By Samantha Trencs and Eric Coffill

The American Catalog Manufacturers Association (ACMA) filed an action for a declaratory judgment in Ohio state court asserting that the new Ohio statutory definition of substantial nexus, which was expanded to include remote sellers by adopting “software” and “network” nexus provisions, violates the Commerce Clause, the Due Process Clause and the Internet Tax Freedom Act (ITFA).

Under Ohio’s expanded nexus provision, a seller located outside of Ohio is presumed to have substantial nexus with Ohio for its sales and use tax laws if a seller uses in-state software (e.g., apps or cookies) or enters into a contract with an in-state content distribution network to facilitate website delivery, provided that the seller has annual gross receipts in excess of $500,000 from transactions with Ohio customers in the current or preceding calendar year. ACMA alleges that the expanded nexus provision violates the physical presence requirement in Quill v. North Dakota because some of ACMA’s members would be required to register, collect and remit Ohio sales and use tax despite lacking a physical presence in Ohio. ACMA also alleges that the software and network nexus provisions discriminate against electronic commerce in contravention of ITFA. Complaint, American Catalog Mailers Association v. Testa, Case No. 17 CV 011440 (Ohio C.P. Dec. 29, 2017).

By Samantha Trencs and Eric Coffill

The American Catalog Manufacturers Association (ACMA) filed an action for a declaratory judgment in Ohio state court asserting that the new Ohio statutory definition of substantial nexus, which was expanded to include remote sellers by adopting “software” and “network” nexus provisions, violates the Commerce Clause, the Due Process Clause and the Internet Tax Freedom Act (ITFA).

Under Ohio’s expanded nexus provision, a seller located outside of Ohio is presumed to have substantial nexus with Ohio for its sales and use tax laws if a seller uses in-state software (e.g., apps or cookies) or enters into a contract with an in-state content distribution network to facilitate website delivery, provided that the seller has annual gross receipts in excess of $500,000 from transactions with Ohio customers in the current or preceding calendar year. ACMA alleges that the expanded nexus provision violates the physical presence requirement in Quill v. North Dakota because some of ACMA’s members would be required to register, collect and remit Ohio sales and use tax despite lacking a physical presence in Ohio. ACMA also alleges that the software and network nexus provisions discriminate against electronic commerce in contravention of ITFA. Complaint, American Catalog Mailers Association v. Testa, Case No. 17 CV 011440 (Ohio C.P. Dec. 29, 2017).

By Charles Capouet and Scott Wright

The Michigan Court of Appeals held that sales of a Detroit attorney’s services can be included in the sales factor numerator for the Detroit income tax only if the client received the services in Detroit. The Detroit income tax apportions income by a three-factor, property, payroll and sales formula. Gross revenue is included in the sales factor numerator if derived from sales made and services rendered in the city. The law firm contended that its services are “rendered” where the client receives the services, rather than where the work is performed. The court of appeals compared the sales factor term “services rendered” to the payroll factor term “services performed” and concluded that the terms must have different meanings. The court also considered the term in the context of how the Legislature treated the sale of tangible goods. The court concluded that only services provided to a client in the city of Detroit are considered to be “in-city” services includible in the sales factor numerator. Honigman Miller Schwartz & Cohn LLP v. City of Detroit, No. 336175 (Mich. Ct. App. Jan. 18, 2018).

By Mike Le and Open Weaver Banks

The Indiana Department of State Revenue issued a Letter of Finding denying a taxpayer’s protest of throwback sales because the taxpayer failed to substantiate being subject to tax in multiple jurisdictions. For income tax purposes, Indiana requires the throwback of sales when tangible personal property is shipped from Indiana to a jurisdiction where a taxpayer is not subject to tax. The taxpayer argued that it was subject to tax in multiple jurisdictions because it was either included in its parent’s combined/unitary returns, employed employees who solicited sales in various states, or conducted business in foreign countries. The Department, however, concluded that the taxpayer failed to carry its burden and did not provide sufficient evidence to prove that it was subject to taxation in those jurisdictions. In particular, the Department determined that since the taxpayer filed a separate Indiana return, its Indiana-origin sales to states in which it was included in combined/unitary returns with its affiliates must be thrown back to Indiana. The Department also denied the taxpayer’s request for abatement of the negligence penalty, finding that the taxpayer failed to demonstrate that its actions were reasonable. Ind. Dep’t of State Rev., Ltr. Of Findings No. 02-20170298 (January 31, 2018).