Marketplace collection laws have shifted our common understanding of those persons that are responsible for collecting sales and use taxes. Historically, sellers have been responsible for collecting sales or use tax on sales they make to purchasers. Marketplace collection laws shift the tax collection responsibility on sales made through a marketplace from the seller to “marketplace providers” and “marketplace facilitators” (referred to throughout as “marketplace facilitators”).

In general, state tax laws have defined marketplace facilitators either narrowly (e.g., Oklahoma and Pennsylvania) or broadly (e.g., California, New Jersey, and Washington). State laws applying a narrow definition generally contain two requirements to qualify as a marketplace facilitator: (1) a person must facilitate a sale by listing or advertising the sale in a forum, and (2) the person must collect payment from the purchaser and transmit the payment to the seller.

In those states applying a broad definition, a person can qualify as a marketplace facilitator by conducting any one of a series of activities in two broad categories. For example, a broad definition will generally provide that a person qualifies as a marketplace facilitator if it contracts with a seller to facilitate the sale of the seller’s products through the marketplace and engages in one or more specified activities. Such activities typically include:

(i) transmitting or otherwise communicating the offer or acceptance between buyer and seller;
(ii) owning or operating the marketplace infrastructure that brings buyer and seller together;
(iii) providing a virtual currency that buyers may or are required to use to purchase items from a seller; or
(iv) research and development activities related to one of the preceding activities.

In addition, a person qualifying as a marketplace facilitator also engages in one of the following activities with respect to the seller’s products:

(i) payment processing services;
(ii) fulfillment or storage services;
(iii) listing products for sale;
(iv) setting prices;
(v) branding sales as those of the person (as opposed to the seller’s);
(vi) order taking;
(vii) advertising or promotion; or
(viii) performing customer service or accepting/assisting with returns or exchanges.

The two definitions can have varying consequences. For example, under the narrow definition, a person must, at minimum, conduct activities that facilitate the sale of the seller’s property and collect the payment from the purchaser. However, a person that does not collect payment from the purchaser could still be a marketplace facilitator in a state with a broad definition if the person merely lists products for sales and transmits the offer and acceptance between the buyer and the seller.

In addition to the two general definitions of marketplace facilitator, there are other differences in the state marketplace facilitator provisions that can lead to inconsistencies in who qualifies as a marketplace facilitator. These nuances include exclusions from the definition of marketplace facilitator for certain types of sales (e.g., services) or exclusions for marketplace facilitators in certain industries. For example, New York’s definition of “marketplace provider” does not capture a person that facilitates sales of services. N.Y. Tax Law § 1101(e)(1). For example, California law provides an exclusion for a “delivery network company” from its definition of “marketplace facilitator.” Cal. Rev. & Tax. Cd. § 6041.5(a). A “delivery network company,” for purposes of the marketplace exclusion, is defined as a business that maintains an Internet website or mobile application used to facilitate the pickup of local products from a local merchant and delivery of the local products to a customer. Cal. Rev. & Tax. Cd. § 6041.5(b).

Why this is important: The lack of uniformity in the definitions of marketplace facilitator will result in inconsistent tax collection obligations for similar transactions. Persons that qualify as a marketplace facilitator in one state may not necessarily have a tax collection obligation in other states. If a marketplace is not required to collect in a particular state, the seller will remain responsible for collecting and remitting sales tax.

What to prepare for: It is expected that the remaining states without marketplace collection laws will eventually enact such laws resulting in additional differences and nuances in the state laws. Furthermore, modifications and refinements to marketplace laws are expected in those states that already have such laws. As state’s issue guidance on existing laws, it is possible there will be further variations.

Next Monday: Economic Nexus Thresholds for Marketplaces

Meet Winston, a seven-month-old English Labrador Retriever who belongs to Damian Hunt, Director – State and Local Tax at Amazon. Despite being named after a former British Prime Minister, this English Lab is more concerned with royal formalities than political negotiations.

As a puppy, Winston did his best to emulate British monarchs of the past, by having Damian carry him down from his 10th floor office anytime he needed to go outside. What was at first an easy task, quickly turned into a biceps workout as Winston approached 50 pounds.

In their time together, Damian has been teaching Winston how to fetch. While he is great at tracking the ball down, he has yet to master the concept of returning the ball after he retrieves it –putting a potential career as the Wimbledon ball dog in jeopardy.

Winston is known to eat anything he can get his paws on, including a hefty serving of fish and chips from time to time. However, since he is still teething, any treat, including the occasional cardboard box, will do. Winston is still working on learning a few tricks, and while he can’t yet recite Shakespeare soliloquies from memory, he will happily sit for you if you have the right treat.

We are thrilled to feature Winston as our July Pet of the Month!

On July 1, 2019, eight (8) more states had marketplace collection laws go into effect. These states include Arkansas, Indiana, Kentucky, New Mexico, Rhode Island, Virginia, West Virginia and Wyoming. With this new wave of states, approximately 22 states now have effective marketplace collection laws with many more expected to become effective this fall.

Why this is important: Businesses operating marketplaces and businesses selling through a marketplace will need to change their sales tax collection practices in each of these states. Marketplaces are now required to collect and remit sales and use tax on their own sales and sales made by sellers through the marketplace (marketplace sellers) in each of these eight states. Marketplace sellers may need to cease sales tax collection in these eight states if all of their sales are through marketplaces that are collecting sales tax on their behalf. Each of these eight states may also have different rules on what types of sales a marketplace is required to collect tax on, documentation requirements, and audit liabilities. Each of these issues will need to be evaluated.

Each of these eight states also has varying rules regarding taxability, so preparation for sales tax collection may require additional considerations. For example, in New Mexico and West Virginia, most receipts from the provision of services are subject to sales tax. Additionally, some states have recently enacted legislation that expands their sales tax. For example, in Rhode Island, the sale of certain digital products is subject to sales tax effective October 1, 2019.

Many of these issues will be addressed in forthcoming Marketplace Monday posts as we shed light on marketplace collection laws across the states.

What to prepare for: The next wave of marketplace collection laws is set to become effective October 1, 2019. As of today, these states include Arizona, California, Colorado, Maine, Maryland, Minnesota, Nevada, North Dakota and Texas.

Next Monday: Who qualifies as a marketplace?

On June 14, 2019, an Illinois Appellate Court held that a taxpayer’s subsidiaries are financial organizations that were excluded from the taxpayer’s Illinois combined return. During 2006, 2007 and 2008, Illinois excluded from a combined return those affiliates that apply a different apportionment method. (Note that, for taxable years ending on or after December 31, 2017, members with different apportionment formulas are no longer excluded from Illinois combined returns.) Financial organizations, which included “sales finance companies,” used a different apportionment method than other types of corporations. In relevant part, a sales finance company is a company engaged in “the business of making loans for the express purpose of funding purchases of … services by the borrower….” The taxpayer’s affiliates made loans to customers to facilitate the purchase of insurance from related insurance companies. The question before the court was whether insurance constituted a service or an intangible. The court concluded that insurance was a service, and therefore, the taxpayer’s subsidiaries were excluded from the Illinois combined return.

Premier Auto Fin., Inc. v. Illinois Indep. Tax Tribunal, 2019 IL App (1st) 172472-U.

July 23 – 24, 2019
Foster City, CA

Link for more details

Eversheds Sutherland is a proud sponsor of the COST State and Local Tax Workshop for Technology Companies in Foster City, California on July 23 – 24, 2019. This one and half day workshop will cover the key state and local tax issues that technology companies (both start-up and established) are facing. Attorneys Jeff Friedman, Michele Borens and Todd Betor will speak on a variety of state and local tax issues.

• Technology – Constantly Evolving – Changing Everything | Tuesday, July 23, 2:30 – 3:30 pm
Michele Borens

• The TCJA and Its Impact on Tech Companies | Wednesday, July 24, 9:20 – 10:30 am
Todd Betor

• What Gigs?: SALT Issues for the Gig Economy | Wednesday, July 24, 1:00 – 2:00 pm
Jeff Friedman

• Ask The Experts | Wednesday, July 24, 3:30 PM – 5:00 pm
Jeff Friedman

On June 28, the New Jersey Tax Court held that the state’s alternative minimum tax (known as the “Alternative Minimum Assessment,” or AMA) – which was repealed for tax years beginning on or after January 1, 2018 – is preempted by P.L. 86-272, a federal statute that bars states from imposing a net income tax on certain out-of-state sellers of tangible goods with specific limited contacts in the State.

The New Jersey Tax Court characterized the AMA as a “de facto CBT [Corporation Business Tax]” and stated: “While attempts to tax everyone fairly is certainly a laudable purpose, the second phase of the AMA obliterates the protections of P.L. 86-272 and is thereby contrary to supremacy of Congressional action as required by the Constitution.”

The court explained: “As pointed out by the taxpayer in this case, to argue that the AMA compensates for the CBT is to recognize that the AMA stands as an obstacle to the congressional mandate of P.L. 86-272. The Legislature’s attempt to “compensate” in this case is nothing more than an effort to ignore P.L. 86-272.”

Out-of-state companies that claim P.L. 86-272 protection could be entitled to AMA refunds for tax years after June 30, 2006, and prior to January 1, 2018.

Stainslaus Food Products Co. v. Div. of Taxation, N.J. Tax Ct., Dkt. No. 011050-2017 (2019)

States have enacted new marketplace facilitator laws designed to impose sales tax obligations on marketplace facilitators related to sales made by third-party sellers. These new sales tax collection obligations on marketplace facilitators create the potential for class-action lawsuits arising out of unintended overcollection of tax.

Today’s Marketplace Monday explores two legislative solutions to overcoming this potentially expensive business risk.

Overview

  • Most recently-enacted marketplace facilitator laws prohibit or mitigate the likelihood of class-action lawsuits related to the overcollection of sales taxes.
  • These safeguards allow marketplace facilitators to comply with new tax collection obligations without fearing consumer litigation.
  • States take different approaches to mitigating the risk of overcollection lawsuits, so marketplace facilitators must be aware of their state-specific obligations.

The Problem

Marketplace facilitator laws are a departure from the traditional imposition of sales tax collection obligations on a seller. Now, some states require marketplace facilitators – rather than the seller of goods – to collect tax on third-party sales facilitated through a marketplace platform if certain conditions are met.

Tax overcollection may occur if both a marketplace facilitator and a marketplace seller collect sales tax, or if a marketplace facilitator mistakenly collects sales tax on items that are not subject to a state’s tax.  These errors may occur due to a marketplace facilitator’s unfamiliarity with the item being sold.

Pennsylvania’s Approach: Ban Class-Actions Outright

To address the threat of litigation, many new marketplace laws ban class-action lawsuits related to the overcollection of sales tax by a marketplace facilitator. Class-action bans are common in states that place a tax collection obligation on both facilitators and sellers. Pennsylvania’s marketplace law provides an example of a common class-action ban:

A class action may not be brought against a marketplace facilitator or a referrer on behalf of purchasers arising from or in any way related to an overpayment of sales or use tax collected by the marketplace facilitator or the referrer, regardless of whether such action is characterized as a tax refund claim. Nothing in this subsection shall affect a purchaser’s right to seek a refund from the department under other provisions of this article. 72 Pa. Const. Stat. § 7213.5(e).

Therefore, consumers alleging tax overcollection cannot directly sue a marketplace facilitator, but must rather seek refund claims from the Pennsylvania Department of Revenue.

Maine’s Approach: Clearly Place the Tax Collection Obligation Solely on Facilitators

The failure of a state to provide a class-action ban does not necessarily mean that marketplace facilitators are at an increased risk of facing class actions. For example, on June 20, Maine Governor Janet Mills signed a marketplace facilitator law that does not contain a ban on class-action lawsuits relating to the overcollection of tax.

The introduced version of L.D. 1452, filed April 2, contained similar provisions to Pennsylvania’s marketplace law, including an identical class-action ban. However, the class-action ban was removed in the legislative process after the law was amended to place the tax collection burden on marketplace facilitators.

Maine’s newly-enacted law:

  1. Places all tax collection responsibilities on marketplace facilitators that meet certain requirements,
  2. Requires marketplace facilitators to provide a written statement to marketplace sellers informing them that the facilitator (not the seller) will collect the applicable tax, and
  3. Bars marketplace sellers that receive required statement from marketplace facilitators from collecting tax on the same sales.

Therefore, a Maine class-action lawsuit is unlikely to arise out of the double-collection of tax by marketplace facilitators and sellers. However, a marketplace facilitator may be exposed to litigation associated with the overcollection of sales tax due to errors in determining the proper tax rates or the taxability of specific items.

The New York Division of Tax Appeals (DTA) held that the retroactive application of an amended statute did not violate a non-resident individual’s due process rights.  In 2009, the individual entered into an agreement to sell his shares in an S corporation and made an IRC 338(h)(10) election, pursuant to which the transaction was treated as an asset sale for federal tax purposes.  At the time of the sale, the individual was advised by his tax accountant that under a then recently-issued Tax Appeals Tribunal (Tribunal) decision, New York would treat the transaction as a sale of an intangible, i.e., stock, notwithstanding the deemed asset sale treatment for federal tax purposes, and that the gain on the sale would not be subject to New York tax.  In 2010, however, prior to the date on which the individual filed his New York return for the 2009 tax year, New York amended its statute to provide that if shareholders of an S corporation made an IRC § 338(h)(10) election, the gain shall be treated as New York source income allocated based on the State’s rules.  The DTA, relying on a 2015 New York Court of Appeals decision, found that the individual’s reliance on the Tribunal decision was not reasonable.  The DTA explained that the Court of Appeals had determined the Tribunal’s decision was a departure from the Division’s long-standing and articulated policy in administering transactions involving deemed asset sale elections made by non-resident taxpayers, and that the Court of Appeals accepted the validity of the Legislature’s stated aims of curing an incorrect Tribunal decision.

In the Matter of the Petition of Franklin C. Lewis, NY St. Div. of Tax Appeals, DTA No, 827791 (June 20, 2019)

The South Carolina Department of Revenue issued a private letter ruling advising a company that its charges for developing and conducting surveys tailored to its clients’ needs are not subject to sales and use tax as communications services. Although taxable communications services include “charges to access an individual website,” and the company provided its clients with online access to their survey results, the Department determined that the true object of the transaction was the non-taxable professional service. The charges for online access to the survey results were merely incidental to the underlying professional service.

S.C. Private Letter Ruling 19-1

The Maryland Court of Special Appeals upheld the Maryland Tax Court’s decision holding that the State Comptroller can subject an out-of-state holding company to tax because the holding company did not have economic substance apart from its parent, which was conducting business in the state. In addition to upholding the assessment of tax, the Court of Special Appeals also upheld the Tax Court’s abatement of penalties and interest. The Circuit Court for Arundel County had previously reversed the tax court’s decision with respect to abatement of interest.

The Maryland Comptroller assessed ConAgra Brands, Inc. (Brands) for the 1996-2003 tax years, arguing that the Brands was nothing more than a conduit used to shift its affiliates’ income out of Maryland. Brands had no employees or property in Maryland and did not otherwise conduct business in the state. However, Brands held and managed the intellectual property of a number of affiliated companies, all of which were owned by ConAgra Foods, Inc. (ConAgra), and many of which did business in Maryland. Brands licensed the trademarks to the ConAgra subsidiaries from which they had been acquired in exchange for annual royalty payments. These annual royalties were the primary source of Brands’ income and were ultimately paid to ConAgra through various intercompany transactions.

The Court of Special Appeals applied a “substantial evidence” standard of review to the Tax Court’s decision, and found that there was substantial evidence for the Tax Court’s decision findings that Brands depended on ConAgra and its subsidiaries for the majority of its income, there was a circular flow of money from ConAgra and affiliates to Brands and back to ConAgra, Brands relied on ConAgra for its core functions, and Brands lacked any meaningful substantive activity apart from ConAgra. As a result, the Court of Special Appeals agreed with the Tax Court that, based on the Maryland Court of Appeals’ decision in Gore Enterprise Holdings, Inv. v. Comptroller of the Treasury, Brands lacked economic substance as a business separate from ConAgra. Additionally, the Court of Special Appeals upheld the use of an alternative apportionment method, based on a blended apportionment factor using the apportionment factors of ConAgra and its subsidiaries, citing once again to the Gore decision.

ConAgra Foods RDM, Inc. v. Comptroller of the Treasury, No. 1940 (Md. Ct. Spec. App. June 27, 2019). For more information on the tax court’s prior decision in this case, see our previous post, here.