In an effort to find new or expanded sources of revenue, an increasing number of states are targeting out-of-state businesses.  Specifically, a number of states have passed or are considering implementing so-called "Amazon Laws" aimed at collecting sales taxes from online out-of-state retailers.  Similarly, many states are forgoing the traditional "physical presence" standard for establishing nexus in favor of more expansive "economic presence" nexus standards for income and franchise tax purposes.  This advisory discusses two such examples.  

First, the Colorado legislature recently passed a unique variation on the "Amazon Law" concept.  The legislation imposes new reporting requirements on out-of-state entities and stiff penalties for a company's failure to follow the reporting requirements.  It remains to be seen whether other states will follow Colorado's lead and augment or replace their "Amazon Laws" with such reporting requirements.  Second, in a similar fashion, the New York Department of Taxation and Finance recently released a proposal suggesting that the state deviate from its traditional physical presence standard for determining nexus and adopt an economic presence nexus requirement.  

Colorado Imposes New Tax Reporting Obligations on Out-of-State Retailers

On February 24, 2010, Colorado Governor Bill Ritter (Dem.) signed House Bill 1193 into law.  This new law imposes extensive reporting requirements on out-of-state retailers with the intention of increasing compliance among such retailers with Colorado's sales and use tax.  Among other obligations, every retailer that does not collect Colorado sales tax on sales to Colorado purchasers must now:  1) notify Colorado purchasers that sales or use tax is due on certain purchases from the retailer and that Colorado law requires the purchaser to file a sales and use tax return; and 2) annually report all sales to Colorado purchasers, including dates of purchases, amounts of purchases and categories of purchases, to the Colorado Department of Revenue ("CO DOR").  The new law imposes a penalty of $5 on out-of-state retailers for each sale to a Colorado purchaser without the required notice.  Out-of-state retailers will also be subject to a $10 penalty for each purchaser not included in their annual report to the CO DOR.

Many online retailers have already altered their business models to account for Colorado's new tax compliance requirements.  For example, Amazon has severed its relationship with all of its online business affiliates located in Colorado as result of the new measure.

New York Proposes Expanding its Corporate Franchise Tax to Out-of-State Businesses with No Physical Presence in the State

In late February, the New York State Department of Taxation and Finance ("NY DTAF") proposed a sweeping reform of its corporate tax system.  Notably, the proposed reform would eliminate the previous requirement that an out-of-state business have at least some sort of physical presence in the state before New York would attempt to impose its corporate franchise tax on the out-of-state business.  Under the proposed reform, an out-of-state corporation would be subject to New York's franchise tax if (i) "it has receipts within [New York] of one million dollars or more in the taxable year"; (ii) "it has issued credit cards to one thousand or more customers who have a mailing address within [New York] as of the last day of its taxable year"; (iii) "it has merchant customer contracts with merchants and the total number of locations covered by those contracts equals one thousand or more locations in [New York] to whom the corporation remitted payments for credit card transactions during the taxable year"; or (iv) the "sum of the number of customers" described in subparagraph (ii) of this paragraph plus the "number of locations covered by its contracts" described in subparagraph (iii) "equals one thousand or more."

The NY DTAF also seeks to make significant changes to a number of other areas of New York's current corporate tax law -- including apportionment of business income, net operating losses ("NOLs"), and combined reporting. 

Client Advisory

New York's reforms currently remain just a proposal and must be enacted by the state legislature before becoming effective. Thus,the ultimate shape of any New York corporate tax law reform may look quite different than this initial proposal.  On the other hand, clients who are concerned with potential tax compliance issues under Colorado's new law should contact the firm immediately, as most of the new compliance requirements are already in effect. 

Clients who are concerned with how either of the above-described changes to state tax law may affect their business should contact Allison Rule at adr@commlawgroup.com or 703-714-1312.