Brennan LLP
International Transactions
• Equitable treatment for foreign countries:
 A remote seller in a foreign country that enforces the
collection and remittance obligation of a consumption tax
on U.S.-based sellers for consumer sales in the foreign
country shall be subject to the same rules that apply to
NOMAD states
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©2015 Sutherland Asbill & Brennan LLP
Hybrid Origin Sourcing –
Discussed Issues
• Customers in the same state will pay different sales tax
rates
• Customers may not have nexus with the taxing jurisdiction
• Customers in states with no sales tax would be forced to
pay
• The definition of “Origin State” is the state in which the
seller has the greatest number of employees
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©2015 Sutherland Asbill & Brennan LLP
Summary of Federal Legislation
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Online Sales
Simplification Act
Marketplace Fairness
Act
Remote Transactions
Parity Act
Sourcing
Origin-based sourcing
Destination-based sourcing
Destination-based sourcing
Small seller
exemption
None
$1,000,000
Phase out:
Year 1: $10,000,000
Year 2: $5,000,000
Year 3: $1,000,000
Year 4: None
Audit
Remote sellers may be
audited by home state.
One audit per state.
Audits conducted through CSPs.
Generally no audits for remote
sellers with under $5m gross
receipts.
Liability
Remote seller liable for
improperly collected
tax.
Remote sellers relieved
from certain liabilities.
Enhanced liability protection.
Software
No software
assistance to remote
sellers
Free software for remote
sellers. Integration costs
excluded.
Free software. Set-up,
installation, and maintenance
cost included.
©2015 Sutherland Asbill & Brennan LLP
Federal Nexus Legislation – Status
• Marketplace Fairness Act
 Sponsored by Sen. Michael Enzi (R-Wyo.) with 22 cosponsors (14 Democrats, 7 Republicans, 1 Independent).
 Supported by National Retail Federation, Retail Industry
Leaders Association, National Governors Association,
numerous other businesses and national trade associations.
 Opposed by National Taxpayers Union (MFA does not
follow Chairman Bob Goodlatte’s seven principles),
Americans for Prosperity, NetChoice.
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©2015 Sutherland Asbill & Brennan LLP
Federal Nexus Legislation – Status
• Remote Transactions Parity Act
 Sponsored by Rep. Jason Chaffetz (R-Utah) and 46 cosponsors (24 Republicans, 22 Democrats).
 Bipartisan group of senators say they will not vote for
PITFA unless remote sales tax legislation is passed.
 Supported by National Governors Association, National
Conference of State Legislatures, Marketplace Fairness
Coalition, International Council of Shopping Centers, NRF
(stating that the bill stops the federal government from
picking winners and losers in the marketplace).
 Opposed by Sen. Ron Wyden, Campaign for Liberty, Web
Enabled Retailers Helping Expand Retail Employment
(arguing the bill helps big retailers and tax collectors, to the
detriment of small retailers), National Taxpayers Union.
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©2015 Sutherland Asbill & Brennan LLP
Federal Nexus Legislation – Status
• Online Sales Simplification Act
 Supported by Rep. Bob Goodlatte, NetChoice (the act will
treat “sales tax obligations the same, whether you entered a
store by foot, by mail, by phone, or via the Internet”).
 Opposed by Multistate Tax Commission (act would violate
state sovereignty and interfere with principles of federalism),
National Conference of State Legislatures (imposes new
taxes on consumers in non-sales tax states and raises taxes
on consumers who purchase products from higher sales tax
states).
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©2015 Sutherland Asbill & Brennan LLP
Questions?
Michele Borens
202.383.0936
michele.borens@sutherland.com
Todd A. Lard
202.383.0909
todd.lard@sutherland.com
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