The state of Wisconsin lost in an attempt to look further down the line to find an ultimate consumer to source sales in the case of Wisconsin Department of Revenue v. Microsoft Corporation, Court of Appeals, District IV, Appeal No. 2018AP2024.[1]

The case involves the state of Wisconsin looking to include in the sales factor fees paid to Microsoft for licensing Windows that are included in machines eventually purchased for use in Wisconsin. The purchasers of the computers enter into a sublicense with the manufacturer to use Windows.  The Wisconsin Department of Revenue argues that the licensing fee paid by the manufacturer when they installed Windows on the machine should be sourced to Wisconsin when sold to a Wisconsin resident.[2]

In Chief Counsel Ruling 2019-03[1], the Franchise Tax ruled on the application of California’s market based sourcing rules as applied to an outside director that attended a shareholder or board of directors meeting in California.

Market based sourcing is increasingly being used by states to determine whether the state has the right to impose an income tax on the amounts paid to an out of state organization or resident for services rendered.  Previously states had generally looked to the location of the sale being tied to where the services were primarily performed.

Wayfair related state sales tax developments have continued since the ruling came down last summer, with virtually every state with a sales tax making changes over the past year in how they handle out of state sellers.  But the state of Kansas has decided to go where no one else has dared to tread, issuing Notice 19-04, Sales Tax Requirements for Retailers Doing Business in Kansas.[1]

As you read the document you’ll note one key item is missing—the minimum amount of sales (either in dollar volume or number of transactions) necessary to trigger the need to register and collect Kansas sales tax.  That is because, in the view of the Kansas Department of Revenue, any amount of sales into Kansas is enough to trigger the requirement to collect and pay over the tax

After having decided that North Carolina could not tax a trust based solely on residence of a beneficiary in the Kaestner Trust case, the Court had to decide what to do with another case.  Shortly after the North Carolina Supreme Court ruled against the North Carolina Department of Revenue in the Kaestner case the Minnesota Supreme Court ruled against the state of Minnesota’s ability to impose its tax on a trust on different grounds.

On June 28, 2019, the Court decided not to hear the Minnesota Department of Revenue’s appeal of the Minnesota Supreme Court’s ruling in the Fielding case.[1]  The Minnesota Supreme Court ruled that the state could not impose an income tax on a trust when the only connection with Minnesota was the fact that the settlor had been a Minnesota resident when the trust became irrevocable.[2]

The U.S. Supreme Court appears to be making June 21 its annual tax opinion day.  Or, at least, they’ve issued the major tax opinion of the term on June 21 for the past two years.  While last year’s issue related to sales taxes (Wayfair), this year the issue is whether a state can tax a trust solely based on the trust having a resident current income beneficiary, even if that beneficiary has no right to force a current distribution of such income, no such distribution is made, and there’ s no guarantee the beneficiary will ever receive such a distribution.

A unanimous Supreme Court decided that the answer is no, a state cannot impose its tax in that situation, in the case of North Carolina Department of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust, United States Supreme Court, Case No. 18-457.[1]  Justice Sotomayor wrote the main opinion on behalf of the Court.

As states scramble to begin collecting sales taxes after the Supreme Court’s decision in the case of South Dakota v. Wayfair, one state that has not yet been able to begin collecting the tax is, of all things, the state of South Dakota itself.  Those who have read the Supreme Court’s decision will remember that the decision did not actually formally approve South Dakota’s law and order the defendants to pay the taxes.  Rather, the case was sent back down to South Dakota state courts to consider other potential objections.

In order to get around this problem, the Governor of the State of South Dakota has called a special session of the state legislature for September 12 and issued two draft pieces of legislation to allow the state to begin collecting taxes from remote sellers beginning on November 1, 2018.

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The North Carolina Department of Revenue issued Directive SD-18-6 that contains the state’s new directive requiring out of state sellers who meet certain de minimis requirement to collect and remit the state’s sales tax.

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The Colorado Department of Revenue has published an emergency rule (Rule 39-21-112(3.5)) to implement Colorado’s “tattletale” use tax reporting requirement for sellers who have more than $100,000 of sales into Colorado and do not collect Colorado sales tax.  The law in question is the one that was upheld by the Tenth Circuit Court of Appeals in the case of Direct Marketing Association v. Brohl, CA10, Case No. 12-1175, 2/22/16, cert denied.

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The state of Washington has upped the ante regarding the risk to businesses who don’t pay attention to individual state laws requiring reporting on sales to residents of a state by a business with no connection with the state.  Washington’s governor signed into law Washington H.B. 2163, a “tattletale” use tax bill that is triggered whenever a remote seller in a year has more than $10,000 in gross sales to Washington state residents.

A “tattletale” bill does not attempt to require remote sellers to collect sales tax for the state on their remote sales.  Rather the bill requires that such sellers take various steps to “turn in” such buyers to the state and “motivate” the buyers to comply with their use tax obligations.  The law will often require some form of notice to potential buyers of their use tax obligations, along with later reports given at the end of the year to both the buyers (listing items they bought for which use tax would be due) and the state in question.

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Normally in this venue we discuss federal tax matters, but in this case the applicability of a Constitutional provision (or perhaps lack of a provision, given the issue is the Dormant Commerce Clause) may have a broad impact.  The case in question is a challenge to a Colorado provision requiring out of state sellers to report to the state customers who are residents of the state to assist in collection of use tax from those individuals (Direct Marketing Association v. Brohl, CA10, Case No. 12-1175).