Why Online Retailers Owe Their Tax Treatment to Mail Order Catalogs
Solely purchasing goods or services in person quickly became a thing of past almost 150 years ago thanks to the Montgomery Ward mail order catalog, which debuted in 1872. The Sears, Roebuck & Co. catalog followed in 1894, quickly becoming the premiere book from which the general public could purchase myriad products (I even remember buying “back to school” items from the Sears catalog when my family was stationed overseas). But did you know that these, as well as the Bloomingdale’s catalog that was created in 1896, paved the way for taxation of today’s online retailers? In her article Kelly Phillips walks us down a mail order catalog memory lane of sorts.
Mail Order Catalogs Paved the Way for Taxing Online Retailers
In the past and even still today, retailers that operated through mail-order systems such as catalogs or telephone ordering have not been required to collect and remit sales tax since merchandise was ordered through the mail and not at a brick and mortar store. If the mail order company did/does not have nexus in the state of the purchaser, collection of sales tax is not required. (By the way, it’s not a loop-hole, it’s the company’s Constitutional right.) However, in 1986, Bloomingdale’s By Mail catalog caught the attention of the Department of Revenue in Pennsylvania that wondered why the luxury retailer did not charge sales tax.
It’s no big surprise Bloomingdale’s argued that since items sold were from a catalog and not bought in-store in Pennsylvania, they did not need to collect taxes on products sold in By Mail. However, once the Dept. of Revenue realized that items ordered from By Mail could be returned to Bloomingdale’s stores in the state, the case went to court.
As the article discusses, Revenue argued in Bloomingdale’s By Mail v. Commissioner that By Mail was directly doing business in Pennsylvania for two reasons: The store advertised in the state and that the items for sale in By Mail were largely the same as those sold in its brick-and-mortar locations. Who won the case? Bloomingdale’s! Why? The court ruled that the retailer didn’t have a tax nexus in the state.
There have been several court cases, both at the state level and at the U.S. Supreme Court, that have focused on mail order catalogs. The most famous, arguably at the Federal level is Quill Corp v. North Dakota (1992). But its predecessor National Bellas Hess v Dept of Revenue in 1967 (also a Supreme Court case) largely framed the Court’s decision in Quill. So why do we still care? Because the internet is just like a big virtual catalog, and perhaps surprisingly, we’re talking about the same issues that we were over 50 years ago. Does the seller (catalog retailer, internet retailer) have nexus?
We’ve discussed tax nexus several times in previous blog posts. It basically means that states are required to establish a physical connection between taxpayers and the state before they can impose taxes. Of course, nexus is pretty easy to figure out for brick-and-mortar stores; they’re either in a state or their not. However, mail order catalogs (and, of course, the Internet) made nexus a bit harder to determine. Other things factored in as well, such as whether or not a retailer had a warehouse, call center or factory in the state.
Today, with billions of dollars of sales taking place on the Internet (that big mail order catalog in the cloud), online retailers like EBay and Amazon, as well as much smaller online retailers, are challenging states on nexus. Until there is some federal reform (such as the proposed Marketplace Fairness Act), the basic concept of nexus still applies, and companies are required to charge sales tax on items sold only into states where they have nexus.
While online retailers rein the shopping industry for consumers seeking the latest products at low prices, they truly do owe the way they tax their customers to their forerunners, mail order catalogs.
Photo Credit:Death to the Stock Photo
Focus on North Carolina
There are various explanations for the origination of the term “tar heel.” Perhaps the most convincing explanation is North Carolina’s early history of being a large exporter of tar. Regardless of the origin, the name has stuck and North Carolina is known as the Tar Heel State.
Business Climate:
North Carolina is the tenth most populated state in the country at an estimated 10 million in 2013. The city of Raleigh is considered one of the best places to work due to lower business costs than the national average and a highly educated workforce stemming from prominent universities such as UNC Chapel Hill, Duke University, North Carolina State University and many more. North Carolina is home to the Research Triangle Park, the largest research park in the country which has become a hot spot for technology and life science companies. In this area, there are over 190 companies with over 50,000 employees.
The state’s key industries include manufacturing, aerospace and aviation, defense, automotive, green energy, biotechnology, financial services, software and information technology. Charlotte, North Carolina is the second largest financial center, only behind New York City. According to the Charlotte Chamber, the total value of assets held by banks headquartered in the city is over $2.3 trillion in comparison to New York City’s $4.1 trillion and San Francisco’s $1.3 trillion. Its financial dominance is anchored by five of the top U.S. banks including Bank of America, the nation’s second largest bank.
Taxes:
Despite the state’s low cost of living and great weather climate, according to the 2014 State Business Tax Climate Index North Carolina ranks unfavorably at 44 out of 50. However, the Tax Simplification and Reduction Act enacted in July 2013 brought a brighter outlook for the state’s tax climate that should be beneficial in their rankings for years to come. Changes include a 5.8% flat rate on individual income tax, compared to a progressive tax rate as high as 7.75%. Other changes include a reduced corporate income tax rate (6.0% down from 6.9%) and a repeal of the estate tax. According to the Tax Foundation, in 2014 the combined state and local sales tax average was 6.9%, which ranks 25th nationally.Read more
Sales Tax & The 80/80 Rule
The world of taxation can be a confusing one. Tax codes are thick with rules and regulations that can be applied a number of different ways. A recent article in the Los Angeles Times underscores this idea. The article talked about the 80/80 rule and how it’s applied to sales tax. In this post we’ll take a look at the 80/80 rule and explain how it works.
Understanding the 80/80 Rule
The rule is a useful guide for figuring out if food sold to-go or as take out is taxable. Sales tax can be applied if more than 80% of a businesses’ revenue comes from selling food, and more than 80% of sales are from food eaten on the premises or is served hot.
The 80/80 Rule in Action
The rule seems pretty straightforward but, like most things in the tax world, there is nuance that complicates matters. Read more
Tesla Chooses Nevada
For the last several weeks, we’ve been blogging about tax incentives and the push of states to lure companies such as Tesla to build plants and employ workers in their state. Last week, Tesla announced that it will be locating its new factory to produce lithium ion battery packs (the so-called “Giga-factory”) in Nevada, just outside of Reno. Not Texas, Arizona, New Mexico, or the company’s headquarters state of California. The final tax incentive package reportedly offers the company tax breaks of over $1Billion including sales tax abatements over 20 years, real and personal property tax abatements over 10 years, payroll tax abatements, and even some transferrable tax credits (that the company can sell to other companies). While Tesla CEO Elon Musk claimed that the deal was done with Reno not solely for the tax incentives, they certainly had a huge impact on the decision.
As a Californian, I couldn’t decide if I was happy or sad to see the plant go to Nevada. Certainly, the obvious answer is that, as a citizen, I would have liked to see us retain or gain 6,500 jobs in the manufacturing sector. That would be good for everyone – right? But the state tax professional in me, and regular cynic of California politics is smiling a little bit deep inside that Tesla gave us the jilt. I want to say, “See, I told you so!” We watched as Governor Jerry Brown and our legislature did away with Redevelopment programs across the state in one fell swoop and then eliminated the successful enterprise zone program the following year – all in the name of somehow being friendlier to business in the Golden State. (Right? Help me with that math!) All of our tax rates are high (corporate, individual, and sales/use tax), we continue to have among the highest worker’s compensation rates in the country, and we make it difficult for companies to navigate our environmental laws to construct buildings – just to name a few things. While Mr. Musk didn’t specifically call out the state about these things, I can’t help but wonder if that didn’t have something to do with his decision to locate the factory outside of California. Tesla is the kind of company that gets things done. My guess is that trying to build such a Giga-factory here wasn’t going to “get done” quickly.
Don’t get me wrong. There are certainly a lot of things to love about California, which is why so many of us make this our home. But I think it is time for Sacramento to open its collective eyes and put its actions toward truly making this a better place to do business. If not, we’re likely to see some of our other gems leaving for other states. Not every deal will be a $Billion and promise 6,500 jobs, but small and mid-size companies can talk with their feet as well.
Nexus Redefined: The Click-Through Model
As more of our marketplace goes virtual, and as we purchase fewer “hard items” for things like reading, entertainment, software (think e-readers, i-tunes, and SaaS models), thereby further shrinking the tax base, cash-strapped states continue in their clever attempts to raise revenue. One tactic that has been expanding into more states over the years is something called “click-through” nexus and its companion “affiliate nexus”. The idea behind these laws challenges the traditional thinking about what it means to have physical presence in a state, and makes it easier for states to require companies to collect sales tax on sales to customers within the state. More states are enacting these types of statutes, partially as a stop gap measure to fill the hole left both by the changing marketplace and by Congress’s inability to pass a comprehensive sales tax reform bill such as the proposed Marketplace Fairness Act. Read more
California Tax Credits for Aerospace
Background:
The U.S. Air Force is looking for a partner for their Advanced Strategic Aircraft Program, a deal worth $55 billion. They are looking to buy up to 100 stealth bombers. In the mix for this deal are Northrop Grumman Corp. and Boeing Co. conjointly with Lockheed Martin Corp. California, seeing the benefits this could provide the state, has approved bills in regards to tax credits and incentives for the corporation that the U.S. Air Force ultimately chooses to form a contract with.
Assembly Bill 2389 & Senate Bill 718:
Initially on July 10, 2014 Governor Brown approved Assembly Bill 2389, which contains two portions that can save potentially up to $420 million in tax breaks for a qualified employer. The first portion relates to the Capital Investment Incentive Program (CIIP), a program formed in 1999 to attract large manufacturing facilities by offering 15 years of property tax rebates. This was previously applicable to a broad range of manufacturers, but is being temporarily narrowed down to North American Industry Classification System (NAICS) codes 3364 (Aerospace Product and Parts Manufacturing) and 3359 (Other Electrical Equipment and Component Manufacturing).
The second portion is more specifically for the actual contract with the U.S. Air Force. It’s an aerospace income tax credit of 17.5% of qualified wages paid or incurred to qualified full-time employees. In order for employees to be qualified they must spend 80% or more of their time working on the advanced strategic aircraft program. However, AB 2389 stated that the employer/taxpayer is a “subcontractor with regard to the manufacture of that aircraft.”
Under that definition, the only “subcontractor” that would qualify for the aerospace tax credit is Lockheed Martin since Northrop Grumman is a prime contractor. Northrop Grumman, the largest aerospace/defense employer in California, complained about favoritism and that it would put them at a disadvantage for winning the contract. However, it appeared as though the government wasn’t aware of the corporation’s interest in this deal until last minute. Consequently, Senate Bill 718 was passed on August 15, 2014. This expanded the bill to include prime contractors, thus creating a fairer playing field for both parties. Only one of these corporations will qualify for the aerospace tax credits and it is contingent upon who receives the contract with the U.S. Air Force and if they build the bombers in California.Read more
Tax Credits & Incentives: Understanding Their Importance
Tax credits and incentives are back in the news. California automaker Tesla is in talks with five states to build a new, ten-million-square-foot factory. The battery plant will cost $5 billion to construct and will create an estimated 6,500 jobs. It's easy to see why so many states are playing the role of suitor. In this post we'll take a look at the power of tax credits and incentives plus we'll examine California's chances of landing the new Tesla contract.
The Power of Tax Credits and Incentives
Tesla is a good case study to understand the significance of tax credits and incentives. The five states in the running (California, Nevada, Arizona, New Mexico and Texas) are all offering something to attract the car maker. The exact details are closely guarded but these types of deals typically involve breaks on everything from tax credits based on the number of employees hired to income tax or sales tax credits for purchases of equipment, and property tax reductions or abatements. Oftentimes the negotiated incentives also include promised assistance with infrastructure.Read more
Focus on Nevada
Miles Consulting continues to help clients in other states, so this week we dedicate some time to Nevada.
Business Climate:
Nevada conjures up images of bright lights, gambling, and other entertainment. But we’re blogging about state taxes! According to the 2014 State Business Tax Climate Index, Nevada ranks very favorably due to an absence of several taxes. Some of the taxes not levied include individual income tax, franchise tax, and corporate tax. Nevada also offers many credit and incentives programs that attract employers to increase their workforce. The combination of low taxes and incentives makes Nevada a hot spot for new and existing businesses. Companies like Amazon and Urban Outfitters elected to create fulfillment centers in the Northern Nevada area for these very reasons. The geographic location of Nevada is still within close proximity to California markets without the burden of a high tax structure.
Key industries within the state include manufacturing, aerospace/defense, mining, tourism, gaming, and hospitality. As of 2014, there are roughly 381,800 jobs within the tourism & gaming industry. Nevada is an ideal location for manufacturing due to its proximity to ports in California. The industry currently has over 1,800 manufacturing companies which employ over 56,000 residents of Nevada. The state-wide unemployment rate in April 2014 was 8.0% and has been decreasing due to the addition of 42,700 private sector jobs added within the first four months of 2014.Read more
Sales Tax Issue Heads to the Supreme Court
This fall the United States Supreme Court will add its opinion to the online sales tax debate. The court has agreed to hear a case challenging Colorado's "Amazon Tax." The 2010 law requires online retailers located outside the state to notify consumers of the state sales tax they would owe on purchases. Not only that, the law required these companies to turn over customer names to the state so that the state could enforce the remittance of self-assessed use tax. The Direction Marketing Association [DMA] challenged the law on the basis it violated a consumer's right to privacy.
The "Amazon Tax"
One of the more interesting aspects of this legislation concerns how sales tax is collected. The Colorado law doesn't ask out-of-state companies to collect sales tax, but it does require them to report the names, address and total annual purchases. This is a pretty clever way (read “Big Brother”) of charging an online sales tax – albeit in a roundabout way. A federal district court sided with DMA on the grounds that the notice and reporting aspects of the law violated the Commerce Clause of the Constitution. The 10th Circuit Court of appeals later overturned this decision.Read more
CA Manufacturing Exemption - Regs Final
The California Manufacturers’ Sales/Use Tax Exemption allows certain manufacturing and biotech companies (within NAICS codes 3111 to 3399, 541711, or 541712) to claim a partial exemption from sales and use tax on purchases of manufacturing and research and development (R&D) equipment. The partial exemption rate is 4.1875%.
Regulation Finalized
On July 17, 2014 the California State Board of Equalization (BOE) adopted a regulation to implement the California Manufacturers’ Sales/Use Tax Exemption. The law and related regulation applies to equipment used primarily (greater than 50% of the time) in manufacturing or research and development. This regulation further clarified the Board’s view of the types of businesses and purchases that qualify for the exemption which took effect on July 1, 2014.
The Regulation discusses specific areas that might be of interest to our clients, including:
- Qualifications of an “establishment” within a business that might not be in a primarily qualified NAICS code.
- Definition of “qualified property” including special purpose buildings.
- Special rules for construction contractors.
