Tax Issues Confront TelemarketersH. Robert Wientzen, president/CEO of the Direct Marketing Association, recently sent the organization's members an e-mail calling their attention to two bills proposed this year in Congress that aim to clarify the applicability of state and local sales taxes to out-of-state entities. While both bills, S.B. 664 and H.R. 2526, primarily concern Internet sales, they also apply to telemarketing and direct mail solicitations and, if passed, would clarify an area of uncertainty regarding how states can tax telemarketing sales to their residents.
Obviously, this issue is of extreme importance to the telemarketing industry. While the collection of sales tax for future sales is not necessarily a bad thing, the uncertainty of tax liability for past sales is, especially considering the interest and penalties that can make judgments in this area huge. Further, there are many municipal, county and other government subdivisions that impose sales tax, too, making a nationwide business potentially subject to tax in scores of jurisdictions.
Currently, a state can tax a sale if it has sufficient "nexus" with that state. Nexus is the link among the sale, the seller, the buyer and the state. Two Supreme Court decisions set forth what type of link is necessary, in most situations, for the state to be able to tax the sales for a given telemarketing campaign.
The Supreme Court decided the first case in 1992 in response to an attempt by North Dakota to tax the sales of the Quill Corp., a seller of office and other products. Quill mailed catalogs and fliers into the state and contacted customers by telephone but did not employ any salespeople in the state or have any offices there.
The Supreme Court held that North Dakota could not require Quill to collect sales or use tax on these sales because nexus required some physical presence in the state. Unless Quill had a location there or some staff on the ground of North Dakota, the Supreme Court held, the U.S. Constitution forbade North Dakota from taxing those sales.
The second case clarifies whether a telemarketing service bureau, when a separate business from its client, counts as a physical presence. In 1960, the Supreme Court issued an opinion in the Scripto Pen case and held that sales made by independent salespeople, or "jobbers," operating continually in the state were subject to sales tax, even if the company itself had no presence in the state other than the independent contractor salespeople.
Both cases hold that a tax must also be fair to be applicable, that a state may tax a business if it purposefully directs its sales efforts at the state, that the magnitude of those contacts is such that a tax would be fair and that the taxes are related to benefits received by the business in the state.
The first question a telemarketer should ask, then, is whether there is a physical presence in the state. If not, sales or use tax cannot be assessed on the sale by that state. If, however, either the client or the service bureau has a location in the state, sales and use taxes may need to be collected, depending on the particular campaign in question. I say "may" intentionally because even though the Supreme Court attempted to draft an easy test to apply, subsequent case law and the diversity of contractual relationships have muddied the waters.
Both congressional bills would change the current state of the law by clarifying when an independent contractor can be considered to be a physical presence of a business in a state. Both propose amendments to the current federal statute applicable to state taxation of income from interstate commerce.
The bills would adopt this language: "A person shall not be considered to have engaged in business activities within a state or subdivision thereof ... merely by reason of sales ... or the solicitation of orders or contracts ... by one or more independent contractors, or by reason of the maintenance of an office in such state or subdivision by one or more independent contractors whose activities on behalf of such person in such state or subdivision consist solely of making sales, or soliciting orders or contracts for such sales."
True to its purpose, this language would clarify the question of sales tax applicability to interstate commerce in general and to sales made through independent contractor telemarketing service bureaus in particular. Although these bills may get much more press attention for their effect on sales made through the Internet, you should not ignore the benefits other businesses engaged in national sales would enjoy.
NJ Court Issues TCPA Ruling
In an update to a Dec. 20, 1999, column, an appellate court in New Jersey has ruled that suits brought by individuals against telemarketers pursuant to the Telephone Consumer Protection Act may be heard in New Jersey's courts even though the state's legislature had not specifically allowed its courts to be used to enforce this federal law.
The court ruled that the TCPA's language allowing the suits in state court "if otherwise permitted" by state law meant that New Jersey did not have to "opt in" to allow its citizens to sue in state court under the TCPA. Even before the court made this decision, however, the Federal Communications Commission and the New Jersey attorney general still had the power to enforce the provisions of the TCPA, so as a practical matter, this decision will have little effect if your business complies with the TCPA.