In Ooma, Inc. v. Department of Revenue, TC 5331 (March 2, 2020), the Oregon Tax Court ruled that Ooma, Inc., a provider of Voice over Internet Protocol (“VoIP”) services, could be subject to the Oregon E911 tax, despite the fact Ooma had no physical presence in Oregon. The court’s conclusion that physical presence was not required for substantial nexus to exist was not surprising, in light of the U.S. Supreme Court’s elimination of the requirement in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). What is of some concern is the court’s determination that taxes, and also penalties, were due for periods prior to the date of the Wayfair decision. While the Ooma decision will almost certainly be appealed, the decision is a stark reminder that lack of physical presence is no longer (and might never have been) a complete defense to a finding of substantial nexus between a state and a telecommunications service provider, and that state and local taxing authorities may be eager to test the limits of the Wayfair decision. Ironically, telecommunications service providers might face significant state and local tax exposure for past periods in states that lack, or that tax telecommunications services outside of, a general sales and use tax regime.
During the periods at issue, the quarters ended March 31, 2013 through March 31, 2016, Ooma was a corporation, which was based in California, and which had no property or personnel in Oregon. Ooma offered VoIP services to customers nationwide, including in Oregon.
The Oregon E911 tax is imposed on consumers with access to the emergency communications system. For each line, there is a separate charge that is imposed monthly (or per retail transaction, in the case of prepaid wireless services). Because the E911 tax is imposed on consumers, but is required to be collected by service providers, it functions like a sales tax. (Whether it was a sales tax or not was apparently hotly debated.) For the periods at issue, Ooma did not file Oregon E911 tax returns and did not collect the E911 tax from its Oregon customers.
The Oregon DOR determined that, for the period at issue, Ooma was liable not only for taxes, but also for penalties for the failure to file returns and pay taxes. Ooma appealed the Oregon DOR’s determination to the Oregon Tax Court, Magistrate Division, and made several arguments against the imposition of an E911 tax collection obligation on it.
One of Ooma’s most critical arguments was that requiring it to collect and remit the E911 tax violated the U.S. Constitution’s commerce clause. Under the case of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), a state tax will survive a commerce clause challenge if it meets four requirements – it “ is applied to an activity with a substantial nexus with the taxing State,  is fairly apportioned,  does not discriminate against interstate commerce, and  is fairly related to the services provided by the State.” Id., 430 U.S. at 279. One of Ooma’s arguments was based on the substantial nexus requirement. Until overruled by the Wayfair case, the case of Quill Corp. v. North Dakota, 504 U.S. 298 (1992) provided that in the case of a sales or use tax, a seller could not have a sales tax collection obligation in a state unless it had a physical presence in the state. Ooma argued that because it did not have a physical presence in Oregon during the period at issue, it lacked substantial nexus with Oregon and therefore could not be subject to a tax collection obligation there, under the commerce clause/Complete Auto Transit/Quill test.
In a decision that was issued just a few weeks before the U.S. Supreme Court decided the Wayfair case, the magistrate concluded that subjecting Ooma to an E911 tax collection obligation did not violate the U.S. Constitution’s due process clause or commerce clause. The magistrate sidestepped the Quill physical presence requirement by determining that Quill applied to sales and use taxes, that the Oregon E911 tax was not a sales tax, and that Quill’s physical presence test therefore did not apply to it.
Ooma appealed the magistrate’s decision to the Oregon Tax Court, Regular Division, and advanced several arguments, including the argument that it did not have substantial nexus with Oregon. The Tax Court’s regular division took a different approach to addressing the physical presence requirement than did the magistrate. Instead of distinguishing the E911 tax from a sales tax, as the magistrate had done, the Tax Court’s regular division looked to the Wayfair case.
In its Wayfair decision, the U.S. Supreme Court struck down the Quill requirement that an out-of-state seller have a physical presence in a state before it could be required to collect and remit sales/use taxes from customers in that state. The Supreme Court did not, however, do away with the substantial nexus requirement, and pointed to a number of features of South Dakota law that helped ensure that there was substantial nexus and that there was no discrimination against or undue burden upon interstate commerce. Specifically, under the South Dakota statute that was challenged in the Wayfair case, out-of-state sellers were not required to collect and remit South Dakota sales taxes unless they had delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state. In addition, the South Dakota tax act foreclosed the retroactive application of the new requirement and provided means for the act to be appropriately stayed until the constitutionality of the law was clearly established, and South Dakota was a party to the Streamlined Sales and Use Tax Agreement.
It is not clear why the Oregon Tax Court’s regular division abandoned the magistrate’s determination that Quill did not apply and, instead, chose to rely on the case that overruled the Quill decision – i.e., Wayfair. In any event, the Oregon Tax Court’s regular division concluded that because Ooma had more than $600,000 of revenue from Oregon during the first 12 months at issue, and more than $1 million of revenue from Oregon for the last 12 months at issue, it had substantial nexus with Oregon under the South Dakota standard described in Wayfair. Ooma clearly satisfied the Wayfair sales threshold, but the Oregon DOR was attempting to collect E911 taxes for pre-Wayfair periods, and Oregon is not a party to the Streamlined Sales and Use Tax Agreement. The Oregon Tax Court addressed retroactivity in a footnote, as follows:
Those features do not appear to relate to the substantial nexus part of the Complete Auto Transit test, however, and two of the features (safe harbor thresholds and anti-retroactivity provisions) do not appear to be relevant here.
It is not clear why the Oregon Tax Court’s regular division concluded that retroactivity was not relevant, or how it interpreted the South Dakota anti-retroactivity requirement. As to the fact Oregon is not a party to the Streamlined Sales and Use Tax Agreement, the Oregon Tax Court’s regular division appeared to conclude (again in a footnote) that the Oregon E911 tax was simpler than other jurisdictions’ sales and use taxes, so that the uniformity concerns addressed by the Streamlined Sales and Use Tax Agreement were not relevant.
In any event, there seems to be little doubt that the Oregon Tax Court’s opinion will be appealed, so the opinion is probably not the final word on this case, but there are still some key takeaways from the decision:
- Telecommunications service providers should anticipate that even in jurisdictions where they have no physical presence, they might be subject to attempts by state and local taxing authorities to collect taxes from them for periods prior to the date the Wayfair case was decided. Because there is generally no statute of limitations for the assessment of taxes where no tax return has been filed, the potential exposure of such telecommunications service providers may be significant.
- State and local taxing authorities may take multiple approaches to dealing with what were once thought of as complete defenses to a finding of substantial nexus.
- Ironically, it might be in states that do not have traditional sales taxes (such as Oregon), or that impose a separate gross receipts or telecommunications excise tax, that telecommunications service providers have significant exposure.