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%.
Today, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, overturning Quill Corp. v. North Dakota, 504 U. S. 298 (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), that required businesses to have a physical presence in a taxing jurisdiction in order to create nexus for sales and use tax purposes. The Court, overturning its own precedent, held that those cases were “unsound and incorrect.” Additionally, the Court implied with this decision that its prior jurisprudence on the dormant Commerce Clause may be questioned.
In a narrow 5-4 decision, the Court in South Dakota v. Wayfair, Inc. overruled its long-held precedent and held that under the Commerce Clause physical presence is no longer the touchstone for sales tax nexus. Dating back to its decision in National Bellas Hess in 1967, the Court had been clear that a state sales tax passes scrutiny under the Commerce Clause only if the out-of-state business had a physical presence in the taxing state. The holding in National Bellas Hess was affirmed by the Court most recently in 1992 in Quill. Since Quill, the e-commerce marketplace has exploded and, in many ways, is now the sole channel through which consumers shop for purchases of tangible personal property.
The Tax Cuts and Jobs Act (Act) made significant changes to the Internal Revenue Code. One such change significantly restricts business interest deductions, which were fairly broad under the old law. However, significant carve outs remain in place for the complete deduction of floor plan financing interest. Revised Code § 163(j) states that the deduction for business interest is limited to the sum of:
- business interest income for the taxable year;
- 30 percent of the taxpayer’s adjusted taxable income for the taxable year; and
- the taxpayer’s floor plan financing interest for the taxable year.