In an unusual move, the Department of Commerce has chimed in on the question of Internet data privacy, issuing a 78-page report from its Internet Policy Task Force. While the Chairman of the FTC has welcomed the new report, the business-oriented tone of the Commerce report suggests that a battle is brewing. Indeed, the report offers strong support for a “voluntary, multi-stakeholder process” that includes businesses as important, cooperative partners, while the FTC treats voluntary efforts by industry -- and industry itself -- almost contemptuously. While Commerce defers to the FTC as the primary enforcement authority, it also stages what appears to be a power grab to take a leadership role in defining how industry will or will not be regulated in the areas of privacy and information security.
Friday, December 24, 2010
Monday, December 20, 2010
Income Tax Nexus in a Digital World
We have written extensively in this blog about nexus for sales tax and gross receipts tax purposes. All but a few states have an income tax. In addition to the Due Process Clause and Commerce Clause standards of nexus, out-of-state companies are protected from income tax of other states by a federal statute, Public Law 86-272, which is found at 15 U.S.C. § 381. P.L. 86-272 provides an exemption only for state income tax and sets forth a fairly clear, but somewhat limited, standard for the exemption.
The exemption applies if a company’s activities in another state include only the solicitation of sales of tangible personal property by an employee, representative, or independent contractor for delivery of inventory located outside the state to residents of the state, if orders are accepted outside the state. The exemption also extends to maintenance by an independent contractor of an office in the state. Thus, while solicitation activities of an out-of state company in a state would create nexus under the Commerce Clause and Due Process Clause standards, if the solicitation is limited to the sale of tangible personal property and, subject to the other limitations in the underscored portions above, the company would be exempt from the state’s income tax.
There have been a number of cases defining solicitation (See, e.g., Wisconsin Department of Revenue v. William Wrigley, Jr., 112 S.Ct. 2447 (1992)). And the MTC has issued guidelines, which many states have adopted, defining protected and unprotected activities under P.L. 86-272. See Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272 (Multistate Tax Commission, Third Revision adopted July 27, 2001).
The cases and guidelines make it clear that if a company solicits the sale of services as well as tangible personal property, the exemption of P.L. 86-272 does not apply. See, e.g., Amway Corp., v. Director of Revenue, 794 S.W.2d 666 (Mo. 1990). Thus, a pertinent issue under P.L. 86-272 is whether the items being sold by an out-of-state company constitute tangible personal property or services.
The exemption applies if a company’s activities in another state include only the solicitation of sales of tangible personal property by an employee, representative, or independent contractor for delivery of inventory located outside the state to residents of the state, if orders are accepted outside the state. The exemption also extends to maintenance by an independent contractor of an office in the state. Thus, while solicitation activities of an out-of state company in a state would create nexus under the Commerce Clause and Due Process Clause standards, if the solicitation is limited to the sale of tangible personal property and, subject to the other limitations in the underscored portions above, the company would be exempt from the state’s income tax.
There have been a number of cases defining solicitation (See, e.g., Wisconsin Department of Revenue v. William Wrigley, Jr., 112 S.Ct. 2447 (1992)). And the MTC has issued guidelines, which many states have adopted, defining protected and unprotected activities under P.L. 86-272. See Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272 (Multistate Tax Commission, Third Revision adopted July 27, 2001).
The cases and guidelines make it clear that if a company solicits the sale of services as well as tangible personal property, the exemption of P.L. 86-272 does not apply. See, e.g., Amway Corp., v. Director of Revenue, 794 S.W.2d 666 (Mo. 1990). Thus, a pertinent issue under P.L. 86-272 is whether the items being sold by an out-of-state company constitute tangible personal property or services.
Tuesday, December 14, 2010
Do As I Say, Not As I Do: The FTC "Do Not Track" Initiative Could Cripple E-Commerce
Just as governments – including our own – are pursuing aggressive new initiatives to gather information about our individual browsing habits and electronic communications for law enforcement purposes, the FTC has decided to advise Congress on sweeping initiatives to prevent direct marketers from engaging in far less invasive practices that present none of the grave risks attendant to enhanced government surveillance. Indeed, many of the commercial practices targeted by the FTC actually benefit consumers by assisting Internet sellers to configure their web sites, adjust their product offerings, and tailor advertising to the specific needs and interests of consumers. While the FTC shrilly intones that consumer information about Internet browsing has been used by an unidentified "some" in "an irresponsible or even reckless manner," it fails to acknowledge forthrightly that the vast majority of direct marketers use such information solely to better serve their customers, and that new laws and FTC initiatives are unlikely to faze the tiny group of Internet pirates who misuse consumer data.
Although most headlines have focused on the FTC's proposal for a "do not track" list, the FTC report is about much more than that. It foretells a highly aggressive new regulatory strategy that may change the landscape of Internet privacy without any concern for the cost impact on industry or a realistic assessment of the privacy interests of consumers. It sweeps so broadly against business as to suggest that–if the FTC has its way–even entirely benign and non-intrusive information collection practices that do not track individual consumers will be sharply curtailed. At the same time, new and intrusive requirements will be injected multiple times into virtually every consumer experience on the Web. If you do business on the Internet, you need to know what the FTC is hoping to unleash on eCommerce.
Although most headlines have focused on the FTC's proposal for a "do not track" list, the FTC report is about much more than that. It foretells a highly aggressive new regulatory strategy that may change the landscape of Internet privacy without any concern for the cost impact on industry or a realistic assessment of the privacy interests of consumers. It sweeps so broadly against business as to suggest that–if the FTC has its way–even entirely benign and non-intrusive information collection practices that do not track individual consumers will be sharply curtailed. At the same time, new and intrusive requirements will be injected multiple times into virtually every consumer experience on the Web. If you do business on the Internet, you need to know what the FTC is hoping to unleash on eCommerce.
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