New York E-Retail Ruling May Tax the Supreme Court

This post was written by Kelley C. Miller and Daniel M. Dixon.

On March 21, we posted Clouds Continue To Rain State Tax On Retailers, the most recent in a series of blog posts related to the U.S. state tax implications of cloud computing, e-Commerce and retailing. To keep the thread going, this past Thursday (March 28), the New York Court of Appeals, the highest state court thus far to consider the issue, issued a much-anticipated ruling in Overstock.com v. New York Department of Taxation and Finance (combining two similar cases brought by e-retailers Overstock.com and Amazon.com. At issue is the New York statute that requires the collection of sales or use tax from an e-retailer (a remote vendor) with no physical presence in the state, if, as part of its business model, it pays in-state residents to assist in business solicitation; and the question being litigated is whether that statute violates the Due Process Clause or Commerce Clause of the U.S. Constitution. The Trial Court—and now the Court of Appeals—have upheld the law.

Significant to the Court of Appeals’ decision is its deference to the bright-line requirement of physical presence necessary for a state to require sales or use tax collection. This standard was set forth by the United States Supreme Court in Quill v. North Dakota (504 U.S. 298; 1992). Although the Court of Appeals acknowledged that Quill is still applicable even though the “world has changed dramatically in the last two decades,” it nonetheless noted that changing the physical-presence requirement in light of the way e-retailers now conduct their business, “would be something for the United States Supreme Court to consider.” A key issue in the case was whether the in-state residents hired or engaged by Overstock and Amazon, and who were involved in soliciting business – they are often referred to as “affiliates” – were actively soliciting customers in the state or whether their actions were more akin to that of an advertiser seeking to influence buying patterns – conduct that might be seen as more passive and, accordingly, would not meet Quill’s physical presence standard.

Despite hopes that the Court of Appeals might address this issue in its decision, the majority deferred discussion of this important distinction in lieu of a more focused analysis of whether the New York statute was unconstitutional on its face. The court held that a discussion of the affiliates’ activities was not warranted as neither Overstock.com nor Amazon.com could prove there were no circumstances under which the statute could be constitutionally applied: “The bottom line is that if a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden.”

The dissenting opinion, however, does address the possibility that there could be significant distinctions between those who act as sales agents for a company and those who place advertisements for a company on websites. The dissent noted that mere advertising by a remote seller, through use of an in-state affiliate that might place advertisements on websites, does not meet the Quill test for physical presence. Placing links on websites from within the state to e retailers are advertisements and not solicitations.

Reacting to the decision, Overstock.com indicated that it may ask the United States Supreme Court to review the issue. In a press release issued yesterday by Overstock.com, Acting Chief Executive Officer Jonathan Johnson noted, “Given that courts in other states have upheld U.S. Supreme Court precedent, and struck down similar laws, the matter appears ripe for resolution by the U.S. Supreme Court.” To ask the Supreme Court to review the ruling in the case, a petition for writ of certiorari would be due on or before June 26.

The Rimon State Tax Team will be closely following developments in this case, including not only the possibility of an appeal to the United States Supreme Court, but also the status of The Main Street Fairness Act of 2013 – U.S. federal legislation currently pending in the House of Representatives (and recently given symbolic approval in the Senate) that would allow states to impose sales and use tax requirements on e-retailers (presumably engaged in inter-state commerce) even if the e-retailer does not have a physical presence in a state.

For more information regarding these developments and to stay on top of the legal wrangling in state taxation related to e-Commerce, contact Kelley C. Miller or Daniel M. Dixon directly. Of course, you can always find out more about our Cloud Computing initiative or get the assistance you need by contacting me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

Clouds Continue To Rain State Tax On Retailers

As you may remember, this past January, Rimon presented a teleseminar entitled: State Tax Update: States Can Be Taxing in a Digital World, led by Dan Dixon and Kelley Miller, who are leading the charge in keeping clients informed as the worlds of cloud computing and state tax converge – or perhaps we should say “collide.”

Increasingly, states are scrutinizing the operations of cloud providers and their cloud-related business activities as they seek ways to force online retailers to collect sales tax from customers. Dan and Kelley have become recognized leaders in this area, closely monitoring all 50 state tax departments within the United States, and the dynamically evolving landscape. Dan and Kelley continue to assist clients, speak and write about new state tax developments, and have been quoted in a variety of media sources, including BusinessWeek, The Wall Street Journal, Forbes, NPR, NetworkWorld, E-Commerce Times and The Hartford Courant.

Dan and Kelley have prepared a recent Rimon Client Alert, entitled “The Wall Street Journal, Forbes, BusinessWeek and Fortune 500 Companies All Agree: No One Knows Taxing the Cloud Like Rimon State Tax!” You can read the full alert online “Cloud Computing is Taxing (Web)”, or you can download a PDF version “Cloud Computing is Taxing (PDF).”  As you may also recall, in 2010 Rimon launched a cloud computing initiative, commissioning a series of individual white papers, now compiled into a comprehensive work entitled, “Transcending the Cloud: A Legal Guide to the Risks and Rewards of Cloud Computing.”

For more information regarding this alert or to stay on top of the developments in state taxation related to cloud services, products, and platforms, from Rimon lawyers who really know this area, contact Dan Dixon or Kelley C. Miller directly. Of course, you can always find out more about our Cloud Computing initiative or get the assistance you need by contacting me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

State Tax Update: States Can Be Taxing in a Digital World

Please join Rimon lawyers Dan Dixon and Kelley Miller Thursday, January 31 at Noon EST (9 a.m. PST; 11 a.m. CST) for "Clouds, Codes, and Crunching Numbers: An Update on Current Multi-State Tax Developments in the Taxation of Electronic Goods and Services." Participants will hear about the latest state developments and trends, including affiliate nexus, “Amazon” legislation, states’ tax treatment of various digital products, software, cloud computing, web-based & web-hosting services, information services, data processing, and sourcing rules for digital goods and services transactions. Don’t miss this timely teleseminar!

Registration link: Click here to register for this seminar.

Taxing Storm Clouds Gather Over Utah

In June 2010, we announced the launch of an initiative focusing on Cloud Computing (‘Transcending the Cloud’ – Rimon Announces White Paper Series & Legal Initiative on Cloud Computing), showcased with a series of individual and topical white papers, in time being compiled into a comprehensive work entitled, “Transcending the Cloud: A Legal Guide to the Risks and Rewards of Cloud Computing.” One of the first in our series was a paper on the state tax implications of cloud computing, entitled: “Pennies From Heaven”

Just as clouds have different shapes, sizes and shades of gray, different states are approaching taxation of cloud transactions differently. Well now, our State Tax practice reports that taxing storm clouds are gathering over Utah. In a marked about-face from the state’s previously issued guidance, the Utah Sales Tax Commission has ruled that web services that charge a fee constitute sale of a service, subject to sales tax. The implication being that mere access of or to an application is enough to subject the provider to a tax liability.

Notable for cloud computing providers, even though the product at issue was access to remotely hosted software that allowed users to conduct webinars "in the cloud," allowing customers to download a free device application for access to that service had the state seeing "software" (sales of which are subject to sales tax in Utah). With at least one state looking at clouds from the application side now, it will be interesting to see if other states quickly follow.

For more information about the Utah ruling, or to stay on top of the developments in the taxation cloud products and platforms, visit www.taxingtech.com. To get legal assistance and guidance from someone who really knows that state of state taxation of cloud computing, contact Kelley C. Miller directly. Of course, you can always find out more about our Cloud Computing initiative or get the assistance you need by contacting me, Joseph I. ("Joe") Rosenbaum, or the Rimon attorney with whom you regularly work.
 

The State of Cloud Computing Can Be Taxing – Want to Understand Why?

Back in June 2010 – more than a year ago – we announced the launch of a new Rimon initiative focusing on Cloud Computing (see ‘Transcending the Cloud’ – Rimon Announces White Paper Series & Legal Initiative on Cloud Computing),showcased with a series of individual and topical white papers, in time being compiled into a comprehensive work entitled, “Transcending the Cloud: A Legal Guide to the Risks and Rewards of Cloud Computing.” As most of you know, this brave new world, with new providers, new economic models, new access plans, and broadened capabilities, has grown, and over the past year we have released nine individual white papers, with more on the horizon and updates to existing papers as the legal and technology environments evolve. One of the first in our series was a paper on the state tax implications of cloud computing entitled: “Pennies From Heaven.”

Just letting you know our State Tax Practice is hosting a Rimon teleseminar on recent developments in state taxation on the subject, and you can view the invitation and sign up through the registration link on the invitation. Just head to: “Clouds, Codes and Crunching Numbers: An Update on Current State Multi-State Tax Development and Trends in the Taxation of Electronic Goods and Services” and sign up today!

Of course, make sure you subscribe via email or get the Legal Bytes RSS Feed so you are always in touch with our latest information; and if you have any questions about our Cloud Computing initiative or need help, feel free to contact me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work. We are happy to help.