The Maryland House of Delegates is considering legislation (House Bill 426) that would impose sales and use tax on digital products and sales tax on digital codes. If signed into law, Maryland would begin taxing digital products and digital codes on July 1, 2019. House Bill 426 was read for the first time in the Ways and Means Committee on January 31, 2019.
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.
Wayfair Case Background
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
- 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.
The Texas Court of Appeals held that a seismic data gathering company was entitled to a cost of goods sold (COGS) deduction for costs of labor and materials incurred to acquire and process seismic data for its clients. Pursuant to Tex. Tax Code § 171.1012(i), a taxpayer may include costs from “furnishing labor or materials to a project for the construction … of real property” in its computation of COGS. The Comptroller had denied the taxpayer’s COGS deduction because the Comptroller characterized the taxpayer as a service provider to companies engaged in the exploration and production of real property (i.e., oil and gas wells). The court rejected this view and agreed with the taxpayer’s position that its activities satisfied the statute because the taxpayer’s seismic services and products were integral to the customer’s oil well drilling process. Hegar v. CCG Veritas Serv. (U.S.) Inc., No. 03-14-00713-CV (Tex. App. Third Dist. Mar. 9, 2016).
The Director of the Arizona Department of Revenue affirmed an Administrative Law Judge determination that a taxpayer must pay the Transaction Privilege Tax on sales of access to the taxpayer’s subscription-based online research service. The Director reasoned that these sales were taxable as rentals of tangible personal property—and not non-taxable services—because the taxpayer’s customers had sufficient control and use of the taxpayer’s software and could manipulate the software content for their specific needs. The Director rejected the taxpayer’s assertion that the common understanding of the taxpayer’s trade or business was the provision of database access and content, or that the transaction’s dominant purpose was database browsing and searching. Ariz. Dep’t of Revenue Director’s Decision, No. 201400197-S (Oct. 27, 2015).
The Tennessee Department of Revenue has issued guidance explaining that the retail sale of, use of, or subscription to a computer software maintenance contract is subject to sales and use tax when: (1) the maintenance contract is sold as part of a taxable sale of computer software; (2) the underlying software is installed on a computer located in Tennessee; or (3) the location of the underlying software is unknown by the seller, but the purchaser’s residential or primary business address is located in Tennessee. The Department noted that additional tax is not imposed on any repairs or maintenance performed as part of the computer software maintenance contract. However, if any repairs or maintenance are not covered by the contract, then those transactions are subject to sales and use tax. Finally, the Department stated that separate sales of support services (e.g., help desk and customer service support) are not subject to sales and use tax, provided that: (1) the purchaser is not required to purchase the support services in connection with the computer software maintenance contract; and (2) the support services do not include the installation, transfer, repair or maintenance of the computer software. Tenn. Dep’t of Revenue, Notice No. 15-25 (Dec. 1, 2015).
On August 7, the Chicago Department of Finance delayed the effective date of the imposition of the Personal Property Lease Transaction Tax on cloud computing services from September 1, 2015, to January 1, 2016. However, the Department did not delay the effective date of the imposition of the Amusement Tax on streaming services. Chicago will seek to impose the Amusement Tax on streaming services beginning September 1, 2015.
View the full Legal Alert.
Yesterday, the Multistate Tax Commission held meetings of its Litigation, Uniformity, and Strategic Planning Steering Committees. The meetings were generally dominated by discussions of evolving apportionment issues, including litigation and significant edits to existing regulations. The Uniformity Committee also advanced its new model “engaged in business” statute.
View the full Legal Alert.
The Indiana Department of Revenue determined that a taxpayer’s sales of merchandise return-related services to retailers are not subject to Indiana sales and use tax. The Department addressed the taxability of three services: (1) the Merchandise Authorization Service (MAS), which utilizes the taxpayer’s proprietary database and risk-scoring computer model to determine whether a retailer-client should accept its customers’ merchandise returns; (2) the Discount Coupon Service, which generates coupons for its retailer-clients’ customers when they make returns; and (3) the product integration services. The Department ruled that the taxpayer’s MAS and Discount Coupon Service were non-taxable services and did not constitute taxable tangible personal property, specified digital products, prewritten computer software or telecommunication services. Also, the MAS was not subject to Indiana sales tax because it was a customized information service. Further, the Discount Coupon Service was a non-taxable service because the coupons were customized to each of the retailer’s customers, the customers did not pay fees for individual coupons, and the fee was based on a percentage of sales generated by transactions in which the coupon is redeemed. Finally, the product integration services were non-taxable because they were professional or personal services not transferred in conjunction with tangible personal property. Ind. Revenue Ruling No. 2013-05ST (May 27, 2015).
On June 2, 2015, the U.S. House of Representatives Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law conducted a hearing on three state tax bills: the Mobile Workforce State Income Tax Simplification Act, the Digital Goods and Services Tax Fairness Act, and the Business Activity Tax Simplification Act.
View the full Legal Alert.
The Alabama Department of Revenue has proposed an amendment to the state’s rental tax regulation. If finalized, the regulation would tax the rental of “digital transmissions,” such as “on-demand” movies, television programs, streaming video, streaming audio and other similar programs, regardless of the method of transmission or the length of time of the rental. The proposed amendment would also reach certain cable television boxes and related accessories. By statute, the rental tax is levied on persons engaged in the business of leasing or renting tangible personal property. The regulatory proposal would treat cable or satellite television providers, online movie and digital music providers, app stores, and other similar providers of digital transmissions as engaging in the business of leasing tangible personal property and would subject them to the rental tax. The proposed regulation would also apply the rental tax to multipurpose cable boxes that function as digital video recorders or perform other functions in addition to accessing basic cable. Under the proposal, cable television boxes that are used solely to access basic cable are not subject to the rental tax. The Department has scheduled a public hearing to discuss the proposed regulation expanding the scope of Alabama’s rental tax for April 8, 2015. Prop. Ala. Admin. Code r. 810-6-5-.09 (2015).