Last year, the U.S. Supreme Court ruled in South Dakota v. Wayfair that economic nexus is constitutional for sales tax purposes. South Dakota’s economic nexus statute at issue in the case included an economic threshold of at least $100,000 of sales or 200 separate transactions into the state in the prior calendar year. The decision overruled prior decisions by the Supreme Court, including the landmark holding in Quill Corp. v. North Dakota. In the 1992 Quill decision, the Court affirmed a bright-line physical presence rule limiting the imposition of sales and use taxes on remote sellers. The Wayfair ruling created a snowball effect with approximately 40 states jumping on the bandwagon of “economic nexus.” Nearly all of these states enacted laws that mirrored South Dakota’s $100,000/200 separate transaction threshold model. Continue Reading
In the late nineteenth century, Annie Oakley was arguably the most famous woman in the country. She was renowned for her skill as a sharpshooter and traveled the country in Buffalo Bill’s Wild West Show performing mind-blowing feats. She is credited with shooting the ashes off a lit cigarette hanging out of someone’s mouth and hitting objects by looking at them in a mirror. With rare exception, if Annie Oakley targeting something, she hit it.
When the U.S. Supreme Court issued its decision in Wayfair, many viewed the case as resolving all of the outstanding questions of sales tax nexus. To this point, the Court determined that an online retailer could be liable for sales taxes whether or not it was physically present in a state. State and local tax authorities viewed the Wayfair case as granting carte blanche to economic nexus laws that triggered liability based solely on thresholds tied to sales revenue and the number of sales made by the retailer. Despite this unbridled effort by states to expand the scope of their sales tax laws, there remains a certain level of ambiguity regarding sales tax nexus post-Wayfair.
The decision by the New York City Tax Appeals Tribunal in Goldman Sachs Petershill Fund Offshore Holdings Corp (“Petershill Fund“), unfortunately, does not involve parachute pants or any reference to the “Running Man” dance. Setting this disappointment aside, the case does address a critical constitutional issue impacting passive investors in partnerships. The crux of the dispute was whether the U.S. Constitution prevented New York City (“NYC”) from imposing its General Corporation Tax on a nonresident corporate partner’s sale of its interest in a partnership actively conducting business in the City.
The two primary constitutional weapons used to combat the application of state tax laws are the Due Process Clause and the Commerce Clause. That said, for decades Due Process Clause arguments were often afterthoughts to those made under the Commerce Clause. All that changed when the U.S. Supreme Court’s decision in South Dakota v. Wayfair. The Court’s holding in Wayfair calls into question the going forward usefulness of taxpayer challenges brought under the Commerce Clause. Despite the far-reaching impact of the decision in Wayfair, however, the Court did not address the Due Process Clause. Enter Kaestner Trust.
New York City faces a continuing decline in state and federal funding and increased property taxes continue to be a reliable revenue stream to fund local services. Every January 15th, the NYC Department of Finance (DOF) sends to each owner of NYC commercial real property a Tentative Assessment setting forth (i) the market value of the lot (including improvements), (ii) the actual assessed value of the lot, and, most importantly, (iii) the value upon which the lot will be taxed for the upcoming tax year. The property owner has until March 1st to challenge the Tentative Assessment determining the amount of tax to be paid on the property. If this tax appeal, often referred to as Tax Certiorari or Tax Cert, is not filed by March 1st, the owner loses any right to challenge the assessment for the upcoming tax year.
On June 21, 2018, in its South Dakota v. Wayfair, 138 S. Ct. 2080 (2018), decision, the U.S. Supreme Court reversed its “physical presence” nexus test established over a quarter century earlier in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Wayfair, the Court held that “economic nexus” arising from “economic and virtual contacts” with a state could trigger a sales tax collection obligation. Thus, an out-of-state seller without physical connection to a state can now be required charge, collect, report, and remit sales tax to such state. As expected, most states (over 35 to date) updated their nexus policies to take advantage of the revenue-collection opportunity created by the Wayfair economic nexus decision.
New Jersey’s Tax Amnesty, launched by the New Jersey Division of Taxation on November 15, 2018, is a limited-time opportunity for taxpayers to settle certain New Jersey tax obligations with reduced interest and abated penalties.
The enactment in October of a shared housing surcharge in Chicago and a new tax on online bookings in Pennsylvania both will have an impact on the hotel industry.
Illinois recently passed Public Act 100-587 which requires remote sellers with no physical presence in Illinois to register and collect Use Tax on sales sourced to the state if certain thresholds are met, effective October 1, 2018. On September 11, 2018, the Department issued an emergency regulation, Sec. 150.803 to provide further guidance on the state’s new economic nexus statute.
Indiana recently passed a new sales tax exemption for Software as a Service (“SaaS”), effective July 1, 2018. Under the new law, sales, leases, and licenses of prewritten software remains taxable, regardless of delivery mechanism, but sales, leases, and licenses of SaaS products are not subject to tax. As such, it appears that if a customer has access or control over the software code, the transaction remains taxable in Indiana. If not, the transaction will not be subject to tax going forward. This distinction is similar to the possessory versus non-possessory rules of the Chicago Personal Property Lease Transaction Tax (“Chicago Lease Tax”) which taxes the lease or license of cloud products at a lower rate, 5.25%, than leases or licenses of software delivered by other methods, which is taxed at 9%.