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Colorado: Federal court delays ruling on controversial remote taxation law

In recent years, state lawmakers have passed laws to expand (or in attempt to expand) their respective department of revenue’s authority to cause out-of-state or remote sellers to collect and remit sales taxes.  In some cases, these laws have been deemed to be unconstitutional, as the statute exceeded the guidelines articulated in the seminal case of Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  In Quill, the U.S. Supreme Court held that it was unconstitutional under the dormant commerce clause of the Constitution for a state to require a retailer with no in-state physical presence to collect sales or use tax.

Most recently enacted statutes addressing this issue have (mostly successfully, thus far) attempted to get around the physical presence requirement by creating an affiliate nexus standard which creates sufficient nexus to subject businesses to sales and use tax in a particular state.  For example, New York requires out-of-state retailers who only conduct their business over the internet to collect and remit sales tax despite not having any physical location or employees in the state under certain circumstances.  A New York court, in ruling on the validity of this law, held that where these out-of-state retailers enter into arrangements whereby they use a third party New York resident’s website to link to the out-of-state retailer’s website for compensation to the resident, the out-of-state retailer is responsible to collect and remit sales tax (click here for a prior article where we discussed this New York case).

Colorado lawmakers took an entirely different tack.  Instead of requiring out-of-state retailers to collect and remit state sales tax, an area fraught with constitutional traps, lawmakers require out-of-state retailers to simply provide information about the sales made to Colorado residents, a so-called “tattletale” law.  The rationale of the Colorado lawmakers is that such a law does not directly conflict with the holding of Quill.

More specifically, the 2010 Colorado law (Colo. Rev. Stat. 39–21–112(3.5)(c) & (d)) requires non-collecting retailers whose gross sales in Colorado exceed $100,000 to: (1) provide transactional notices to Colorado purchasers; (2) send annual purchase summaries to Colorado customers; and (3) annually report Colorado purchaser information to the Colorado Department of Revenue (the “Department”).

This law was most recently litigated in Direct Marketing Ass'n v. Brohl, 2013 WL 4419324 (10th Cir. 2013).  In Direct Marketing Ass’n, the U.S. Court of Appeals declined to rule on the merits of the case and held that the lower federal court did not have the authority to make a ruling or grant an injunction to the taxpayer under the Tax Injunction Act (“TIA”) – Colorado state courts retain jurisdiction for such a ruling.  The TIA provides that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341.  The Direct Marketing Ass’n holding remands the ultimate decision of whether the statute is constitutional to Colorado state courts for now.

Three aspects should be noted: (1) the Court of Appeals did not rule whether the Colorado law is constitutional; (2) if an out-of-state retailer does not collect and remit sales taxes, the state resident is required by state law to report and pay use taxes to the Department with their income tax returns; and (3) this Colorado “tattletale” law provides the Department with the information necessary to enforce use tax laws.  Additionally, the failure to report and pay use tax is a criminal offense.  However, as the court recognized in Direct Marketing Ass’n, “use tax collection is elusive.  Most Colorado residents do not report or remit use tax despite the legal obligation to do so.”  As long as this is the case, state legislators will certainly continue to attempt to increase the requirement of mandating out-of-state retailers to collect and remit sales taxes.

Click here to read the 10th Circuit Court of Appeals’ Direct Marketing Ass'n v. Brohl decision.

Click here to read the text Colorado Revised Statute 39–21–112.

South Carolina Department of Revenue releases application for angel investor tax credits

On October 1, 2013, the South Carolina Department of Revenue (the “Department”) released the application for angel investors to apply for South Carolina’s angel investor tax credit.

South Carolina Governor Nikki Haley signed the High Growth Small Business Job Creation Act of 2013 (the “Act”) on June 14, 2013, which provides a nonrefundable income tax credit of up to 35 percent for qualified investments by certain angel investors in certain qualified businesses headquartered in South Carolina.  Qualifying angel investors may claim up to $100,000 in angel tax credits in a year.  Fifty percent of such tax credit may be applied to the angel investor’s income tax liability in the first year the qualified investment is made, and the remainder may be carried forward for up to 10 years.  Such tax credits may be transferred subject to certain limitations.  The total amount of credits available from the state is limited to $5 million per year.

Angel investors must meet certain criteria in order to qualify for the tax credit under the Act.  Venture capital funds, commodity funds with institutional investors and hedge funds do not qualify as angel investors under the Act.

In order for a company to be eligible to receive an investment that qualifies for this tax credit, the company must first submit the application for registration as a “qualified business” with the South Carolina Secretary of State.  In order to be a qualifying business, the business must meet certain criteria, including the following:

  • Is headquartered in South Carolina;
  • Was formed no more than five years before the qualifying investment was made;

  • Had gross income of $2 million or less on a consolidated basis in any complete fiscal year before registration;
  • Employs 25 or fewer people in South Carolina at the time of registration as a qualified business; and

  • Is primarily engaged in manufacturing, processing, warehousing, wholesaling, software development, information technology, research and development and certain business services.

Once the company is qualified by the Secretary of State, certain angel investors may then claim a tax credit for a qualified investment in such company by submitting the application for angel investor credit to the Department.  Applications must be filed with the Department on or before December 31 of the calendar year when the qualifying investment was made.  The Department will allocate tentative credits on or before January 31 of the following calendar year.  If total credits exceed $5 million, then the Department will allocate tentative credits on a pro rata basis.

Click here for the application for registration as a qualified business.

Click here for the application for angel investor credit.

Click here for our prior alert about this angel investor tax credit.

New York: Governor creates Tax Relief Commission

On October 2, 2013, New York Governor Andrew M. Cuomo announced the creation of the “New York State Tax Relief Commission that will identify way [sic] to reduce the State’s property and business taxes to provide relief to New York’s homeowners and businesses.”  This is an effort to improve the state’s ability to attract business and spur economic growth, as well as mend the state’s current reputation as one of the most tax-burdensome states.

The governor has charged the New York State Tax Relief Commission (the “Commission”) with “identifying new strategies to deliver tax relief to homeowners, renters, and businesses alike.”  Examples of recommendations the Commission could make may include property tax relief, business tax relief, policies that would reduce the tax burden on New York families, and other policies that would encourage job creation and economic growth.  Essentially, the Commission’s job is to propose strategies that will make New York State more competitive with other states.  The Commission’s first report on its findings and recommendations is due by December 6, 2013 and is set to be included in the Governor’s 2014 State of the State agenda.

Click here to read Governor Andrew M. Cuomo’s October 2, 2013 press release.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Jeremy J. Schirra
216.348.5444
jschirra@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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