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Multistate Tax Commission Proposes Controversial Uniformity Sales Tax Statutes

State and Local Tax

By Cathleen Condrac

Despite opposing litigation, the Multistate Tax Commission (“MTC”) is proposing two new sales tax statutes that consist of a sales/use tax notice and reporting model, as well as an associate nexus model, both of which would impact out-of-state sellers that do not currently collect sales or use tax on items delivered to participating states.

Based on existing Colorado law currently challenged by the Direct Marketing Association (“DMA”), the key provisions of the proposed sales/use tax notice and reporting model would require sellers not registered with participating states to give notice to customers of a potential tax liability; send an annual report to customers listing the transactions on which tax was not collected; and provide an annual report to the state’s department of revenue to assist in identifying non-filers. The Federal District Court in Colorado granted the DMA a preliminary injunction blocking enforcement of the burdensome reporting law based on the likelihood that it violates the Commerce Clause. The DMA has also raised concerns that the proposal is inconsistent with the Streamlined Sales Tax effort.

The associate nexus model proposed by the MTC would require Internet retailers to collect sales or use tax on purchases sourced to their state if a retailer contracts with a resident to pay a commission for purchases made through the resident’s Internet website and those purchases exceed a specified threshold amount. New York, the first state to enact such a law in 2008, was challenged by Amazon.com (“Amazon”) which claimed that the statute was facially unconstitutional and additionally unconstitutional “as applied” under the Commerce, Due Process and Equal Protection Clauses. The New York Supreme Court rejected Amazon’s arguments, granting the Department’s motion for summary judgment against Amazon and Overstock.com. The Appellate Division of the New York Supreme Court upheld the decision of the trial court on the facial claims, but remanded on the “as applied” Commerce Clause claims to the trial court. Amazon has appealed, asking the Appellate Division to resolve the “as applied” claims or to allow the case to proceed to the New York Court of Appeals (December 6, 2010).

During the MTC’s Annual Conference and Committee Meeting in July 2011, the Executive Committee voted to address the model sales/use tax notice and reporting statute at its next meeting with the potential for possible adoption as a uniformity recommendation during the 2012 annual meeting, since a majority of affected states have indicated that they would consider adoption. In addition, the Sales and Use Tax Subcommittee reviewed several policy choices, including whether or not to develop the associate nexus model before litigation is final in New York.

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