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Illinois: Supreme Court strikes down controversial “Amazon tax”

Last Friday, October 18, 2013, the Illinois Supreme Court issued a 6-1 opinion holding that the state’s “click-through” nexus law or “Amazon tax” is invalid. The underlying law was passed in 2011 when brick-and-mortar retailers in Illinois called on the state legislature to “level the playing field” and cause out-of-state retailers to collect and remit sales tax on their sales to Illinois customers.

This state law drove CouponCabin.com, FatWallet.com and other Illinois-based Internet marketers to relocate to other states, recognizing that this law would create nexus for their clients.

In Illinois, any retailer “maintaining a place of business in this state” is legally required to collect and remit sales tax. The underlying Illinois law in this case (the “Act”) made it so “maintaining a place of business in this state” includes:

a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customer to the retailer by a link of the person’s Internet website. Pub. Act 96-1544, §5.

In Performance Marketing Association v. Hamer, 2013 IL 114496 (October 18, 2013), the plaintiff was a trade group that represents businesses engaged in performance marketing – exactly the type of businesses affected by the Act. “Performance marketing” means programs where the display of advertising is paid for when a specific action, usually a sale, is completed. The advertisements are commonly found on blogs, news websites, and virtually any place online with web traffic and not in a competing retail business itself. These advertisers, or so-called “internet affiliates,” display texts, images or combinations of both on their websites, containing a link to a retailer’s website. The retailer then compensates the website owner when a consumer clicks on the link and makes a purchase.

Among the challenges raised by the plaintiff were that the new definitions in the Act were unconstitutional under the commerce clause of the U.S. Constitution (U.S. Const., art. I, § 8) and that the provisions of the Act were preempted by federal law prohibiting discriminatory taxes on electronic commerce (the Internet Tax Freedom Act) with the belief that permitting such a law would be in violation of the supremacy clause of the U.S. Constitution (U.S. Const., art. VI, cl. 2).

The court in Performance Marketing Association noted several flaws in the Act. For one, the Act did not have a requirement that the sales be made to Illinois residents. Additionally, there was no requirement in the Act that the computer server hosting the Illinois affiliate’s website be located in Illinois. The Act did require that referral contracts generate more than $10,000 per year. The court noted that other types of “performance marketing,” whether engaged in through print media or over-the-air broadcasting, did not give rise to tax obligations under the Act. Therefore, the court reasoned that the Act is a discriminatory tax on electronic commerce within the meaning of federal law and is therefore preempted. The court ultimately found that the tax was invalid on this basis – that it was in conflict with federal law – making the tax invalid on supremacy clause grounds. The court then declined to perform any commerce clause analysis on the tax because such analysis would not change the outcome.

The Multistate Tax Update previously covered New York’s highest court ruling on a similar (although not identical) New York “Amazon tax” law where the court ultimately upheld the law, which will likely cause a debate on the validity of such laws and heighten calls for the U.S. Supreme Court to consider the issue.

Massachusetts: Following successful pilot program, DOR expands expedited dispute settlement program

Massachusetts Revenue Commissioner Amy Pitter announced that the Department of Revenue (DOR) will give taxpayers an option for settling tax disputes faster than traditional appeal methods or litigation following the success of a year-long early mediation pilot program.

In fact, the program pilot was so well received that “[t]hree of four corporate taxpayers that participated in the pilot settled their $1 million or more tax assessments during the very first mediation session. These cases with tax assessments ranging from $2.6 to $9.7 million closed in 3 1/2 to five months compared with the year or more it would have taken through the department’s regular appeals process,” according to a DOR press release.

This could mean that taxpayers involved in a dispute with the DOR may now have an avenue to resolve cases in a more efficient manner – both from a cost and time perspective.

Commissioner Pitter credited the program’s success to training. The hearing officers had mediation training, while the DOR’s auditors and attorneys took conflict resolution classes. During the mediation, the hearing officers act as a neutral party while the taxpayer, DOR auditors and attorneys discuss resolution.

Due to the success of the pilot, early mediation is now an integral part of the DOR’s resolution process, according to the DOR’s press release. To qualify for mediation, a taxpayer must: have a tax assessment of at least $250,000 (down from the $1 million base for the pilot program), state their case and facts in writing, have fully developed the issues in the case, come to the mediation willing to settle, and have its decision makers present and participate in the mediation session (the DOR has the same last two requirements).

Of note, according to the DOR, out of 717 current pre-assessment audit cases in appeals in fiscal year 2013, 77 will likely meet the program’s threshold and may be eligible for this program.

If you are considering participating in any negotiations with a taxing authority, it is strongly suggested that experienced counsel is engaged. Not only will this help you understand your rights, obligations, and whether this is likely the best avenue for resolution, but experienced counsel will greatly assist with the presentation of your case, which should ultimately provide a better final result. 
 
Click here
to read the DOR’s press release on this intriguing alternative to litigation.

California: Governor signs retroactive tax relief for sale of qualified small business stock

Entrepreneurs who invested in California small businesses can breathe a sigh of relief because Governor Jerry Brown signed legislation (A.B. 1412) which fully relieves such investors from retroactive tax assessments from the sale of Qualified Small Business Stock (QSBS) between tax years 2008 and 2012. Without this legislation, investors would have been required to pay approximately $120 million in retroactive tax assessments, interest and penalties.

Culter decision and retroactive QSBS tax assessments

The legislation is aimed at reversing the actions of the Franchise Tax Board (FTB) in the wake of Cutler v. Franchise Tax Board, 208 Cal.App.4th 1247 (2012), which held that California’s law providing for 50 percent income tax exclusion on gains from the sale of QSBS in certain corporations discriminated against interstate commerce. The FTB interpreted Culter as invaliding the entire California QSBS law and determined that the only way it could remedy such discrimination was to require taxpayers who took the exclusion under the California QSBS law in years still open for assessment to pay tax and interest on those gains.

Two proposed legislative fixes

The California legislature has been working on a legislative fix to such retroactive tax assessments by proposing amendments to the QSBS law to remove the specific language in California’s QSBS law that Culter stated was discriminatory. These amendments would apply to sales of QSBS made before January 1, 2013. The legislature sent two bills (S.B. 209 and A.B. 1412) to Governor Jerry Brown providing a partial or full legislative fix for such retroactive tax assessments and left it to the governor to decide how much relief to provide to taxpayers, if any.

A.B. 1412 provided for a full legislative fix and would allow such California investors to exclude up to 50 percent of the gain from the sale of QSBS during tax years 2008 through 2012, which would eliminate the retroactive QSBS assessments. S.B. 209 provided for a partial legislative fix and would allow such California investors to exclude up to 38 percent of the gain from the sale of QSBS during tax years 2008 through 2012, which would have meant that taxpayers would be required to pay one-fourth of those retroactive QSBS assessments.

Governor Jerry Brown actually signed both bills, but because he signed A.B. 1412 second, the full 50 percent exclusion for sales of QSBS made before January 1, 2013 becomes law as of January 1, 2014.

Franchise Tax Board guidance

The FTB has posted guidance on its website regarding the changes in the California QSBS law.

For taxpayers who filed their 2008 to 2012 tax returns and were contacted by the FTB regarding their QSBS election, the FTB will notify taxpayers of the following: 

  • Pending Notices of Proposed Assessments based on the Cutler decision or FTB Notice 2012-3 will be withdrawn. 
  • Closing letters will be mailed to taxpayers who signed a limited QSBS waiver for 2008. 
  • Unpaid tax, interest or penalty assessed as a result of the Cutler decision/FTB Notice 2012-3 will be abated.
  • Refunds for payments received related to the Cutler decision/FTB Notice 2012-3 will be issued. No action is needed by taxpayers to request refunds, unless they do not hear from the FTB by November 30, 2013, in which case such taxpayers should contact the FTB. 

In addition, certain taxpayers who filed their 2008 to 2012 tax returns may now be able to claim a QSBS exclusion. A.B. 1412 amends the California QSBS law to eliminate the previous requirement that 80 percent of business activity occur in California during the five-year holding period. Therefore, as long as the corporation met the 80 percent California payroll requirement at the time of the taxpayer’s investment in the corporation, such taxpayer may claim the 50 percent gain exclusion from the sale of such QSBS between the years 2008 to 2012 if the four-year statute of limitations is open. A.B. 1412 permits taxpayers until June 30, 2014, to file a QSBS claim for refund for tax year 2008. The FTB website provides specific instructions to claim such refunds.

To read the information on the FTB website, click here
 
Click here for the full text of A.B. 1412. 
 
For a discussion of the state appellate court case and more background on S.B. 209, A.B. 1412 and the QSBS exclusion, view our previous Multistate Tax Updates.

 Click here to read the Multistate Tax Update -- April 11, 2013

 Click here to read the Multistate Tax Update -- June 13, 2013

 Click here to read the Multistate Tax Update -- September 26, 2013

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

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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