Baker McKenzie attended the U.S. Supreme Court’s oral arguments yesterday in South Dakota v. Wayfair, Docket No. 17-494. At issue in the case is whether the Court should abrogate the physical presence nexus standard that it first articulated in National Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967), and later affirmed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court’s decision could have a profound impact on sales and use tax nexus in the United States by altering the limitations currently imposed on a state’s ability to require out-of-state retailers to collect such tax.
The Utah Supreme Court recently heard arguments in Utah State Tax Comm’n v. See’s Candies Inc., Utah, No. 20160910-SC, which is an important case for whether Utah will respect arm’s-length transfer pricing. During the hearing, the Utah State Tax Commission (“Commission”) argued that Internal Revenue Code (“IRC”) § 482 should not limit its discretionary authority to reallocate income between related companies. The taxpayer, on the other hand, claimed the intercompany transactions at issue were at arm’s length and therefore deductible.
On June 12, 2017, Congressman Jim Sensenbrenner (R-WI) reintroduced into Congress H.R. 2887, also known as the “No Regulation Without Representation Act of 2017” (the “Legislation”), which codifies the physical presence nexus requirement established by the U.S. Supreme Court in Quill v. North Dakota, 504 U.S. 298 (1992) (“Quill”). The Legislation is interesting for several reasons: (1) it proposes to employ a result that is the exact opposite of the recent trend to overturn Quill; (2) it defines “tax” broadly to include net income and business activity taxes; and (3) it expands the law to require a physical presence for states to regulate a person’s activity in interstate commerce outside of the tax context.
The Utah Tax Court recently issued its decision in See’s Candies, Inc. v. Utah State Tax Commission, Case No. 140401556, holding that the “arm’s-length” standard set forth in the federal treasury regulations relating to section 482 of the Internal Revenue Code (“IRC”) controls for purposes of guiding the Utah State Tax Commission (“Commission”) in reallocating income pursuant to Utah Code section 59-7-113 (“Section 59-7-113”), which is nearly identical to section 482 of the IRC.