Fascinating. MA has decided to declare that an out-of-state internet vendor (as opposed to non-internet mail order vendor) who makes too many sales in MA has taxable nexus.
They even assert that the code of a webapp being downloaded to a computer in MA means the vendor has a physical presence in MA.
I'm not a lawyer, but I think their position is defensible. I'm actually surprised that MA did this first and not NY or CA.
Ira Smilovitz, EA
The Supreme Court has used what it calls the "purposefully availed" test - when a vendor knowingly targets purchasers is a particular state, that state can claim jurisdiction over the vendor for sales done in that state. In other words a state has jurisdiction when someone "purposefully avails itself of the privilege of conducting activities" in the state.
For example in McGee v. International Life Ins.Co. (1957) 355 U.S.
220, a life insurance company was allowed to be sued in a state where it had sent one letter to solicit business from the plaintiff's decedent.The theory appears to be that if a vendor does more than 100 transactions in a year in Massachusetts, amounting to more than $500,000, it can be presumed that it is targeting or intentionally soliciting business from that state. It's hard to say how the courts would treat this - it could be that most cases the law would be approved. But there could well be individual situations where the courts would say the law goes too far.
That numerical argument seems like a non-starter. Quill sold $1M/yr to 3000 customers in North Dakota, the court found against the state anyway, and that was 1992 dollars, worth about $1.7M today. The targeting arguments also seem weak, since Quill certainly knew it was sending catalogs and orders to addresses in N.D. and it didn't matter.
As far as I can make out the Mass. argument, they're saying this is different from Quill because Quill's only contacts were through common carriers, presumably the post office and maybe UPS or Fedex. These sales are over the Internet, which is not a common carrier. I don't know whether that's meaningful or just pixie dust.
In Quill the court also seemed to say that dealing with all the state tax rules would be burdensome, but with 25 years of advances in computers and networking, that's less clear, particularly for a state like Mass. that charges the same tax rate statewide.
R's, John
PS: I have occasionally made taxable sales within New York, where the rate varies by county and city, and have wasted time squinting at Google maps to guess which town and so which county an address was really in.
That's why I call it "Taxachusetts", and the many lousy automobile drivers here I call "Massholes".
Jeff
surprised that MA did this first and not NY or CA.
Massachusetts seemed to be the "first field test site" for US tax law changes.
/BAH
I read it. As they're basing it on Quill v North Dakota which is now 25 years old, they're not breaking new ground. I've always been surprised that lots of other states didn't amend their sales tax laws to take advantage of the favorable ruling. My state lost Bellas Hess 50 years ago and sales tax laws are still the same today. Well, we have a retailers occupation tax as the sales tax was unconstitutional under the 1870 constitution, not an issue under the 1970 constitution.
Hah! It's because the vendor asserts ownership of the ordering application. Let's see if a vendor using an open source ordering application can successfully assert that there's no nexus. Software copyright and patenting has long been abused and they can't have it both ways.
Technical question about sales versus use taxes: If the state asserts nexus, is the duty imposed upon the retailer to remit taxes always going to be a sales tax and not a use tax, or are there exceptional circumstances in which the vendor is remitting a use tax? I always think of a use tax as being levied on the purchaser and not the retailer.
I'm surprised states haven't gotten together and agreed to collect taxes for each other. They could agree, for example, that states would collect tax at their own rate for any sale by a person located in that state, and that the taxes collected would go to the state where the buyer was located. Or they could arrange it differently. But they could certainly do something. But they haven't, as far as I'm aware.
The answer to your question could depend on the law of the specific state you are talking about. At least here in California, the use tax is just a backup way for the state to collect tax in case there is some confusion and sales tax is not collected. It's only one or the other, and they really don't care which, as long as they get to collect. The sales tax is always collected by the retailer. The use tax is imposed on the buyer when no sales tax was collected.
Michigan and surrounding states have some agreement. If I bought something from a state which had a higher sales tax, I do not have to include it on the Michigan income tax form. If I buy something out of state which has a lower sales tax, then I have to include the difference on the Michigan income tax form MI-1040, line 23. The title of the line is "Use Tax" but it's really a sales tax.
I do not know how Michigan and the other states interact w.r.t. this money.
/BAH
In article ,
It may have something to do with the detail that Article I, Section 9 of the Constitution forbids doing that. Even if they could come up with a fiddle to avoid the constitutional problem, e.g. claim that they're merely doing it as the agent of the target state, the states without sales tax would not join so Amazon et al would migrate to Delaware, Montana, New Hampshire, and Oregon.
Anyone interested in this topic should read the Quill decision. It's not very long:
Simply requiring all mail order vendors to collect and remit tax would be a horror show for small merchants. DC and 45 states have state sales taxes. In many states, counties and cities can add their own tax, including a 46th, Alaska, which has no state tax, so figuring out the correct rate on a sale to a state like New York with separate rates for every county and for several dozen cities is not easy. If you are Amazon or Wal-Mart or Staples or Nordstrom, you can subscribe to tax software that does the calculations, and tie it into your order system so it asks the appropriate questions, e.g., since my zip code covers addresses in three counties and I have a PO box, I often get a popup question asking which county I'm physically in. But that service costs something like $100,000/yr.
Congress could address this by creating a clearinghouse where small vendors can send an annual check and a spreadsheet saying how much was for each state, and requiring states to set a single average rate for out of state vendors if they want to collect tax, but 25 years after Quill, no effort to do that has gone anywhere.
R's, John
In article ,
Not really. You are supposed to pay use tax on any goods you import into your state, but to avoid double taxation you can credit sales tax already paid somewhere else. This doesn't require any coordination among the states.
New York and New Jersey used to have a voluntary reciprocal agreement where merchants in one state would collect use tax for goods delivered into the other state, and the home state would arrange to collect and remit the tax to the other state. It ended in 2010. Since it wasn't mandatory, I don't see why any vendors would have bothered.
The NY state income tax form now has a line to report use tax, and a default formula if you leave it blank. My tax accountant tells me that it would be a poor idea to write down $0. I added up my mail order purchases one year, found the default was less than the actual, and have taken the default ever since.
R's, John
I think of myself as buying a lot through the Internet, and Amazon fails surprisingly often to collect NYS tax. Nevertheless, the formula amount has been more than the amount I actually owe, every year since I started keeping track several years ago.
Like you, I suspect writing $0 would be poor strategy, and anyway it's not true. But if I'm called in to account for the number I actually write, I've got the records.
Heh... you're right. The explanation in the 2016 MI-1040 instructions have changed. It's also called a companion tax and a remote sales tax. The date 1-Oct-2015 is mentioned w.r.t. internet purchases; I suspect some law was passed???
I wrote $0 this year because I didn't order anything. Other years, the stuff I've ordered was always less than the smallest default.
And, thanks to you, I just learned that the shipping and handling charges have to be included when calculating the tax.
/BAH
Probably has something to do with unusual lists of taxable and nontaxable items, and a largw number of distinct tax rates.
-- Arthur Rubin, AFSP, CRTP, Brea, CA
The Supreme Court has used what it calls the "purposefully availed" test - when a vendor knowingly targets purchasers is a particular state, that state can claim jurisdiction over the vendor for sales done in that state. In other words a state has jurisdiction when someone "purposefully avails itself of the privilege of conducting activities" in the state.
For example in McGee v. International Life Ins.Co. (1957) 355 U.S.
220, a life insurance company was allowed to be sued in a state where it had sent one letter to solicit business from the plaintiff's decedent.The theory appears to be that if a vendor does more than 100 transactions in a year in Massachusetts, amounting to more than $500,000, it can be presumed that it is targeting or intentionally soliciting business from that state. It's hard to say how the courts would treat this - it could be that most cases the law would be approved. But there could well be individual situations where the courts would say the law goes too far.
----
I don't see how this is valid. Without a presence in the state, I don't see how a state can reach OUTSIDE ITS BORDERS to impose its law on an "alien" (with respect to the state) entity.
It's not the vendor reaching into the state, but the residents of the state reaching outside the state to the vendor. Big difference.
If someone in one state sends a bomb or poison into another state, and someone is injured, the state where the damage took place surely has jurisdiction over the person who perpetrated it, even if he never stepped foot in that state. It's the same theory.
When that's the case, you're right. But when a vendor actively and knowingly solicits business in a state, it can be subject to the laws of that state if it causes damage or injury there.
Except that Quill v. N.D. says for sales tax purposes, if they reach via the post office or common carrier, it doesn't count, except maybe it might.
The decision isn't particularly long, but I find it hard to parse out the nuance. It's clear that the court expected the Congress to sort this out legislatively, but after 25 years I'm not holding my breath.
You're right. They say that, for sales tax purposes, only communicating by mail and delivering goods by common carrier is not a sufficient contact with the state to impose sales tax, because it is a burden on interstate commerce. For criminal and other kind of cases, the interstate commerce issue does not exist, so jurisdiction may be proper in those cases.
It's a close question whether it's fair because in-state companies do have to collect the tax, or its unfair because a company doing interstate business has to keep track of and interact with so many tax systems. But the Court made that decision.
Remitting sales tax can be very painful. I used to sell books mail order, within NY state every county any many cities set their own tax rates, and I'm supposed to report everything by tax jurisdiction so they can allocate the $12 I sent them. I gather that 50 state sales tax software costs on the order of $100K/yr.
Another response to Quill would have been for states to simplify collection, e.g., a single rate per state for out of state sales, and a central clearinghouse so you can send in one form and one check rather than 45. There's been some motion toward that but the big states like NY and CA (both of which have a zillion different rates) haven't signed on.
R's, John
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