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New California Law Requires Collection of Sales Tax From Third-Party Online Retailers

April 26, 2019

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Under a new California law signed by Governor Gavin Newsom on Thursday, out-of-state online retailers that make more than $500,000 from California sales must collect sales tax from their California customers.

Although the largest online retailers already collect California sales tax, smaller retailers that sell through the sites have not paid state taxes until recently.  The new law clarifies that online sales platforms must collect tax for products sold on their websites even if they come from so-called third-party retailers, but provides an exemption for out-of-state retailers that make less than $500,000 from California sales.

As we previously reported, the U.S. Supreme Court held in South Dakota v. Wayfair that states can tax purchases from out-of-state sellers.  After that ruling, numerous states, including California, took steps to begin collecting sales tax from out-of-state retailers.

On April 1, California started requiring out-of-state retailers to register with the state and begin charging customers sales tax.  That policy applied to retailers making more than 200 transactions or $100,000 in California sales. Worried that would harm small businesses, state lawmakers fast-tracked a bill to raise the cap to $500,000, and Governor Newsom signed it into law Thursday.

The new law, AB147, also codifies California’s new policies for larger online retailers, which state lawmakers argued had an unfair advantage over in-state businesses who already had to tax California customers.

“This new law will close this major loophole by mandating that all online retailers collect and remit all the state and local sales taxes due

States Start to Enforce Online Sales Tax Laws, Look to Tax Marketplace Providers

August 16, 2018

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Since the Supreme Court’s landmark decision in South Dakota v. Wayfair, more than half of the states with sales tax have rapidly taken steps to begin collecting sales tax from out-of-state retailers, with 24 of the 45 states with a sales tax in various stages of requiring out-of-state retailers to collect.

As we previously reported, in Wayfair, the Supreme court ruled that internet retailers can be required to collect sales and use tax in states in which they lack a physical presence, overturning 26 years of precedent barring states from taxing out-of-state sellers.

Some states, like Massachusetts, are already enforcing laws they had on the books, while others will start on October 1, the beginning of the fiscal year for many states, or January 1 .  A number of states are still in the process of formulating their respective remote collection laws, while others are delaying enactment to provide notice to retailers.

One issue being addressed is the new requirement that “marketplace providers,” which offer third-party vendors a platform on which to sell goods (e.g. Amazon, Ebay, and Etsy), will also need to begin collecting and remitting tax on those facilitated sales.

While Amazon and others have been collecting and remitting taxes on their own transactions, marketplace provider laws require them to also collect tax on the sales they facilitate for millions of small vendors using their platforms.

Alabama, Arizona, Connecticut, Iowa, Massachusetts, Minnesota, Oklahoma, Pennsylvania, Rhode Island, and Washington have already enacted these laws. Additional states are in

Supreme Court Overturns Quill, Holds States Can Tax Online Retailers Without Physical Presence

June 21, 2018

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In a highly anticipated decision, the U.S. Supreme Court has ruled in South Dakota v. Wayfair, Inc., that internet retailers can be required to collect sales and use tax in states in which they lack a physical presence, overturning 26 years of precedent barring states from taxing out-of-state sellers.

As we previously reported, South Dakota brought the suit, acknowledging that its position defies the Supreme Court’s holding in the 1992 case Quill Corp v. North Dakota, by arguing that the development of the internet and ensuing growth in online shopping necessitate reconsideration of the requirement that a business have a physical presence within a state in order to be subject to that state’s sales tax collection obligations.

By a 5-4 vote, the court found for South Dakota, holding that the state’s 2016 law mandating that certain out-of-state sellers collect and remit tax regardless of whether they had a physical presence in South Dakota, is permissible under the commerce clause.

The Supreme Court vacated and remanded the opinion of the South Dakota Supreme Court, which previously found the South Dakota law unconstitutional because it was contrary to Quill.   Justice Anthony Kennedy wrote the opinion for the majority.  In his concurrence in a prior case, he had stated that the court should consider an appropriate challenge to Quill.

In overruling Quill, Judge Kennedy noted that “[a]lthough we approach the reconsideration of our decisions with the utmost caution, stare decisis is not an inexorable command.”  He wrote that Quill’s physical presence rule

Supreme Court Hears Oral Arguments on State Taxation of Online Retailers

April 18, 2018

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The U.S. Supreme Court heard long-awaited arguments yesterday in South Dakota v. Wayfair, the case brought by the state against several retailers, hoping that the court will overturn over 25 years of precedent on the issue of the collection of sales tax from businesses located outside of the state.

A transcript of the oral arguments is available here, and an audio recording will be available on the Supreme Court’s website this Friday.

South Dakota brought the suit, acknowledging that its position defies the Supreme Court’s holding in the 1992 case Quill Corp v. North Dakota, by arguing that the development of the internet and ensuing growth in online shopping necessitate reconsideration of the requirement that a business have a physical presence within a state in order to be subject to that state’s sales tax collection obligations.

Many await the high court’s decision, from numerous retailers, large and small, wary of the potential burdens of being forced to track and collect sales tax from customers who reside in various jurisdictions with different tax rates, to the states, who could see a boon to their coffers if Quill is overturned.

However, by the end of the arguments on Tuesday, the apparently divided Court left no clear indication that Quill would be overturned.

Justice Sonia Sotomayor suggested that Congress, rather than the Supreme Court, was the right forum in which to settle the matter. “Is there anything we can do to give Congress a signal that it should act more affirmatively in

Retailers Anxiously Await Possible Changes to Taxation of Online Sales

January 19, 2018

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Retailers will be closely watching the outcome of the U.S. Supreme Court’s decision to revisit a 26-year-old case which has limited states’ taxing authority over online sales.

The Supreme Court, heeding calls from traditional retailers and dozens of states, has granted review of South Dakota v. Wayfair, Inc., in which retailers challenge the 1992 ruling in Quill Corp v. North Dakota as obsolete. Quill held – in a pre-internet era – that states cannot impose sales and use tax collection obligations on retailers without a physical presence within a state.  As a result, online retailers without a physical presence in a state have developed a pricing advantage over retailers located within the state.

In the meantime, Congress is considering a number of legislative proposals addressing state taxation of online sales, including the Remote Transactions Parity Act, which would allow states to require out-of-state sellers to collect sales tax. The bill has the support of the National Retail Federation.

Additionally, with many major online retailers already collecting and remitting sales and use taxes to states, some states are turning their legislative sights on smaller third-party sellers that move their merchandise over marketplace platforms hosted by e-commerce giants. Last year, Minnesota, Washington, Pennsylvania, and Rhode Island all enacted “marketplace provider laws”—first-ever statutes imposing tax collection duties on marketplaces for sales by their third-party sellers.

Estimates of uncollected state taxes on such transactions vary, but many analysts put the number at several billion dollars annually from Amazon alone. An analyst with

States Urge Reversal of Physical Presence Rule That Bars Collecting Sales Tax From Online Retailers

November 16, 2017

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Thirty-six state attorneys general, most recently joined by California and Hawaii, have filed an amici curiae brief urging the U.S. Supreme Court to reconsider the “physical presence test”.  The test requires that a retailer have a physical presence within a state before being subject to the collection of sales and use tax by such a state.

The test was established by the 25-year-old case of Quill v. North Dakota, long before the existence of online retailers and e-commerce, as we know, today.  The crux of the argument against the physical presence test is that out-of-state online retailers that sell goods to in-state residents receive an unfair pricing advantage over in-state retailers because the out-of-state online retailers are not required to collect sales or use tax from the customer.

The attorneys general filed the brief in support of a petition submitted by the state of South Dakota asking the Supreme Court to reconsider the issue in a case the state brought against several retailers, including Overstock.com and Newegg, Inc.  A number of other organizations have also submitted supporting briefs, including the National Governors Association.

Cook County Retailers Cheer Repeal of Soda Tax That Spurred Class-Action Lawsuits

October 16, 2017

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Cook County, Illinois has repealed its sweetened beverage tax, just two months after the unpopular ordinance was implemented. As we previously reported, Cook County was among a number of localities across the country to pass sugary drink tax laws, including the following:

  • Berkeley in December 2015;
  • Albany, California in December 2016;
  • Philadelphia in January 2017;
  • and Oakland, California; Boulder, Colorado; and Cook County, Illinois in July 2017.

Cook County consumers objected, however, to paying an additional 68 cents for a two-liter soft drink or an extra 72 cents for a six-pack. Retailers complained the tax was driving consumers to neighboring jurisdictions to avoid the tax.

The sweetened beverage tax also triggered numerous lawsuits, some of which are still playing out in court.  The Illinois Retail Merchants Association sued the county to get the tax thrown out days before it was to take effect.  The court granted a restraining order to keep the tax from being imposed.  Later, however, the court allowed the tax to move forward.  The merchants appealed that decision.

And law firms filed at least a dozen consumer class actions against retailers and fast food chains that failed to properly calculate the tax on retail sales.  For example, one plaintiff sued a retailer for allegedly wrongly charging the tax on unsweetened sparkling water.  The case, which seeks class-action status, is still pending.

For questions or more information, contact the author, Charles Lin, at Charles.Lin@bryancave.com or (949) 223-7145, or any member of the Retail

Retail Distributors Face Compliance With Sugary Drink Taxes Around the Country

September 15, 2017

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Retail distributors of sugary drinks are facing compliance with a number of taxes enacted by cities around the country.  San Francisco’s sweetened beverage tax takes effect on January 1, 2018, and follows a national trend.

Similar taxes have recently taken effect in numerous other localities, including:

  • Berkeley in December 2015;
  • Albany, California in December 2016;
  • Philadelphia in January 2017;
  • and Oakland, California; Boulder, Colorado; and Cook County, Illinois in July 2017.

This past June, voters in Seattle, Washington approved a sugary drink tax, while such a tax was rejected by voters in Santa Fe, Mexico.

Typically, the taxes take the form of an excise tax on the first distribution of sugar-sweetened beverages and the powders or syrups used in making these beverages. The term “sugar-sweetened beverage” can be defined differently in each locality.  In Albany and Berkeley, for example, a sweetened beverage is defined broadly as any beverage that contains at least two calories per fluid ounce, while Oakland and San Francisco define it as containing 25 or more calories per 12 fluid ounces.

The San Francisco tax is 1 cent per fluid ounce and imposed on non-alcoholic beverages with added caloric sweetener.  Beverages commonly referred to as soda, pop, soft drinks, sports and energy drinks, and sweetened ice teas all fall within this definition.  The tax also applies to syrups and powders used to make sweetened beverages, i.e. fountain drinks.  Beverages produced for infant consumption are exempted.

Distributors of sweetened beverages in the affected areas should register

Congress Considers Legislative Solutions to Internet Sales Tax War

October 6, 2016

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As we reported on September 15,  several states have enacted or proposed laws related to the collection of sales tax from online retailers without a physical presence in those states, as required by United States Supreme Court case Quill v. North Dakota.  South Dakota’s current lawsuit against several internet retailers was specifically brought by the state to force reconsideration of Supreme Court precedent.

However, there is a small change that Congress may decide the issue before it reaches the Supreme Court, with three bills having been introduced and a fourth pending.

One of the three bills, cited as the “No Regulation Without Representation Act of 2016“, is more or less a proposal to codify the decision in Quill.  Needless to say, the states who have challenged Quill are highly opposed to this bill.

The other two bills, the “Marketplace Fairness Act of 2015” and the “Remote Transactions Parity Act of 2015“, both similarly propose a destination-based sales tax system which will allow states the authority to require the collection of sales tax from out-of-state retailers. Among a few differences, the former provides an exception for sellers who have $1,000,000 or less in gross annual sales while the latter does not.

A fourth proposal not yet formally introduced would base the taxability of purchases on the law of the seller’s location but at the tax rate of the buyer’s location.  The “Online Sales Simplification Act” would require the seller to collect and remit sales tax to

States Battle E-Retailers and Federal Precedent Over Digital Sales Tax

September 15, 2016

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South Dakota and several online retailers are currently engaged in a battle over the state’s new internet sales tax law (SB 106) aimed at online businesses who sell products to South Dakota residents but which are not obligated to pay sales tax to the state.

Decades ago, during the internet’s infancy, the U.S. Supreme Court concluded in Quill v. N. Dakota that states are prohibited from requiring companies without a physical presence in those states to collect sales tax from its residents. Among the four internet retailers sued by South Dakota are the popular Overstock.com and Newegg.com.

The state acknowledges in its complaint that SB 106 is a violation of Supreme Court precedent. However, it has stated that the purpose of the suit is to facilitate Supreme Court review, because Quill is outdated in the internet age.

Several outcomes to the case are possible, including a grant of summary judgment for either of the parties with a determination of the applicability of Quill and the constitutionality of SB 106.  If South Dakota’s law is struck down as unconstitutional, other states may face legal challenges to their digital sales tax laws.  If it is upheld, more states are likely to pass such laws.

South Dakota’s suit is just one of several recent actions taken by states to “modernize” sales tax laws for application to online retailers.  Alabama has enacted its own law, which requires out-of-state retailers without a physical presence in the state to collect sales tax

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