November 9, 2016 Top Ten Sales and Use Tax Cases of 2016 · Top Ten Sales and Use Tax Cases of 2016 Marc A. Simonetti, Partner ... False Claims Act and Consumer Fraud Act Cases Notable

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Top Ten Sales and Use Tax Cases of 2016

Marc A. Simonetti, Partner Open Weaver Banks, Counsel TEI New York State and Local Tax Seminar November 9, 2016

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Overview

Nexus Cases False Claims Act and Consumer Fraud Act Cases Notable Sales and Use Tax Decisions

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Nexus Under Attack

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Nexus

In a concurring opinion, Justice Anthony Kennedy went out of his way to invite reconsideration of Quill. - “Given these changes in technology and consumer sophistication,

it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier…. It should be left in place only if a powerful showing can be made that its rationale is still correct.”

Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (2015)

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Nexus

Direct Mktg. Ass’n v. Brohl Statistics Number of District Court Decisions: 1 Number of Tenth Circuit Decisions: 2 Number of Supreme Court Decisions: 1 Number of Petitions for Certiorari: 3 Number of Reversals: 2 Number of Remands: 2 Number of Briefs (including amicus): at least 26

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Nexus

Colorado’s notice and reporting requirements did not violate the

Commerce Clause because such requirements neither discriminated against nor unduly burdened interstate commerce.

The court found Quill applies narrowly to sales and use tax collection. - “Even though the Supreme Court has not overruled Quill, it has not

extended the physical presence rule beyond the realm of sales and use tax collection.”

- “We cannot identify any good reasons to sua sponte extend the bright-line rule of Quill.”

Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129 (10th Cir. Feb. 22, 2016)

“sua sponte” = “on its own motion”

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Nexus

On August 29, 2016, DMA filed a petition for writ of certiorari with the Supreme Court. On October 3, 2016, the state filed a “conditional cross-

petition for writ of certiorari” to address whether a state law to enforce its use tax in light of the Quill restrictions is constitutional. Colorado states: - “Quill is the only reason that the States treat in-state and out-of-

state retailers differently; without it, Colorado and other States will treat retailers alike, regardless of their in-state or out-of-state location.”

Direct Mktg. Ass’n v. Brohl (cont’d)

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Nexus

The Alabama Department of Revenue promulgated regulation 810-6-

2-.90.03, effective Jan. 1, 2016, imposing sales and use tax reporting and collecting obligations on an out-of-state retailer without physical presence in Alabama if such retailer had at least $250,000 in retail sales of tangible personal property the prior calendar year.

On June 8, 2016, Newegg filed suit in the Alabama Tax Tribunal challenging an assessment based on the new regulation.

Newegg contends that the Department’s attempt to apply its regulation is unconstitutional and violates U.S. Supreme Court precedent. Newegg also argues that the regulation conflicts with Alabama’s statutes.

Pending: Newegg Inc. v. Ala. Dep’t of Revenue, No. S 16-613 (Ala. Tax Tribunal)

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Nexus

Alabama’s Answer to Newegg’s Complaint filed on Aug. 26, 2016 contends that Quill is “unworkable.” - “The Department acknowledges that the Rule is at odds with the

decision in Quill. However, the Department argues that developments in the national economy have diminished the applicability of the reasoning in Quill and have made the physical presence rule established by Quill unworkable. ‘[T]he fact that a decision has proved ‘unworkable’ is a traditional ground for overruling it.’ Montejo v. Louisiana, 556 U.S. 778, 792 (2009) (citing Payne v. Tennessee, 501 U.S. 808, 827 (1991)).”

Pending: Newegg Inc. v. Ala. Dep’t of Revenue (cont’d)

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Nexus

On March 22, 2016, South Dakota enacted S.B. 106, which imposes sales and use tax reporting and collection on out-of-state retailers without physical presence in South Dakota if: - $100,000 in gross revenue from sales into South Dakota or - 200 separate transactions involving delivery into South Dakota

S.B. 106 permits the state to bring a declaratory judgment action in

any South Dakota Circuit Court against “any person [that South Dakota] believes meets the criteria of section 1 of [S.B. 106] to establish that the obligation to remit sales tax is applicable and valid under state and federal law.”

Pending: South Dakota v. Wayfair, Inc., et al., Hughes County Circuit Court Docket No. 32CIV16-00092

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Nexus

South Dakota brought suit against Wayfair, Inc., Systemax, Inc., Overstock.com, Inc., and Newegg Inc. on April 28, 2016 in state court. - Defendants filed a Notice of Removal to Federal Court and a

motion for summary judgment. Trade associations also filed a separate constitutional challenge to

S.B. 106 in state court in Am. Catalog Mailers Ass’n v. Gerlach, No. 32CIV16-___ (6th Judicial Cir., S.D.).

Pending: South Dakota v. Wayfair, Inc., et al. (cont’d)

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False Claims Act and

Consumer Fraud Act Cases

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Consumer Fraud Act Litigation

The plaintiff brought a $15 million consumer fraud class

action alleging that Verizon overcharged 911 fees. The court held that New Jersey’s State Uniform Tax

Procedure Law, as incorporated into the 911 statute, provides the exclusive remedy to seek a refund of the 911 fees. Each customer must file a refund claim with New Jersey

and class actions are not permitted.

Frank Greek & Son, Inc. v. Verizon New Jersey, Inc., No. A-1928-14T4, 2016 WL 4490597 (N.J. Super. Ct. App. Div. Aug. 26, 2016)

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Class Action Litigation

Plaintiffs commenced a class action lawsuit claiming that

Dunkin’ Donuts improperly collected sales tax on prepackaged coffee. The court dismissed the complaint based on a lack of

subject matter jurisdiction because plaintiffs failed to follow New York’s statutory law, which provides an administrative procedure for seeking a refund that is the exclusive remedy.

Estler, et al. v. Dunkin Brands, Inc., et al., S.D.N.Y. Docket No. 16 Civ. 932 (Oct. 3, 2016)

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False Claims Act Litigation

New York Attorney General took over a whistleblower lawsuit that

alleged that Sprint Nextel had failed to collect $100 million in telecommunications sales taxes after unbundling its wireless services.

On February 27, 2014, the appellate court affirmed a 2013 trial court ruling denying Sprint Nextel’s motion to dismiss the complaint.

On October 20, 2015, the appellate court denied Sprint Nextel’s motion to dismiss, finding that the complaint sufficiently pleaded a cause of action under New York’s False Claims Act that Sprint knowingly filed false tax records with the state.

People of the State of New York, et al. v. Sprint Nextel Corp, et al., 26 N.Y.3d 98 (N.Y., Oct. 20, 2015)

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False Claims Act

Lush (Ill. Cir. Ct. May 10, 2016; on appeal) – Retailer Win - No attributional nexus based on in-state affiliate with brick-and-mortar retail

stores; and - No scienter violation where company relied on expert advice in an area

that is “far from clear.” Relax the Back (Ill. App. Div. (1st) Oct. 17, 2016) – Retailer Win

- Defendant did not act with reckless disregard in determining that it did not have a duty to collect use tax on its catalog and Internet sales.

Nat’l Bus. Furniture (Ill. App. Div. (1st) Aug. 1, 2016) – Retailer Win - Defendant did not act with reckless disregard; and - A knowing violation of the Act cannot occur when the pertinent area of the

law is unclear and specific factual analysis must be completed to determine a retailer’s use tax liability.

Illinois Cases

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Notable Sales and Use Tax Decisions

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Sales and Use Taxes

The Company had a business location in Florida. All sales of flowers and other TPP were initiated online. Sales orders were filled by local florists (outside Florida). The Department assessed sales tax on sales delivered

outside of Florida by local florists, consistent with the Florida statute. No violation of Complete Auto or Due Process.

Florida Department of Revenue v. American Business USA Corp., 191 So.3d 906 (2016)

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Sales and Use Taxes

“Competitive price audits” did not constitute the

nontaxable furnishing of information which is personal or individual in nature and which is not substantially incorporated in reports furnished to other persons. The Tribunal’s decision turned on the source of the raw

data rather than the existence of a customized request from the customer.

Matter of RetailData, LLC, DTA No. 825334 (NYS Tax App. Trib., Mar. 3, 2016); Matter of Wegmans Food Markets, Inc., DTA No. 825347 (NYS. Tax App. Trib., Mar. 10, 2016)

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Sales and Use Taxes

Actual payment to a customer must occur before the

Department may issue a refund to the vendor. The Tribunal did not address whether the funding of an

escrow account would be sufficient to satisfy the repayment requirement.

Matter of New Cingular Wireless PCS LLC, DTA No. 825318 (NYS Tax App. Trib., Feb. 16, 2016)

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Sales and Use Taxes

Neither Citibank nor Sears was eligible for bad debt relief. Vermont may collect sales tax on retail purchases, the

financing of which was ultimately defaulted on by the consumers. The Department of Taxes operated within its discretion in

imposing penalties on the retailer.

Citibank (South Dakota), N.A. v. Dep’t of Taxes, 2016 VT 69 (2016)

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Keep Fighting!

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Questions?

Marc A. Simonetti

Sutherland Asbill & Brennan LLP 212.389.5015

[email protected]

Open Weaver Banks Sutherland Asbill & Brennan LLP

212.389.5081 [email protected]

mailto:[email protected]



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November 9, 2016 Top Ten Sales and Use Tax Cases of 2016 · Top Ten Sales and Use Tax Cases of 2016 Marc A. Simonetti, Partner ... False Claims Act and Consumer Fraud Act Cases Notable