Catalogers’ Legal Challenges ’07 (and Beyond)
Beginning with our January 2008 issue, veteran direct marketing tax attorney George Isaacson will join our distinguished panel of columnists with a periodic column devoted primarily to tax issues affecting catalogers and multichannel marketers. To lay the groundwork for his column, in this issue he offers an overview of key legal issues affecting catalogers and other direct marketers. His columns next year will delve more deeply into the specific issues.
Sales & Use Tax (Nexus)
State revenue departments have stepped up their efforts to require catalog companies and Internet merchants to collect state sales and use taxes. To impose such collection obligations, state tax auditors must be able to prove that a retailer has some form of physical presence in the taxing state — what lawyers refer to as “nexus.”
Increasingly, states are relying upon so-called “agency nexus” theories, claiming that presale promotional programs and after-sale customer services performed by a third party (such as in-state distribution of advertising materials, acceptance of customer returns and performing on-site repairs) are a sufficient connection with the out-of-state seller to establish nexus.
States also are pursuing “clicks and mortar” retailers. These are companies whose common parent corporations have both a retail store subsidiary, which collects sales tax in all states where it has stores, and a catalog/direct marketing subsidiary, which collects sales tax only in its headquarters state.
Auditors have attacked these multicorporation structures, arguing the commonly owned companies are so financially and operationally integrated that the nexus created by the retail stores should apply to the direct marketing entity as well.
Finally, keep an eye on Congress. There’s proposed legislation that would require most direct marketers to collect state taxes.
Escheat (Abandoned Property)
The word “escheat” may sound like a new brand of perfume, but it’s actually a long since established legal doctrine entitling states to take over property that has been abandoned by its owner. All states have laws requiring holders of unclaimed property to report and pay over money that has remained unclaimed for a specific number of years (usually three to five years, depending on the state and the type of property).