On January 12, 2017, significant unclaimed property legislation, SB13, was introduced in the Delaware General Assembly. If enacted, which appears likely, SB13 would make numerous changes to the state’s much-maligned procedures for enforcing its abandoned and unclaimed property laws. Legislation has been widely expected in the wake of last summer’s summary judgment decision against Delaware in Temple-Inland Inc. v. Cook, 1:14-cv-00654 (D. Del. filed May 21, 2014). In Temple-Inland a federal district court invalidated many of the unclaimed property audit practices authorized by Delaware and implemented by the state’s contract auditors (See our prior coverage Federal District Court Holds Delaware’s Unclaimed Property Enforcement Practices “Shock the Conscience” and Delaware Unclaimed Property Litigation Update). The parties agreed to dismiss the Temple-Inland case before the court could consider remedies to the substantive due process violations it found, and thus, the state was left with the opportunity to pass legislation likely in an effort to preserve the stream of unclaimed property receipts that have become one of Delaware’s largest sources of revenue. Among other changes, the proposed legislation addresses some of the federal district court’s concerns, and provides a path to the state’s voluntary disclosure agreement (“VDA”) program for companies already under audit. Descriptions of some of the more significant provisions of SB13 follow. Unless otherwise specified, the provisions below would be effective upon enactment of the legislation.
In Capital One Auto Finance, Inc. v. Department of Revenue, Dkt. No. TC 5197 (Oregon Tax Ct. Dec. 23, 2016), the Oregon Tax Court held that physical presence was unnecessary to establish nexus for corporate excise and corporate income tax purposes. As we reported last month, the Ohio Supreme Court similarly upheld the constitutionality of Ohio’s factor presence (or, economic nexus) standard for purposes of the Ohio Commercial Activity Tax. Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760 (Ohio 2016). (See our previous post, Ohio Supreme Court Physical Presence Not Required for Commercial Activity Tax.)
Background – South Dakota’s Remote Sales Tax Case
South Dakota recently enacted Senate Bill 106 (“SB 106”), requiring all retailers with annual in-state sales exceeding $100,000, or 200 separate transactions within the state in a year, to collect and remit sales tax, even if the retailer does not have a physical presence in the state. As stated in the “Legislative Findings” of SB 106, the statute was designed to directly challenge the physical presence standard set forth in the 1992 US Supreme Court decision, Quill v. North Dakota, 504 U.S. 298. In Quill, the US Supreme Court affirmed the physical presence standard, prohibiting states from imposing sales and use tax collection obligations on out-of-state retailers that lack physical presence within the state. To compel compliance with SB 106, the South Dakota Department of Revenue (the “Department” or “State”) sued four online retailers including Wayfair Inc., Newegg Inc., Overstock.com Inc., and Systemax Inc. South Dakota v. Wayfair, Inc. et al., D.S.D. No. 3-16-CV-03019-RAL (“Wayfair”). Systemax has since dropped out of the lawsuit and registered with the state to collect sales tax.
The recent Harley-Davidson opinion from the Superior Court of California, County of San Diego is an alarming example of why it is important to apply the appropriate constitutional standard in state tax cases. In a Commerce Clause challenge, where the taxpayer argued a California statute discriminated against interstate commerce, both the California Appellate Court and the trial court applied Equal Protection standards in their Commerce Clause analyses. In doing so, the courts upheld an otherwise discriminatory tax scheme on the grounds that it furthered the state’s legitimate interests in generating revenue and ensuring income is fairly apportioned among the several states. Such a holding effectively guts the protections offered under the dormant Commerce Clause and highlights the analytical differences between discrimination under the Commerce Clause and discrimination under the Equal Protection Clause.