New York: Please hand over your corkage tax—State issues tax guidance on remote wine sales
The New York Department of Taxation and Finance (the Department) recently issued Advisory Opinion TSB-A-13(35)S (the Opinion). In the Opinion, the Department was asked by a catalog and online seller of wine located in California (Petitioner) whether it must collect sales tax on its sales of bottled wine in the state. New York tax law provides that such a seller must collect sales tax on wine. However, for other (nonalcoholic) tangible property sales sold in such a manner, requiring the seller to collect New York sales tax would be unconstitutional. The real question is—what makes wine so special? To fully appreciate this Opinion, it is important to understand where this Opinion departs from what would commonly occur with sales of other tangible goods, as well as the facts and circumstances surrounding the Petitioner.
The Petitioner is a California corporation that is a retailer of bottled wine. It sells this bottled wine through its website and online catalogs. Petitioner has an out-of-state direct shipper’s license under New York Alcoholic Beverage Control Law, authorizing it to sell bottled wine directly to residents of New York who are of legal age if certain conditions are met. Delivery of the bottles of wine is exclusively handled through common carriers. Petitioner has no employees, agents or physical place of business or property in New York. In sum, Petitioner’s only contact with the State of New York is its remote wine bottle sales and Petitioner has no physical presence in the state.
General law applicable to remote sellers
Without going through a lengthy and detailed analysis of the limitations on a state’s ability to tax remote sellers, such as the Petitioner in this case, the general rule regarding a state’s ability to tax a remote seller is as follows: physical presence in a state is required before a state can require a business to collect sales taxes. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
What physical presence is required has been a topic of recent debate. Nonetheless, the Department does not argue that the Petitioner in this case has physical presence—it argues that New York’s law is applicable regardless of physical presence. Note that the use of common carriers for delivery of products in a given state has been held not to establish a physical presence in such state.
Department’s analysis under the Opinion
Under New York tax law, sales tax is imposed on the customer but is to be collected by persons required to collect sales tax. Section 2 of the Twenty-first Amendment to the U.S. Constitution provides that “[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”
Using the authority granted to the states under the Twenty-first Amendment, the state has conditioned a vendor’s permission under the Alcoholic Beverage Control Law to make such sales of alcohol shipped directly to a resident in New York on collecting sales tax (among other duties).
“The Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system,” the Department reasons, quoting the U.S. Supreme Court’s decision in California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 110 (1980). Accordingly, the Department concluded that “[c]onditioning the right of an out-of-state wine seller to directly ship wine to New York residents on the seller accepting the duty to collect the State’s sales and use tax is constitutional, regardless of whether the seller has a physical presence in the State.”
Click here to read Advisory Opinion TSB-A-13(35)S.
Massachusetts: Online shoppers will begin paying state sales tax on Amazon orders
During this time of year, you often hear the phrase “just in time for the holidays.” Since Friday, November 1, 2013, Massachusetts residents making purchases have noticed something new in the process of checking out on Amazon—state sales taxes of 6.25 percent—just in time for the holidays. This date was planned and reached in connection with an agreement between the state and Amazon. The deal did not come easy. Amazon and the state negotiated for six months before reaching an agreement, and Amazon received many concessions. One such concession included not requiring Amazon to collect sales taxes prior to November 1, 2013, even if Amazon established a physical presence in Massachusetts prior to November 1 (which it did) in exchange for Amazon agreeing to collect sales taxes, adding new Massachusetts jobs and a physical presence.
So far, customers do not seem thrilled about the prospect of Amazon’s collecting of sales tax, but these customers are already required to pay use tax (an equivalent tax) on such sales because sales tax is not being collected by the vendor. Such use tax is typically due when the customer files his or her state income tax return. Contrary to law, many customers view taxes on online sales as a new tax since so few actually pay such use taxes. This has been the problem that state lawmakers have been attempting to counter as the economy has not recovered from its peak several years ago, leaving state coffers in need of funds. Businesses are better at collecting and paying sales taxes than your average individual taxpayer is at paying use taxes.
The general requirement that enables a state to constitutionally require a retailer to collect sales taxes hinges on one thing: physical presence in the underlying state. This physical presence bright-line rule remains in the absence of Congress passing anything to the contrary. Common carriers, such as the United States Postal Service, Federal Express and UPS do not establish a physical presence for out-of-state retailers.
Amazon has emerged as both a friend and foe in recent years of the states’ ability to require it to collect and remit sales tax on its online sales. For many years, Amazon has carefully placed its physical business presence so that it would not be required to collect and remit sales taxes in connection with its sales to some of the nation’s most populated states (and where critical masses of Amazon customers reside). Had these same sales taken place in the state in a traditional brick-and-mortar retail operation, the customer would have paid the seller sales tax and the seller would later remit those taxes to the state.
More recently, Amazon has become a champion of the Marketplace Fairness Act of 2013, which would enable states to require qualifying remote sellers (such as Amazon) to collect and remit sales taxes. Many argue that such a measure would level the retail playing field between brick-and-mortar businesses and Internet businesses. All things being equal among retailers, Amazon believes it can retain and continue to grow its market position. Amazon is currently subject to collecting and remitting sales taxes in an increasing number of states, as its business has grown and it continues to expand its footprint in attempt to improve product delivery times.
Interestingly enough, while Amazon has supported the Marketplace Fairness Act, it has remained a staunch opponent of states attempting to require it to collect and remit sales taxes. Amazon has gotten around collecting sales tax on most of its sales by virtue of the constitution limitation on the ability of states to require remote sellers, like Amazon, to collect and remit sales taxes.
Other perspectives on online sales taxes
The Boston Herald recently published a related opinion piece with an interesting perspective entitled Paying tax to Amazon nonsensical by Michael Graham. Some of the major points and arguments of why it is “nonsensical” to tax Amazon sales not only relate to the fact of the tax, but also to the manner in which online sales are taxed. For example, when a Massachusetts resident buys gas in New York or goes on vacation and purchases items, the resident pays the local tax, not Massachusetts tax, even though the items may return to Massachusetts ultimately.
Graham posits that if businesses are to apply sales taxes, they should be applied in the same way on the Internet as in any traditional transaction—“pay the rate of the city/state where the store itself is located.” Three reasons that Graham offers in support of his argument are:
- Taxes will be easier for businesses to collect and only one tax rate will apply to the business’ sales (its local rate), which the business will pay to its state each month
- It does what sales taxes are intended to do (e.g., pay for the police outside the Amazon warehouse in X state, not the state where the items were shipped)
- It will lower customers’ tax bills (i.e., businesses will either relocate to states with lower sales tax rates or states will be forced to be competitive in their tax rates with other states to attract Internet businesses)
While this is an interesting perspective, it is highly unlikely that something like this would ever be passed, as lawmakers have little incentive for such a move unless there is a dire public outcry for it (the author recognized his idea would have little traction). Nonetheless, this article is highly relevant, as many states have recently increased sales taxes in order to lower income taxes. If this is a continuing trend, it is likely that sales taxes in general will receive heightened public scrutiny.
Virginia: Activities of a single employee create corporate income tax nexus
The Virginia Tax Commissioner advised in a recent ruling (PD 13-172) (the Ruling) that a foreign corporation (i.e., non-Virginian corporation) (the Taxpayer) must pay Virginia corporate income tax because the activities of a single employee located in Virginia created sufficient nexus with the state to impose such income tax.
The Taxpayer was headquartered outside of Virginia and did not have any customers in Virginia. The Taxpayer did have a single employee who worked out of a home office in Virginia developing test methods and who travelled to customers’ facilities and to the Taxpayer’s office to provide consulting services and conduct training sessions. The Taxpayer acknowledged that it would need to withhold Virginia income tax from such employee’s compensation.
The Virginia tax code imposes income tax on the Virginia taxable income for each taxable year of every foreign corporation that has income from Virginia sources. A foreign corporation will have income from Virginia sources if there is sufficient business activity with the state to make the applicable apportionment factor (property, sales and/or payroll) positive.
Federal law (P.L. 86-272) prohibits a state from imposing a net income tax where the only contacts with the state constitute solicitation of orders for sales of tangible personal property. The Ruling noted that the Virginia Department of Tax (the Department) extends the application of P.L. 86-272 to sales other than tangible personal property, but narrowly interprets P.L. 86-272 as applying only to those activities that constitute solicitation, are ancillary to solicitation or are de minimis in nature.
The Virginia employee was engaged in the development of test methods from her home office in Virginia. The Ruling inferred that such test methods were related to the consulting and training services provided to customers outside of Virginia. In a prior ruling (P.D. 01-70), the Department held that providing technical training to customers exceeds the protection provided in P.L. 86-272. Similarly, in this Ruling, the Department determined that the services being provided by the Virginia employee were outside of the protections provided in P.L. 86-272 because such services do not appear to be related to the sale of products by the Taxpayer.
Consequently, the Department determined that the Virginia employee’s activities of creating tests related to the provision of consulting and training services to customers would create nexus for the foreign corporation in Virginia, unless such activities were found to be de minimis. The Department stated that it did not have enough information to determine if such activities were de minimis.
Therefore, based on the facts presented, the Department determined that the Taxpayer’s activities in Virginia appear to create sufficient nexus to allow Virginia to impose income tax on the Taxpayer’s income that is apportioned to Virginia. The existence of a positive Virginia apportionment factor, in this case the payroll factor, establishes income from Virginia sources. Consequently, the Department determined that based on these facts, it would appear that the Taxpayer would be required to file Virginia corporate income tax returns due to the activities of its employee in Virginia.
Click here to read the full text of the Ruling.
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