In a 5-4 decision, the US Supreme Court today overruled its landmark decisions in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois, disposing of the “physical presence” rule that has served as the bright-line standard for whether remote sellers are required to collect state sales taxes. Although the Court made clear its criticisms of the physical presence standard—referring to it as “arbitrary,” “artificial,” and a “judicially created tax shelter”—it was less clear in describing a new standard to replace it.
South Dakota v. Wayfair – Insights and Analysis
On June 21, 2018, the US Supreme Court struck down the “physical presence rule” of Quill and National Bellas Hess which barred states from imposing sales tax collection requirements on certain out-of-state sellers. This decision is expected to have a significant impact on online sales across the country.
The case, South Dakota v. Wayfair, is the first sales tax jurisdiction case heard by the US Supreme Court in 25 years.
The physical presence rule challenged in this case has long been criticized as giving out-of-state sellers an advantage. In its opinion, the Supreme Court held that over time, the physical presence rule became further removed from economic reality and resulted in significant revenue losses to the States. Additionally, the court held that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.
Read the Wayfair Opinion
Read the full opinion in South Dakota v. Wayfair here. Additional insight and analysis will be added to this post throughout the week.
About the Case
- Title: South Dakota v. Wayfair, Inc., et al.
- Supreme Court Decision: No. 17–494.
- Decision Below: State v. Wayfair Inc., 901 N.W.2d 754 (2018) (PDF)
- Listen: Oral Argument Audio.
The Wayfair case re-examines the Supreme Court’s 1992 holding of Quill v. North Dakota, in which the court ruled that states could not require mail order retailers that lack a physical presence in the state to collect sales tax from their customers. The Quill decision protects Internet retailers that lack physical presence from being forced to collect tax on online sales.
Post-Wayfair Oral Argument Webcast
On April 18, 2018, the Tax Executives Institute (TEI) and Thomson Reuters hosted a two-hour webcast entitled “South Dakota v. Wayfair – Insights on the Oral Argument.” Eversheds Sutherland Partner Jeff Friedman was among the panelists who addressed the issues raised by Wayfair and provided commentary on the oral arguments.
View Details and listen to the webcast replay now.
Wayfair Case Background
Prior Cases
In 1967, the US Supreme Court held that the Commerce Clause prohibits a state from requiring catalog retailers to collect sales taxes on sales unless the retailer has a physical presence there. Nat’l Bellas Hess v. Dep’t of Rev. of Ill., 386 U.S. 753 (1967).
In 1992, the US Supreme Court declined to overrule the physical presence requirement of Bellas Hess in a state sales tax case involving a mail-order catalog seller. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Wayfair, South Dakota has brought a similar case against three online sellers – Wayfair Inc., Overstock.com, Inc., and Newegg Inc.
More: See the Supreme Court docket for complete case filings.
Photos from Oral Arguments
Media Coverage:
- Politico, A taxing case on the Supreme Court’s docket“.” Bernie Becker. (April, 17, 2018)
- Tax Notes, “South Dakota Slams Physical Presence Rule as ‘Unworkable and Indefensible.” Jad Chamseddine. (April 10, 2018) (Subscription.)
- Bloomberg, “South Dakota Rebuffs E-retailer Concerns in Last High Court Brief.” Ryan Prete. (April 9, 2018)
- Reuters, “U.S. Supreme Court takes up state online sales tax dispute.” Lawrence Hurley. (Jan. 12, 2018)
About Eversheds Sutherland SALT:
As state and local jurisdictions in the US evolve their tax systems and engage in increasingly sophisticated enforcement and litigation strategies, businesses need sound state and local tax (SALT) advice more than ever before. Eversheds Sutherland’s SALT practice is committed to delivering innovative solutions that meet the needs of your business. Read more.
Submit your pet to be featured as a SALT Pet of the Month!
The Eversheds Sutherland SALT Team is always excited to see what kind of pets our clients and friends have. Our team features a different pet at the end of every month, and we want to feature YOURS! Featured pets will receive a fun prize from the SALT Team.
To submit your pet to be featured, visit the Eversheds Sutherland SALT Shaker App, click “Pet of the Month” in the drop-down, then click “Submit A Pet.”
Don’t have the app? It is available for download in the Apple App Store, Google Play and the Amazon Appstore.
The Sales Taxation of Virtual Currency
Bitcoin and other virtual currencies may be the most controversial financial assets on the market right now and are certainly the most discussed.
In their article for Bloomberg BNA, Eversheds Sutherland attorneys Jonathan Feldman and Christopher Beaudro examine the state sales tax implications of selling virtual currency.
View the full article.
New York Bill Introduced to Exempt GILTI
On June 11, 2018, Senate Bill 8991 was introduced by New York Senate Majority Leader John Flanagan. The Bill would decouple from the federal treatment of Global Intangible Low-Taxed Income (GILTI).
View the full legal alert.
New Jersey Court Holds That Taxpayer Not Entitled to Exception to State’s Interest Add-Back Requirement
In Kraft Foods Global, Inc. v. Director, Division of Taxation, 2018 WL 2247356 (May 17, 2018), the New Jersey Superior Court, Appellate Division, recently upheld a New Jersey Tax Court decision denying a taxpayer an exception to the state’s interest add-back requirement in determining the taxpayer’s corporate net income subject to New Jersey’s corporation business tax (CBT). This case highlights the unintended tax consequences that may result from financing arrangements between related entities.
Like many states, New Jersey uses federal taxable income as a starting point for the CBT and then has several modifications to federal taxable income to arrive at New Jersey taxable income. One of these modifications is the related party interest add-back provision, which provides that “[e]ntire net income shall be determined without the exclusion, deduction or credit of … [i]nterest paid, accrued or incurred for the privilege period to a related member….” N.J.S.A. 54:10A–4(k)(2)(I).
There are five statutory exceptions to the interest add-back requirement. In Kraft Foods, the only exception relied upon by the taxpayer was the “Unreasonable Exception,” which requires the taxpayer to establish “by clear and convincing evidence, as determined by the director, that the disallowance of a deduction is unreasonable.” In support of its argument, the taxpayer argued that its parent company simply “pushed down” loans from bondholders because the parent company could secure a better interest rate on the open market than the taxpayer.
The appellate court upheld the determination of the Tax Court that the taxpayer did not qualify for the Unreasonable Exception. While acknowledging that legislative history supported the taxpayer’s contention that the Unreasonable Exception may apply to a “pushed down” loan, even in the absence of a guarantee of the third-party debt, the appellate court found that the taxpayer did not meet its evidentiary burden. According to the court, the taxpayer produced no document suggesting that it was ultimately responsible for the third-party debt. The taxpayer’s promise to pay its parent company did not contain a guarantee to the third-party bondholders, nor did the promissory notes the taxpayer signed on behalf of its parent contain payment terms or a schedule for principal payments. Thus, according to the appellate court, it was reasonable for the Director to determine that the parent’s debt to the bondholders “was not, legally or effectively, ‘pushed down’” to the taxpayer. Kraft Foods Global, Inc. v. Director, Division of Taxation, 2018 WL 2247356 (May 17, 2018).
Happy Birthday to Jeff Friedman!
Happy Birthday to Jeff Friedman, SALT lawyer, Tax Chair and yes, Yankees fan.
Non-Tax Lawyer’s Guide to the Tax Cuts and Jobs Act
On December 22, 2017, the largest overhaul of the nation’s tax code since 1986 was signed into law. While the reduction in the corporate income tax rate grabbed most of the headlines, in their article for the Summer 2018 edition of Partnering Perspectives, Eversheds Sutherland attorneys Jeffrey Friedman and Michael Resnick discuss several additional important considerations related to the Tax Cuts and Jobs Act.
View the full article.
Eversheds Sutherland SALT Shaker: May 2018 Digest
Read our May 2018 posts on stateandlocaltax.com or read each article by clicking on the title. For the latest coverage and commentary on state and local tax developments delivered directly to your phone, download the latest version of the Eversheds Sutherland SALT Shaker app.
- SALT Pet of the Month: Fiver
Meet Fiver, the adorable pet rabbit belonging to Brandi Drake, Strategic Tax Senior Director at Charter Communications. - Chicago Streaming Video Tax Does Not Violate Federal and State Law
On May 24, 2018, the Circuit Court of Cook County upheld the City of Chicago’s imposition of its amusement tax on streaming services. - Indiana Enacts IRC Conformity Bill, Decouples from Certain Federal Tax Reform Provisions
On May 14, 2018, Indiana Governor Eric Holcomb signed into law H.B 1316 (the Bill). The Bill provides a number of changes to Indiana’s tax laws, including responding to provisions of the federal Tax Cuts and Jobs Act. - Maryland’s Limited Interest on Wynne Refunds Ruled Unconstitutional
Maryland Tax Court holds that Maryland’s limitation of interest on refunds resulting from the US Supreme Court’s decision in Comptroller of the Treasury of Maryland v. Wynne violates the US Constitution. - New York City: Penalty Relief Available for Certain Section 965 Underpayments
The New York City Department of Finance recently announced the availability of penalty abatements for certain taxpayers that have underpaid business taxes due to the inclusion of Section 965 income. - Oregon Imposes 911 Tax on Out-of-State Retailer with No Physical Presence
The Oregon Tax Court held that the state was not constitutionally prohibited from imposing its statewide 911 tax on an out-of-state VOIP service provider with no physical presence in the state. - Oregon Deems Amendments to Statutory State Apportionment Formulas to Be Constitutional
In another of the so-called “Compact” cases, the Oregon Supreme Court affirmed the decision of the Oregon Tax Court and held that: (1) the 1967 Oregon Legislature, in enacting Oregon Statute Section 305.655, did not clearly and unmistakably intend for Oregon to enter into a binding contract that would bind the states under the Oregon and federal contract clauses, and (2) the 1993 Legislature’s repeal of part of Oregon Statute Section 305.655 did not violate the Oregon Constitution by not setting out the text of that statute. - IRS to Crackdown on SALT Deduction Cap Workarounds
The IRS intends to issue regulations pertaining to states’ attempts to subvert the state and local tax deduction cap.
FEATURED PUBLICATIONS
- State Tax After TCJA: Treatment Of International Income
The Tax Cuts and Jobs Act, P.L. 115-97,[1] made sweeping changes to the Internal Revenue Code, and will have far-reaching implications for state tax systems that broadly conform to the IRC. In this article for Law360, Eversheds Sutherland attorneys Jeffrey Friedman, Eric Tresh, Todd Lard and Todd Betor focus on the major state income tax implications of the TCJA’s international tax provisions, including: the transition tax imposed by revised IRC § 965; the foreign-source dividends received deduction, or DRD, allowed by new IRC § 245A; the tax on global intangible low-taxed income, or GILTI, in new IRC § 951A and related deduction in IRC § 250; the deduction allowed for foreign-derived intangible income, or FDII, in new IRC § 250; and the base erosion anti-abuse tax, or BEAT, imposed under new IRC § 59A. - A Pinch of SALT: Implications of the MTC’s Market-Based Sourcing Model Regulations
It is more complicated to determine an in-state sale regarding the provision of multistate services or licenses of intangibles. Historically, states looked to a taxpayer’s costs of performing the service or licensing the intangible. Some states have become critical of this cost-of-performance method and replaced it with a market-based method of computing in-state sales. In this edition of A Pinch of SALT, Eversheds Sutherland Partner Jeffrey Friedman discusses the recent amendments to the Multistate Tax Commission’s (MTC) Model General Allocation and Apportionment Regulations; how the model regulations can be further improved; how states are responding to the model regulations; and what is next for the MTC.
FEATURED EVENTS
- Eversheds Sutherland SALT Shakes Things Up in the Big Easy!
Eversheds Sutherland was delighted to sponsor and lead the two days of TEI’s Audit and Appeals seminar focused on State and Local Tax Controversy (May 2–3, 2018). - State and Local Tax Day
The Eversheds Sutherland SALT team presented at the Tax Executives Institute (TEI) Denver Chapter State and Local Tax Day on May 15, 2018, in Lakewood, Colorado. - TEI’s 2018 Region II Forum
Eversheds Sutherland is a proud co-sponsor of the 2018 TEI Region II Tax Forum taking place June 4-5, 2018, at the Borgata Hotel in Atlantic City, New Jersey. The Tax Forum will include four plenary and ten breakout sessions offering a wide selection of federal, international, and state and local topics.
SALT Pet of the Month: Fiver
Meet Fiver, the adorable pet rabbit belonging to Brandi Drake, Strategic Tax Senior Director at Charter Communications. Brandi and her husband Matthew volunteer at Charlotte-Mecklenburg Animal Care and Control in Charlotte, North Carolina, where they agreed to foster two rabbits, Fiver and his twin brother Roger. Roger was adopted by another family and after fostering Fiver for four months, Brandi and Matthew knew they were his forever home. 
Fiver is a feisty little rabbit who loved playing with his late dog brother Logan and cat sister Key. He adores vegetables and will sit up and pay attention when he hears them being taken out of the fridge. He also demands daily ear rubs, sitting beside his people until he gets them, and if they take too long to give him attention, he will nudge them with his nose.
Fiver gets his daily exercise by running laps around the living room and through his play tunnel before settling down to cool off on top of the air vent.
We are so excited to feature Fiver as our May Pet of the Month!