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Arizona will soon allow a multistate service provider to treat sales from services as being in the state based on a combination of income producing activity sales and market sales when calculating its apportionment sales factor (see Ch. 2 (S.B. 1046 ), Laws 2012). This election will be available for taxable years beginning after 2013. A "multistate service provider" is defined as a taxpayer that derives more than 85% of its sales from services provided to purchasers who receive the benefit of the service outside Arizona in the taxable year, and includes all taxpayers required to file a combined report and all members of an affiliated group included in a consolidated return (in calculating the 85% threshold, sales to students receiving educational services at campuses physically located in Arizona are excluded). If the state where services were received cannot be determined, the services are considered to be received at (1) the home of the customer, or (2) in the case of a business, the office of the customer from which the services were ordered in the regular course of the customer's trade or business. If the ordering location cannot be determined, the services are considered to be received at the home or office of the customer billed for the services.

If an election is made, the sales of services that are in Arizona will be determined as follows:


    • 90% of market sales and 10% of income-producing activity sales for taxable years beginning in 2015;

    • 95% of market sales and 5% of income-producing activity sales for taxable years beginning in 2016; and

    • 100% of market sales for taxable years beginning after 2016.

The election must be made on the taxpayer's timely filed original income tax return. The election will be effective retroactively for the full taxable year of the income tax return on which the election is made and binding on the taxpayer for at least five consecutive taxable years (regardless of whether the taxpayer no longer meets the percentage threshold of a multistate service provider during that time period, unless the election is properly terminated). To continue with the election after the five consecutive taxable years, the taxpayer must meet the qualifications to be considered a multistate service provider and renew the election for another five consecutive taxable years. The election may be terminated during the election period either (1) on the acquisition or merger of the taxpayer, or (2) with the permission of the Department of Revenue.

Congressional action on pending online sales tax collection legislation will have to occur by June if the legislation is to have any chance of passing before the election, the Streamlined Sales Tax Governing Board Executive Committee was told on Feb. 17. After June, the Congress is unlikely to move any legislation forward until after the November election. The likeliest scenario is that the legislation will not be taken up until a lame duck session of Congress following the election, according to the committee’s representative on Capitol Hill.

The House Judiciary Committee is unlikely to move forward with the Marketplace Equity Act (H.R. 3179), which was introduced with bipartisan support on Oct. 13, 2011. There is insufficient Republican support on the full committee to bring the bill to the floor. Therefore, supporters of a collection mandate are pinning their hopes on the Senate.


Sen. Richard Durbin, D-Ill., the chief sponsor of the Marketplace Fairness Act (S. 1832) , needs additional Republican sponsors before he pushes for a vote. The bill was introduced on Nov. 9, 2011, with five Republican sponsors and five Democratic sponsors. Durbin is seeking five more Republican sponsors. Sen. Kay Bailey Hutchison, R-Texas, has indicated she may support the legislation, leaving the proponents to attract four more Republican senators.</p>


The West Virginia Supreme Court of Appeals recently held that the portion of a statute allowing a non-lawyer corporate agent to appeal the property tax decisions of a county board of equalization and review to the circuit court is unconstitutional because it is a legislative encroachment on the Court's exclusive authority to define, regulate, and control the practice of law. (+Shenandoah Sales & Service, Inc. v. Assessor of Jefferson County, +West Virginia Supreme Court of Appeals, Nos. 11-0248 and 11-0701, February 9, 2012)



The corporation disputed the county assessor's valuations of its real estate with the county board of equalization, which affirmed the assessments. Due to the fact that the corporation was represented in its appeals to the circuit court by its vice-president rather than a licensed attorney, the appeals were dismissed. The Supreme Court of Appeals noted that it is a well-settled legal principle that a corporation must be represented by a lawyer in a court of record. Additionally, the West Virginia Trial Court Rules do not permit a corporation to be represented by a non-lawyer corporate agent.


The corporation argued that despite the general rule requiring a corporation to be represented by a lawyer in a trial court of record, the plain language of W.Va. Code §11-3-25(b) allows an applicant to appeal a decision of the board of equalization and review through either an agent or an attorney. However, the West Virginia Constitution provides the Supreme Court of Appeals with exclusive authority to regulate the practice of law in the state. The statute's allowance of a corporation to retain a non-lawyer representative to act as an agent violates the court's inherent constitutional authority to define, regulate, and control the practice of law, and, therefore, that portion of the statute was found to be unconstitutional. However, the remainder of W.Va. Code §11-3-25(b) was held constitutional and enforceable.



 The full opinion can be viewed at the West Virginia Judiciary website: Shenandoah Sales & Service, Inc. v. Assessor of Jefferson County</div>




As Julie Minor of CCH reported, supermarket customers in Massachusetts who buy prepackaged salads such as Caesar, Chef, Cobb, Santa Fe, and Asian salads are subject to sales tax on those salads. The Massachusetts Department of Revenue recently issued a letter ruling finding that salads that are prepackaged and sold by a supermarket are taxable as restaurant meals. 


In her letter ruling, Massachusetts Commissioner of Revenue Amy Pitter determined that the salads qualify as taxable "combination plates" that are sold as a unit reasonably and commonly considered a meal. To support this finding, the commissioner noted that the salads:


    • are packaged in an amount suitable for one person;


    1. contain various food items that are combined with lettuce or other greens, rather than just containing varieties of lettuce or other greens; and


    1. are packaged in a bowl or similar container for ease of consumption.



The commissioner also noted that a grocery store does not ordinarily qualify as a restaurant, "except for any part of such a store that sells hot and cold meals and beverages on an eat-in or to-go basis." By selling hot and cold meals and beverages, a grocery store qualifies as a restaurant, at least in part, and the items it sells in its restaurant part or parts are taxable.


The commissioner found that the prepackaged salads are taxable regardless of the fact that they are sold where no seating is available, in the produce or deli section of the supermarket. The fact that customers are expected to eat the salads off the supermarket premises also does not affect their taxability. The determination of taxability also does not depend on where the salads are prepared, either in the store or off the supermarket premises by a third party, or whether there is a fork and/or napkin in the salad container.   


According to the Illinois Department of Revenue (DOR), an out-of-state company that coordinates contracted labor on an as-needed basis for its national customers, some of them located in Illinois, probably has nexus in Illinois for corporate income tax purposes. (General Information Letter IT 12-0001-GIL) The company operates a 24/7 call center for national retailers with multisite locations. The retailers call the company to request on-demand repair and maintenance services, such as plumbing and electrical, at any one of their retail locations. The company will then engage and dispatch a repairman located near the retail location to perform the required service. The repairman will invoice the company for time and materials including sales tax, and the company will then invoice the national retailer for the time and material with an up charge for the dispatching and services provided.


<u>Example</u>: A retail store located in a mall in Chicago, Illinois, has a leaking faucet in its bathroom. The store manager calls the company to request the repair, and the company engages a plumbing contractor in the Chicago area. The plumbing contractor fixes the leak and invoices the company. The company then invoices the headquarters of the retailer (not located in Illinois) for the repair services at an amount slightly higher than the plumbing contractor's charges to the company.


The DOR noted that the "contracted" work is done by independent contractors, since the company does not have payroll, inventory, personal property, or a physical presence in Illinois. However, the relevant Illinois regulation clarifying nexus states that the use of independent contractors may only afford a nonresident immunity from taxation for "limited activities." According to the DOR, the fact that company's business is entirely set up around using independent contractors on a regular basis may jeopardize the protections afforded in the regulation.


The DOR also pointed out that the question of nexus is highly fact-dependent. Therefore, it does not issue rulings regarding whether a taxpayer has nexus with Illinois. However, based on the limited facts presented, the DOR stated that it seemed "likely" that contracting sales of services in Illinois on a regular basis will subject the company to Illinois income taxation.




As Lisa Blaeser of CCH reported, the Illinois Department of Revenue recently released an administrative hearing decision recommending that various types of lifts that make it easier for disabled and elderly persons to move around their homes should qualify for the reduced 1% retailers' occupation and use tax rate as medical appliances. The lifts were sold by a retailer and construction contractor who specialized in selling and installing products for the disabled and elderly community.


A department regulation applicable during the audit period defined "medical appliance" as an item that is intended by its manufacturer for use in directly substituting for a malfunctioning part of the human body. An Administrative Law Judge determined that the lifts were "medical appliances," despite the lack of evidence regarding the manufacturer's intent. The department has since amended the regulation to make the manufacturer's intent irrelevant. 


The ALJ based his determination on a paraplegic physician's testimony regarding the intended use of the lifts. The ALJ found that the physician's specialized medical knowledge, his personal knowledge of the nature of a paraplegic’s disabilities, and his knowledge of the functions of the lifts made the physician's testimony "uniquely competent."


Moreover, wheelchairs were included in the regulation's nonexclusive list of items that qualified for the lower tax rate as medical devices. Thus, the department must have considered wheelchairs to be intended by the manufacturer for use in directly substituting for a malfunctioning part of the human body. The ALJ noted that the lifts "perform the same function as a wheelchair does, by directly supporting and moving a person with malfunctioning body parts in ways that are slightly different from yet still analogous to the support and mobility provided by a wheelchair."


The following items qualified for the reduced tax rate as "medical appliances," according to the ALJ:


<u><span style="font-family: Arial">Ceiling lift:</span></u> A ceiling lift is a battery powered crane that is affixed to a ceiling near a bed or a bath. The component parts include the lifting mechanism and a track, along which a metal bar that extends downward from the ceiling may be moved. The bottom of the bar holds a sling that is wrapped around a person whose legs, or legs and arms, are not functioning. The crane then lifts the sling and the person to allow the person to move or be moved from a wheelchair or other device into and out of a bed or bath.


<u><span style="font-family: Arial">Hoyer lift:</span></u> A Hoyer lift performs the same function as a ceiling lift, but it is free standing and moves on four wheels. It allows a person whose legs, or legs and arms, are not functioning to move or be moved from a wheelchair or other device into and out of a bed or bath.


<u><span style="font-family: Arial">Wheelchair inclined lift:</span></u> A wheelchair inclined lift consists of a track that is attached to one side of a stairway and along which a moveable platform may be raised or lowered. The platform folds down to allow a wheelchair to be placed on it. It allows a person in a wheelchair whose legs, or legs and arms, are not functioning to move from one floor of a home to another.


<u><span style="font-family: Arial">Lift chair:</span></u> A lift chair has motors that work to lift the seat of the chair and enable a person whose legs, or legs and arms, do not function well enough to stand up from a seated position.


<u><span style="font-family: Arial">Stair lift:</span></u> A stair lift is similar to a wheelchair inclined lift. It consists of a track that is attached to one side of a stairway and along which a chair or stool is raised or lowered. It allows a person with limited mobility, whose legs, or legs and arms, do not function well enough to climb a set of stairs to move from one floor of a home to another.


<u><span style="font-family: Arial">Platform lift:</span></u> A platform lift is a small outdoor elevator that is used where the physical structure of a wheelchair-bound person's home does not allow the person to use ramps to get from the sidewalk, or street-level, into the home. It allows a person whose legs do not function, or do not function well enough to get out of a wheelchair or to climb stairs, to move from the sidewalk into a higher floor of a building.




Minnesota Rep. Keith Downey (R), District 41A, has come up with an interesting proposal, H.F. 2031 , that would create a sales tax exemption for personal purchases made over the Internet so that online retailers would not be responsible for collecting the tax. In a phone interview, Rep. Downey explained that the proposal is intended to level the playing field for brick and mortar retailers who feel they are disadvantaged because they have to collect sales tax, while online retailers with no physical presence in Minnesota do not collect the tax. His goal is "tax fairness in the online world," and Rep. Downey believes that fairness should be accomplished by not charging sales tax on products and services purchased by Minnesota residents over the Internet. He does not believe that affiliate (click-through) nexus legislation, such as that proposed in H.F. 1849 , will achieve the goal of tax fairness. That legislation would just "push the online industry out of borders," Downey said.


Under H.F. 2031 as introduced, items that can be deducted as business expenses for federal income tax purposes, or that must be capitalized and can be deducted under federal depreciation or amortization rules, would not qualify for the exemption. Rep. Downey explained that this provision would exclude  business-to-business (point-to-point or EDI) transactions from the exemption. Individuals making purchases over the Internet would be able to make their purchases without paying sales tax at the time of the transaction. 


Rep. Downey plans to add several provisions to his Internet purchases exemption bill to encourage voluntary reporting of the use tax, including:


    • a provision requiring the addition of a "use tax" line on income tax forms;


    1. a requirement that Minnesota online merchants indicate to consumers making an Internet  purchase that use tax is due;


    1. a requirement that receipts for online purchases (via email, website screen, etc.) be accompanied by a Minnesota use tax form and indicate that use tax is due; and


    1. end-of-year reporting requirements for merchants.



Rep. Downey noted that, for consumers making online purchases, price is only one factor being considered. Numerous other factors such as convenience, free shipping, availability, and product selection also come into play.


Downey also said he thinks it is unfair for legislators to communicate that they have solved the problem of brick and mortar stores' competitive disadvantage by enacting affiliate (click-through) nexus legislation. "Let's not pretend we're creating a level playing field. Brick and mortar stores have a much bigger challenge than the sales tax," Downey said. Downey gave an example of a shoe company's image-matching app, in which consumers can take a photo of a shoe with their phone and the app will scan the company's current stock for the closest match and provide product information over the phone. "Competitive pressures won't go away," Downey said.


As CCH's Cathy Agdeppa has reported, Virginia has advanced the Internal Revenue Code (IRC) conformity date from December 31, 2010, to December 31, 2011 (see Ch. 2, Laws 2012). Therefore, references to the IRC are updated to conform Virginia income tax law to federal law changes enacted through December 31, 2011, except that Virginia does not conform to:

• the special bonus depreciation allowance for certain property provided for under IRC §§168(k), 168(l), 168(m), 1400L, and 1400N;

• the five-year carryback period for certain net operating losses (NOLs) under IRC §172(b)(1)(H);

• the original issue discount on applicable high-yield discount obligations under IRC §163(e)(5)(F);

• the deferral of income from the cancellation of debt under IRC §108(i), unless the taxpayer elects to include such income in Virginia taxable income ratably over a three-year period beginning with tax year 2009 for transactions completed in tax year 2009, or over a three-year period beginning with tax year 2010 for transactions completed in tax year 2010 or before April 21, 2010;

• the federal domestic production activities deduction under IRC §199 (two-thirds of the amount deducted for federal income tax purposes may be deducted for Virginia income tax purposes for tax years beginning after 2009); and

• the provisions of IRC §32(b)(3) that relate to the federal earned income tax credit (EITC) for tax years after 2011.

The legislation also makes a technical correction to reinstate language related to the age deduction for individuals born on or before January 1, 1939, which was inadvertently deleted during the 2011 session.


  A concurrent resolution (HCR 2043 ) has been introduced in the Arizona House of Representatives that proposes to amend the state constitution by requiring a supermajority vote from electors to approve a new tax. The resolution mandates that two-thirds of qualified voters approve any initiative, referendum, or proposed constitutional amendment that provides for the following:


-a new tax;

-an increase to an existing tax rate;

-the reduction or elimination of an existing tax deduction, exemption, exclusion, or credit; or

-the establishment of a special taxing district.


The resolution would make the two-thirds requirement retroactive to November 5, 2002. However, as reported by the East Valley Tribune, Representative David Stevens has indicated an intent to remove the retroactivity language when the resolution moves to the full House for consideration.


  If approved, the resolution would be submitted to voters at the November 2012 general election. Arizona already requires a two-thirds vote of each house of the legislature to enact a net increase in state tax revenue.


There’s been an explosion in so-called Amazon legislation introduced in state legislatures since the beginning of 2012. So far, bills have been introduced this session in Florida, Hawaii, Indiana, Minnesota, Missouri, New Jersey, New Mexico, Oklahoma, Vermont and Virginia. These join similar bills introduced in 2011 that are still pending in the legislatures of Massachusetts, Michigan and Tennessee. More bills are likely to be introduced in other states.

The legislation takes various forms, but all of it seeks to expand sales tax nexus in order to force online retailers to collect tax on sales to in-state purchasers. Some bills focus on the retailers’ relationships with in-state website operators (so-called click-through nexus provisions). Others focus on the existence of in-state corporate affiliates, fulfillment centers or other entities that may assist in creating and maintaining a market for the retailers’ products. Many bills take multiple approaches.

Similar legislation was enacted in recent years in Arkansas, California, Colorado, Connecticut, Illinois, New York, North Carolina, Oklahoma, Rhode Island, South Dakota, Texas and Vermont. The California and Vermont laws are not yet in effect; however, the new Vermont bill introduced this year would firm up the effective date of the state’s collection mandate, as well as expand nexus in new ways. Recently, Pennsylvania also adopted a click-through nexus mandate, but it did so through administrative action rather than new legislation. It gave retailers until September 1st to comply.


Meanwhile, Amazon, the prime target of most of this legislation, agreed to begin collecting tax  for sales in California, Indiana and Tennessee by certain future dates.</p>


As Julie Minor of CCH recently reported, a Tennessee Court of Appeals ruled that Scholastic Book Clubs, Inc. has created a de facto marketing and distribution mechanism in Tennessee schools that satisfied the Commerce Clause requirement of "substantial nexus" with the state under Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904 (1992). Scholastic, a well-known seller of books to students and teachers across the United States, was assessed over $5.7 million in Tennessee sales and use taxes, penalties, and interest on sales valued in excess of $34 million during a period covered by audit of over six years.


During the audit period, approximately 8,000 Tennessee schools participated in Scholastic's book program that involved Scholastic sending its marketing materials and order forms to teachers and schools; teachers distributing the marketing information and order forms to students; students and parents remitting their orders and payments to the teachers; and teachers compiling the orders on a master form and forwarding payments to Scholastic. Scholastic then delivered the books to the schools by common carrier, and the teachers distributed the books to their students. Scholastic did not own or lease property in Tennessee; it had no employees, agents, salespersons, independent contractors, or representatives in Tennessee; and it had no bank accounts, data, telephone listing, Web address, or mailing address in Tennessee.



While initially the Commissioner of Revenue asserted to Scholastic that teachers who participated in Scholastic's program acted as agents for the bookseller, the agency theory was not relied upon by the commissioner in the litigation. Rather, the commissioner asserted that Scholastic's use of teachers and schools to sell its products established that Scholastic's relationships with its customers in Tennessee were not merely consummated by mail order and that the facts were sufficient under Quill to sustain the assessment against the bookseller.



The trial court ruled only on the Commerce Clause issue, and found in favor of Scholastic that the bookseller lacked a substantial nexus with Tennessee under the standards set forth in Quill.



In reversing and remanding the trial court's decision, the Tennessee Court of Appeals found that Scholastic did not qualify for the safe harbor, reaffirmed in Quill, for sellers whose only connection with a state is through common carrier or the U.S. mail. Scholastic, the court found, utilized Tennessee schools and teachers to facilitate sales to school children in Tennessee. The court also found that, in addition to creating a de facto marketing and distribution mechanism, the company's use of teachers and schools was a use of public services because the schools and teachers were largely funded by taxpayer dollars. This would help satisfy another prong of the Commerce Clause requirements under Quill and Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, (1977), namely that the tax must be fairly related to services provided by the state.



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