BNA Panelists Debate Sales Tax Notification Reporting Laws, Cite Need for Federal Action

ARLINGTON, Va., July 20 /PRNewswire-USNewswire/ -- The physical presence rule established by the U.S. Supreme Court in Quill v. North Dakota is still the requirement states must satisfy before they can impose a use tax collection obligation on an out-of-state retailer — or, for that matter, impose an onerous reporting requirement in its place, according to Stephen Kranz, partner with Sutherland, Asbill & Brennan LLP, a presenter last week during a BNA Tax & Accounting webinar, "Colorado's New Sales and Use Tax Reporting Requirements: A Model for Other States?"

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That was the opening salvo from Kranz, a past president of the Business Advisory Council to the Streamlined Sales Tax Governing Board, as he made his case for why Colorado's recently enacted use tax reporting regime violates the U.S. Constitution. "Even though out-of-state retailers that lack physical presence in the state are not required to actually collect the use tax on in-state sales," Kranz said, "the law nevertheless violates Due Process and Commerce Clause provisions by requiring certain retailers to report on those sales — at the risk of incurring significant penalties."

At the heart of the discussion was Colorado's enactment of H.B. 1193, which is now codified as Colorado Revised Statutes Section 39-21-112(3.5) — a rule implementing the statute will become final on Aug. 1.

Defending the new regime and arguing that other states should consider implementing it as well, were Phil Horwitz, director of policy for the Colorado Department of Revenue, and Shirley Sicilian, general counsel for the Multistate Tax Commission.  Horwitz and Sicilian maintained that Quill's physical presence requirement does not apply to reporting and notification.  "Quill from a state perspective is limited to the collection of use tax. We don't think Quill addresses the kind of requirements that Colorado establishes," Horwitz said. Colorado is implementing a reporting requirement, not a tax obligation, he said.

The Colorado statute sets a de minimis threshold of $100,000 in gross Colorado sales on out-of-state retailers to notify in-state customers of potential use tax liabilities. The threshold applies to the law's new reporting requirements, which require retailers to:

• Provide purchasers with notice at time of sale about use tax reporting and payment obligations;
• File an annual report with the state for each Colorado purchaser disclosing each purchaser's total dollar amount during the previous calendar year; and
• Provide annual notification, in writing, to each Colorado purchaser (via first-class mail) stating that Colorado requires the purchaser to file a sales/use tax return and pay any tax due, and list for each purchase, the relevant dates, amounts, and category of the purchase.

Significant penalties can be incurred if taxpayers fail to comply.

"Despite Quill's physical presence rule, nexus is a gray area in sales and use taxes," Sicilian added.

Requiring out-of-state retailers to notify their customers of the use tax requirement creates practical problems, Kranz said. This is especially so after Oklahoma adopted and other states are considering a similar consumer notification requirement. How will a company with basic business software create invoices for each state, he asked.  It is possible for an out-of-state retailer to fashion a statement that complies with both Colorado and Oklahoma's notification requirement, Sicilian said.

MTC Releases Draft of Model Statute

The Multistate Tax Commission July 15 released a first draft of a model statute based on the Colorado law (78 DTR H-1, 4/26/10).  Sicilian told BNA the draft model statute tracks the Colorado legislation and related regulations closely, but does not specify dollar amounts for exceptions or penalties. The MTC's Sales and Use Tax Uniformity Subcommittee will take up the draft for discussion at the agency's annual meeting July 26 in Hood River, Ore., she said, and is expected to modify the document based on input from the public—a process that will take a number of months.

Kranz also said that Colorado's reporting rules threaten consumers' privacy. Under the state's regime, the Colorado Department of Revenue has access to detailed information about consumers' purchases. Theoretically, he said, a consumer that falls behind on their use tax payment obligation could receive a tax notice with some potentially embarrassing information about his or her purchasing history.

The MTC's Sicilian countered Kranz's privacy concerns by noting that in the private sector the same type of consumer information is often sold or passed on to affiliates. Unlike at the corporate level, the information reported to Colorado would be kept confidential, she added.

BNA Tax & Accounting is the foremost source of tax and accounting research, news, practice tools, and guidance for tax attorneys, CPAs, corporate tax managers, estate planners, and financial accountants.  For more than 50 years, BNA Tax & Accounting has offered practitioners expert insights and guidance on every significant issue in tax and accounting planning and compliance. Written by practitioners for practitioners, BNA's award-winning Portfolios offer topic-driven, in-depth guidance on transactions designed to help tax professionals achieve new levels of excellence and client service. For more information about our products and services, visit BNA Tax & Accounting online at www.bnatax.com.

SOURCE BNA Tax & Accounting

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