After years of litigation, injunctions, and a U.S. Supreme Court decision, the controversy between Data & Marketing Association (“DMA”) (formerly Direct Marketing Association) and the State of Colorado has come to a conclusion. On February 22, 2017, DMA and the Colorado Department of Revenue (the “Department”) entered into an agreement (the “Settlement Agreement”) resolving the dispute in Direct Mktg. Ass’n v. Colo. Dep’t of Revenue, Colo. Dist. Ct., No. 13-CV-34855, which involved a challenge to the Colorado use tax reporting requirements enacted in 2010. (The Settlement Agreement is available at http://thedma.org/wp-content/uploads/DMA-Colorado-Executed-Settlement-Agreement.pdf.) Under the Settlement Agreement, the Department agrees that compliance with those use tax reporting requirements will not be required until July 1, 2017 and agrees to waive any and all penalties for non-collecting retailers who failed to comply with the use tax reporting requirements prior to July 1, 2017. So on July 1, 2017, a new day of use tax notification and reporting enforcement will dawn in Colorado – and it would not be surprising if other states follow suit.
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.
Bright-line, factor presence nexus has become an increasingly popular issue in state taxation in recent years. While the rules and thresholds vary from state-to-state, the Multistate Tax Commission’s (“MTC”) model rule exemplifies how factor presence nexus works. Specifically, the MTC’s model rule provides, in part, that “substantial nexus” (i.e., a taxable presence) exists for corporate income tax purposes if an out-of-state taxpayer has total sales in the state exceeding $500,000 during any given taxable period. Several states–including Alabama, California, Colorado, New York, Ohio, and Tennessee–have adopted factor presence nexus rules; however, to date, there have been very few cases that have considered the constitutionality of bright-line, factor presence nexus standards.