State Net Capitol Journal – April 8, 2013

State Net Capitol Journal – April 8, 2013

Budget & Taxes

NY HIGH COURT UPHOLDS INTERNET AFFILIATE LAW: In the long-running feud over online sales taxes, the federal courts have consistently held that Internet retailers must have a "physical presence" such as a warehouse or employees in a state to be subject to that state's sales tax. A handful of states, including New York, however, have sought to expand the definition of physical presence legislatively to include so-called affiliates, independent contractors who are paid to promote the Internet retailers on their own websites. Inc. and Inc. challenged that definition in court, arguing that affiliates were not employees and therefore did not constitute a physical presence. On March 28, New York's highest court, the Court of Appeals, rejected that argument, upholding a lower court ruling requiring the Internet retailers to collect New York sales tax from New York residents.

"The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated," the court said. "An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet.... The presence requirement will be satisfied if economic activities are performed in New York by the seller's employees or on its behalf."

Overstock said it might appeal the ruling.

"It's unfortunate and the [U.S.] Supreme Court ought to look at this," said the company's acting chief executive Jonathan Johnson. "We have states saying different things," he said, pointing to an Illinois Supreme Court ruling invalidating a similar tax. (BOSTON GLOBE, REUTERS, ACCOUNTINGWEB.COM, NEWYORKCOURTS.GOV)

VA TRANSPORTATION PLAN SURVIVES VETO SESSION: In their veto session last week, Virginia lawmakers assented to Gov. Bob McDonnell's (R) amendments to the $6 billion transportation funding plan raising the state sales tax to 5.3 percent and converting the per-gallon gas tax to a wholesale tax.

Among other things, the governor lowered the alternative fuel vehicle annual fee in the bill (HB 2313) from $100 to $64. He also changed the language in a regional tax provision for Hampton Roads and Northern Virginia in response to constitutional concerns raised by Attorney General Kenneth Cuccinelli.

Quentin Kidd, director of the Wason Center for Public Policy at Christopher Newport University, said Democrats completely backed the transportation plan, while most Republicans "grudgingly" supported it, and there hadn't been "enough noise" to overturn any of McDonnell's changes. (WASHINGTON TIMES, VIRGINIAN-PILOT [NORFOLK], STATE NET)

COURT RULING DOESN'T DETER MULTISTATE LIBOR PROBE: Last month, U.S. District Judge Naomi Reice Buchwald in Manhattan threw out a "substantial portion" of the proposed lawsuits alleging wrongdoing by banks in connection with the London interbank offered rate, known as the Libor. Among the legal actions torpedoed by the judge's ruling were a class-action suit filed by the city of Baltimore, claiming it suffered losses on derivatives as a result of the alleged interest-rate manipulation, and a suit filed by money-management firm Charles Schwab alleging banks engaged in racketeering.

Despite Buchwald's ruling, 30 states, led by New York and Connecticut, are moving ahead with their investigation into allegations of interest-rate rigging of the Libor. A spokesman for New York Attorney General Eric Schneiderman said the ruling "does not have any impact on our multistate probe into losses incurred as a result of Libor...manipulation."

The ruling drew a clear line between enforcement actions and private lawsuits, stating there were "many requirements that private plaintiffs must satisfy, but which government agencies need not."

Some legal experts suggested much of the ruling might not actually survive on appeal.

"This reflects a judge who doesn't want to spend the rest of her judicial career dealing with Libor cases," said James Cox, a law professor at Duke University.

But if the ruling does stand, it will significantly reduce the financial cost of the Libor mess on the banks involved. It is likely to be some time, however, before it is known what that total cost will be.

"This is still in the early innings," said Darrell Duffie, a professor of finance at Stanford University. It "may be years before we are able to get a relatively precise estimate of the ultimate total damages," he said. (WALL STREET JOURNAL)

BUDGETS IN BRIEF: U.S. Bankruptcy Court Judge Christopher Klein has approved Stockton, CALIFORNIA's petition for bankruptcy. The city of 300,000 is the largest ever in the U.S. to file for bankruptcy (REUTERS). • Defending lawsuits over Act 10, WISCONSIN's 2011 law ending collective bargaining for most public workers, has cost the state's taxpayers $850,000. But a spokesman for Gov. Scott Walker (R) said Act 10 will ultimately save taxpayers far more by forcing public workers to cover more of their health care and pension costs (MILWAUKEE JOURNAL SENTINEL). • Cancer clinics across the nation have started turning away Medicare patients as a result of sequestration cuts. Oncologists say the reduction in federal funding for Medicare, which went into effect on April 1, makes administering expensive chemotherapy drugs financially unsustainable (WASHINGTON POST). • WASHINGTON Gov. Jay Inslee (D) has proposed raising $1.2 billion for education by closing tax breaks and extending existing taxes. But he'll have to persuade the Senate, led by Republicans for the first time in eight years, to eliminate exemptions like the sales-tax break on bottled water and make "temporary" surcharges on beer and certain businesses permanent (SEATTLE TIMES).

- Compiled by KOREY CLARK


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