|February 17, 2014|
Previously published on February 13, 2014
A new bill (H.B. 1269) titled the Marketplace Fairness and Small Business Protection Act was introduced last week in the Colorado House of Representatives that may go one step further than your average “Amazon tax” or affiliate nexus law, including “transitory physical presence” and component member nexus (each explained further below). To be clear, this bill is entirely aimed at nexus for sales tax purposes. This bill appears to not only tread along common notions in its attempt to obligate remote sellers to collect and remit taxes on retail sales into the state, but also contains ambiguous “catch all” language which may cause many businesses to question whether they have sales tax nexus with the state.
For example, H.B. 1269 includes fairly typical affiliate nexus language:
Presumptive physical presence—resident of the state refers customers to retailer. (I) Except as provided in subparagraph (III) of this paragraph (e), a retailer that does not collect Colorado sales tax is presumed to be doing business in this state through an independent contractor or other representative if such retailer enters into an agreement with a resident of this state under which the resident, for a commission or other consideration based on completed sales, directly or indirectly refers potential customers, whether by a link on an internet web site or otherwise, to the retailer that does not collect Colorado sales tax, and if the cumulative gross receipts from sales by the retailer that does not collect Colorado sales tax to customers in the state who are referred to such retailer by all residents with this type of agreement with the retailer that does not collect Colorado sales tax is in excess of ten thousand dollars during the preceding twelve month period.
But has somewhat ambiguous so-called “transitory physical presence” nexus language:
Transitory physical presence with solicitation. The regular or systematic solicitation, promotion, or facilitation, whether direct or indirect, within the state of business from sales and purchases of tangible personal property or taxable services to persons residing in this state and by reason thereof receiving orders from, or selling or leasing tangible personal property to, such persons residing in this state for use, consumption, distribution, and storage for use or consumption in this state.
Based on this transitory physical presence provision, it is unclear what would constitute indirect regular or systematic solicitation, promotion or facilitation in the context in which the bill presents such language. What the law does provide is that it does not extend sales tax nexus further than that which is constitutionally permissible.
In fact, it has been argued that affiliate nexus laws may be outside the bounds of constitutionally permissible nexus. However, to date, the U.S. Supreme Court has not ruled on such affiliate nexus or “Amazon tax” laws.
Controlled group nexus
H.B. 1269 also includes provisions aimed at triggering nexus for out-of-state retailers who are members of a “controlled group” with “component members” in the state in numerous ways. A “controlled group” is essentially a parent-subsidiary structure, common ownership group of two or more brother-sister companies (both subject to certain ownership thresholds), or a combination of the former two classes. See § 1563(a) of the Internal Revenue Code for the definition of “controlled group.” A component member is generally a member corporation of a controlled group. See § 1563(b) of the Internal Revenue Code for the definition of “component member.”
Under H.B. 1269, some ways in which an out-of-state retailer can incur sales tax nexus where a component member has physical presence in the state include:
- Where a component member sells under the same or similar business name similar taxable property or services as the out-of-state retailer;
- Where the component member facilitates delivery of the out-of-state retailer’s product through its in-state real estate; and
- Where the component member uses similar or substantially similar trademarks, service marks or trademarks as those used by the out-of-state retailer.
However, most troubling is the ambiguous provision that causes the out-of-state retailer to have sales tax nexus in the state if a component member “conducts any other activities in this state that are significantly associated with the ability of the retailer that does not collect Colorado sales tax to establish and maintain a market in this state for sales of tangible personal property or taxable services.”
Businesses currently structured in a manner in which certain component members are deemed not to have sales tax nexus in the state while other related component members have nexus would potentially be challenged if this law were to be enacted. Therefore, it is advisable for such businesses to preemptively review their structure and arrangements to ensure that the structure properly accomplishes the businesses’ goals and objectives.
The Marketplace Fairness and Small Business Protection Act in a nutshell
Ultimately, state lawmakers may have provided equivalent clarity if the nexus expansion provisions contained in the Marketplace Fairness and Small Business Protection Act are enacted: Out-of-state retailers are required to collect and remit sales taxes on taxable sales to state residents if:
- They engage in affiliate nexus programs with state residents with aggregate annual sales to state residents in excess of $10,000;
- Are a component member of a controlled group (as such terms are defined under § 1563 (a) and (b) of the Internal Revenue Code); or
- If the U.S. Constitution so permits.