Leave cookies? Pay sales tax, says Massachusetts

Massachusetts just devised a fairly brilliant scheme for collecting sales tax from out-of-state sellers.picseli-6730

The Department of Revenue (DOR) recently published Directive 17-1: Requirement that Out of State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax. This guidance from the DOR lays out the conditions under which “internet vendors” that ship into Massachusetts must register to collect and remit sales tax. Since almost all websites use “cookies”, the directive could have a significant impact.

What is a cookie?

Cookies are small files that are left on computers by websites either temporarily (“session” cookies) or for longer periods of time (“persistent” cookies) that help eCommerce vendors track, among other things, progress in the shopping cart checkout process. Since these files reside on computers that exist physically in Massachusetts, are owned by the vendor (not the customer), and help facilitate sales, according to Massachusetts that triggers “in-state business activity” and therefore triggers a requirement to register to collect and remit sales taxes.

Does it apply to wineries?

Massachusetts is one of the very few states that wineries can ship to that does not require sales tax registration as a condition of receiving a direct shipping permit. To determine whether this new directive would even apply to wineries, we have to answer a few questions:

  1. Do wineries leave cookies?
    According to Andrew Kamphuis, former Founder and CEO of Vin65, “It’s next to impossible to have a shopping cart without having cookies. Almost all wineries have an eCommerce site, and I’m not aware of any wine industry eCommerce companies that do not leave cookies.”
  2. Are wineries “large Internet vendors”?
    The directive only applies to internet vendors that do more than $500,000 in sales in Massachusetts AND more than 100 transactions per year. It would not be uncommon for a winery to do 100 transaction in Massachusetts per year. But, $500,000 in sales per year is a significant amount. Let’s say you sell your wines for $50 per bottle, and make 2 different 3-bottle club shipments per year to 100 different Massachusetts customers. That’s only $30,000 in sales per year, so well below the $500,000 threshold.
  3. Will this directive take effect?
    The directive is designed to take effect on July 1st. However, it seems likely that at least one group will challenge the law’s constitutionality in courts. According to NPR, NetChoice is already pursuing an injunction to block enforcement before it takes effect.
  4. Does the directive apply to out-of-state wine shipments?
    Even if this directive is found to be constitutional, it’s unlikely that wine shipments would be subject to sales tax even for those over $500,000 in sales. Because the ABCC Advisory on wine shipping makes no mention of sales tax but explicitly requires registration with DOR for excise taxes, it seems clear that sales tax are not required. Further, a 2010 ballot initiative repealed the application of sales tax to sales of alcohol that are subject to excise taxes.

Why does this matter?

As we’ve discussed in the past, sales tax reform is coming. States are looking for any way they can to work around the Quill Supreme Court decision, and they’re getting closer and closer to cracking that code. This new attempt by Massachusetts is just another example of a creative solution to compel out of state sellers to pay sales taxes, joining Colorado’s “tattletale” reporting rules (which were upheld as constitutional and are now being copied by multiple states), “economic nexus” rules in multiple states that are working through the courts, and “click-through nexus” in multiple states. Massachusetts accelerates the march to reform and in very short order, the issue of sales tax on eCommerce orders will be settled either by Congress or the Supreme Court.

Until then, fast changes and a lot of uncertainty will exist at the state level. This directive in Massachusetts will be challenged, and we’ll wait to see if an injunction is granted. If it survives the courts, other states will copy it. Massachusetts chose a very high threshold of $500,000, but other states that follow would likely have a much lower annual revenue threshold ($100,00 as the standard in Colorado, for example) or separate transaction threshold. Even though this directive will likely not apply to any wineries, it’s worth staying on top of the ever-changing sales tax landscape.

California wants to require a lot of stuff on cannabis labels

California Cannabis Warning SymbolDepending on how quickly the California Bureau of Marijuana Control (BMC) gets their final regulations and licensing system in place, you may see the first products on the shelf under the new medical cannabis regs as soon as January 1st. Based on the initial dump of proposed regulations by three different agencies in California, you’re going to see a lot of words on those labels.
Continue reading “California wants to require a lot of stuff on cannabis labels”

Vermont may not be the first state to legalize cannabis through the legislature after all

Cannabis advocate were hopeful that Vermont would become the first state to pass a recreational cannabis bill when the legislature passed S 22 on May 10th. The New York Times Editorial Board even weighed in this morning encouraging Scott to sign the “DIY approach.” But, today, Governor Phil Scott (R) decided to veto the bill and “send it back to the legislature”.

Citing the last-minute rush to pass S 22 in the final days of the session as well as shortcomings in the bill related to access for minors, tougher penalties for impaired driving, and the structure and timing of the commission created by the bill, Scott held a press conference to announce he will veto the bill today. He did, however, express willingness to work with the legislature during the summer veto session to possibly get a bill passed with his recommended changes by July, assuming lawmakers are willing to work with him on a compromise.

Given the specific nature of his recommended changes, and the expressed willingness, it seems very possible that a compromise bill will get through this summer and take effect July 2018. This would put Vermont in line with several neighbors including Massachusetts, Maine, and Canada to implement cannabis bills for the summer of 2018.

California’s proposed medical cannabis regulations give a glimpse of what’s to come

header-organizationAll eyes are on California right now as the state moves aggressively to take the extraordinary steps to reconcile two sets of laws (one for medical cannabis and one for recreational, or “adult use” cannabis), draft and approve regulations for laws that are probably not final yet, create regulatory, licensing, and “track and trace” systems, and review and approve applications to allow licensed businesses to operate by January 1st, 2018.

Sound challenging? A California legislator likened it to “flying an airplane while it is still being built.”

The California Bureau of Marijuana Control (BMC) took two major initial steps last month to move these multiple tasks forward by releasing proposed “trailer” legislation to be included in the budget bill as well as proposed regulations for the medical marijuana system. To help you understand how all of these pieces fit together, below is a high-level timeline on cannabis laws and regulations in California.

  • 1996: Voters approve Prop 215, legalizing the use of medicinal cannabis. Since then, little regulation was established, and most of that was done by local governments.
  • 2015: Legislature enacts three bills – AB243, AB266, ad SB643. These bills became known collectively as the Medical Cannabis Regulation and Safety Act, or MCRSA.
  • 2016: Legislature enacts SB 837, which builds on the MCRSA framework to add environmental safeguards to protect streams and rivers.
  • 2016: Voters approve Prop 64, other wise known as Adult Use of Marijuana Act, or AUMA.
  • April, 2017: Department of Consumer Affairs, Bureau of Cannabis Control introduces Proposed Trailer Bill Legislation. This proposed language is meant to consolidate the differences between AUMA and MCRSA by combining the two laws into a single code that would regulate both medical and adult-use cannabis.
  • April, 2017: Department of Public Health, through their new Office of Manufactured Cannabis Safety, drops regulations for medical cannabis manufacturers.
  • April, 2017: Bureau of Marijuana Control sends out a Notice of Proposed Rulemaking with proposed regulations for medical cannabis use for distributors, transporters, and dispensaries.
  • April, 2017: Department of Food & Agriculture’s (CDFA) CalCannabis Cultivation Licensing division, which is responsible for regulating cannabis cultivation, introduces proposed regulations for medical cannabis cultivation.

The proposed regulations for medical cannabis are the first glimpse into the details of what the Bureau of Marijuana Control (BMC) has in mind for regulating cannabis in California. However, it’s important to note that these regulations are very likely subject to change, so therefore should be used primarily as a guide for what is to come. If the legislature passes the proposed trailer legislation either as-is or with modifications, the law would change and the various departments would have to issue new regulations for the consolidated system. So, although you should expect changes coming from the legislature, the medical regulations are helpful for now as a roadmap for what’s to come for California’s cannabis regulatory system.

In future posts, we’ll break down the 58-page medical cannabis regulations (as well as the “trailer” legislation) for distributors, transporters, and dispensaries. These regulations create the rules under which businesses can operate, including details about how to get licensed (get ready to open the kimono!), what details are required for the track and trace system, which information is required for labeling, and generally which activities are permitted and which are prohibited.

One thing to keep an eye on here in particular is the issue of “vertical integration”. In the world of beverage alcohol, most states enforce a “three tier” system that prohibits businesses from owning licenses in multiple tiers (production, wholesale distribution, and retail). AUMA (full integration) and MCRSA (limits on integration) are at odds on whether to allow full vertical integration for cannabis businesses in California. Advocates on both sides of this issue are debating it furiously.

The bottom line here is that things are moving extremely quickly in California right now and it’s time to pay attention and provide feedback to the regulatory authorities before bills are codified and regulations are finalized. We’ll be keeping up with the changes here and breaking down the different parts to help you better understand what’s going on.

Vermont legislature clears the path for recreational cannabis

Cannabis advocates are celebrating this week as the first recreational cannabis bill passed through a state legislature. Lawmakers in Vermont cleared the way for adult-use cannabis sales by passing a compromise bill that now heads to Governor Phil Scott’s desk.

Eight states plus the District of Columbia have legalized recreational cannabis use, but all of them have done it through a voter ballot initiative. If Governor Scott signs S. 22, Vermont would become the first state to adopt a recreational cannabis bill through the legislature.

The compromise bill does not create a full-blown retail cannabis system. Instead, it does the following:

  • Decriminalizes possession of less than one ounce
  • Allows home cultivation for up to two mature plants and four immature plants
  • Creates a study commission that would identify the best way to regulate retail cannabis sales in Vermont. The commission would draft legislation to be introduced at the start of the next legislative session
  • Sets the effective date to July 1st, 2018

It’s unclear at this point whether Governor Scott will sign the bill into law. Although the bill has strong support among the citizens of Vermont, Scott indicated that the bill is not a high priority for the state. The first-term republican governor has the option to veto the bill, sign it, or allow it to become law without signing.

 

 

62% of Americans now have access to medical cannabis

Following significant success at the ballot box in the 2016 elections, cannabis activists hoped that 2017 would be the year where both medical and recreational use cannabis bills would get major traction in the state legislatures.1200px-Seal_of_West_Virginia.svg However, so far only one state has passed a successful bill in 2017. Governor Jim Justice signed into law in April Senate Bill 386, the “West Virginia Medical Cannabis Act“, making West Virginia the 29th state (plus the District of Columbia) to adopt a medical cannabis law. 62% of the US population now lives in a state that offers some form of cannabis for medicinal purposes.

Although the legislation technically takes effect ninety days after passage, or July 5th 2017, experts are predicting that sales will not start until the middle of 2019. The state issue a very small number of licenses to ten growers, ten processors, and thirty dispensaries. The bill does not allow for smoking of cannabis but does allow for the sale and consumption of pills, oils, topical forms including gels, creams or ointments, vaporization or nebulization of non-leaf or plant forms, tinctures, liquids, or dermal patches.

 

Medical marijuana states wait in limbo as Congress passes one-week spending bill

The Rohrabacher-Farr Amendment (RFA), which was set to expire today (April 28th, 2017), lives on for at least another week. By passing a one-week temporary spending bill that effectively just changes the date of the previous spending resolution to May 5th, 2017, Congress also kept alive the RFA. However, states with medical marijuana laws now wait in limbo, hoping that Congress finds compromise and passes a spending bill that covers the rest of the fiscal year in September and includes RFA.

Originally passed in 2014 after at least six failed attempts, the RFA ties the hands of the Department of Justice (DOJ) by prohibiting DOJ from using federal funds to prevent the implementation of state laws. As long as Congress keeps renewing it, RFA is established law that has also withstood court challenges.

None of the funds made available in this Act to the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, and Wisconsin, to prevent such States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

When the Congressional Cannabis Caucus held their kickoff press-conference a few months ago, they identified the renewal of RFA as one of their top priorities as they want to give states the freedom to pass and implement cannabis laws without being subject to the whims of any President or DOJ. Recently, Jared Polis expressed optimism that RFA will be included in any spending bill that is passed. But, lawmakers continue to be at odds about key components and spending priorities of the budget, thus extending the threat of a government shutdown for another week. In the event that Congress fails to pass a spending bill, RFA would expire and the DOJ could initiate enforcement actions against individuals or businesses operating in medical states.

Of course, it’s worth noting that RFA does not include recreational cannabis laws. Those states that have adopted recreational laws continue to be at risk unless a similar amendment or bill is introduced to protect the recreational industry. The Congressional Cannabis Caucus does not plan to add recreational use to the RFA language in this current spending debate because of the risk of losing votes in support of the original medical language.

The elephant in the room here is whether Jeff Sessions plans on enforcing federal law, where marijuana is listed as a “schedule 1” drug on the Controlled Substances Act (CSA). Throughout his career, and especially recently, Sessions has made it clear that he is not a fan of permissive marijuana laws and intends to enforce the current federal laws. RFA ties his hands in medical states, but recreational states are currently unprotected.

Assuming Congress gets its act together next week and passes a spending bill that includes RFA through the end of the fiscal year, medical states will be safe through September. The Congressional Cannabis Caucus will then look to introduce legislation to protect recreational states, a task that will be significantly tougher sledding than extending the renewal of RFA.

Sales Tax Reform is Coming

jacob-hilton-228976On Saturday, the list of states where Amazon collects and remits sales tax on purchases grew to 46, including the District of Columbia. Even though technically that means they added only the states of Hawaii, Idaho, Maine and New Mexico to the roster, this is a watershed moment for sales and use tax reform. Amazon now collects sales tax in ALL states that require it (only the “NOMAD” states of New Hampshire, Oregon, Montana, Alaska, and Delaware have no state-wide sales tax requirement). This is a significant symbolic change that will tilt the scales towards sales tax reform.

Amazon’s gradual policy change

Ever since the Quill decision of 1992, states have had a difficult time compelling out-of-state and online sellers to register for sales tax in their states. In fact, Amazon would battle states and refuse to register for sales tax under the cover of the Supreme Court’s ruling in Quill, which said that states can not require sellers to remit sales taxes if they do not have a physical presence (“substantial nexus”) in the state. Amazon could only do this, however, in states where they did not own a warehouse or an office.

Starting in about 2012, Amazon began changing their philosophy around sales tax. Recognizing that consumer behavior was shifting around delivery expectations, Amazon began building warehouses around the country to enable faster delivery. To do this though, they were forced to negotiate with the states where they wanted to build warehouses, including an agreement to start collecting and remitting sales taxes. Since 2012, consumer expectations have continued to shift, and Amazon has moved in lockstep to meet demand with increasingly fast and convenient delivery options. Accordingly, and especially over the last year, Amazon rapidly relented to the remaining states where they weren’t collecting sales tax.

States target Amazon’s competitors

Now that Amazon is collecting sales tax in all states that require it, the pressure is on Amazon’s competitors as states look to compel out-of-state sellers to register and remit sales taxes. Because the states are hamstrung by Quill, and Congress has yet to push a federal sales tax bill over the finish line, states are increasingly inventing creative ways to circumvent Quill. Forcing sellers to register and remit is far more effective than collecting use tax individually from in-state residents.

Colorado found an interesting way to work around Quill by requiring out-of-state sellers to report their transactions to the Department of Revenue if they don’t register for sales tax. In other words, if out-of-state sellers choose not to voluntarily register to collect sales tax in Colorado, they are forced to rat out their customers so the state can collect use taxes from them. This scheme, originally enacted in 2010, was upheld as constitutional recently following multiple years of constitutional challenges by Direct Marketing Association, resulting in multiple states looking to replicate Colorado’s model. Colorado will start enforcing this law on July 1st.

If Congress does not act, the Supreme Court will

Many other states are in the process of pushing the limits of Quill with the explicit goal of reaching the US Supreme Court (SCOTUS). South Dakota, for example, enacted an “economic nexus” law that was designed to make it all the way to SCOTUS. An immediate challenge is currently on its way to the South Dakota Supreme Court. Indeed, if Congress fails to act, one if not multiple state laws will make its way to SCOTUS and sales tax reform could come from an opinion overturning Quill from the highest court in the nation.

Although Congress has many priorities that have been laid out in this important year for the new administration, sales tax may end up on the docket this year or next given the momentum from Amazon’s change coupled with the increased challenges states and courts are facing.  The only question is whether sales tax reform will come prior to a ruling by SCOTUS or following.

Several proposals have been floated over the last five years or so in Congress. The most successful attempt was the Marketplace Fairness Act (MFA) of 2013. MFA would perpetuate the current incredibly complicated destination-based sales tax scheme while giving states the teeth they need to enforce their local laws. Rep. Bob Goodlatte (R-VA), on the other hand, would like to move to an “origin-sourcing” scheme in an attempt to simplify the sales tax laws. Neither proposal is perfect, so hopefully Congress can compromise and create a bill that’s fair to both large and small sellers.

The route to reform is not perfectly clear yet, but one way or the other we’ll have a significantly different sales tax landscape over the next 1-2 years.

What this means for wineries

Wineries that ship products directly to consumers can currently ship to 45 states with the proper permits. Most of those states require the wineries to first register with the Departments of Revenue for sales tax remittance prior to obtaining their direct shipping permit. Yet some of those states still do not require sales tax registration. Minnesota, for example, currently does not require sales tax registration. The current flurry of activity and momentum towards sales tax reform will surely mean that wineries should prepare for the eventuality of having to register and remit sales taxes in all non-NOMAD states that allow direct shipments.

 

Jared Polis would like to tie Jeff Sessions’ hands on cannabis enforcement

c6242db3-df3a-42e4-91c4-d6e28f222d2dThe cannabis industry has felt tremendous amount of uncertainty ever since Jeff Sessions was nominated for Attorney General. Sessions’ multiple negative comments about cannabis, both in the past and over the last few months, have led to nonstop speculation as to what the Department of Justice (DoJ) will do to businesses in states that allow for the legal use of medical and/or recreational cannabis.

Jared Polis (D-Colorado), who is also a founding member of the Congressional Cannabis Caucus, would like to protect the industry from the whims of Sessions, and future Attorneys General, by removing the purse strings from the DoJ. According to the Denverite, Polis made comments last week announcing plans to attach an amendment to Congress’ annual spending bill to prevent DoJ from using any federal funds to go after businesses operating legally in states that have existing medical or recreational cannabis laws.

If we successfully attach it and it becomes law, no Attorney General — despite what they might want to do — would be able to use the funds that Congress gave them to crack down on activities that are legal under state law with regard to marijuana. – Jared Polis

The proposed amendment would be similar to the Rohrabacher-Farr amendment, from 2014, that prevents DoJ form using federal funds to interfere in the implementation of state medical  cannabis laws. The current extension of Rohrabacher-Farr is scheduled to expire next month on April 28th. Rohrabacher-Farr does not prevent DoJ from spending on the enforcement of any recreational laws. Presumably, Polis’ new amendment would fix that loophole.

Our Take: Because cannabis remains illegal on the list of “Schedule 1” drugs on the Controlled Substances Act (CSA), state laws are in conflict with federal laws. The Obama administration issued the “Cole Memo“, which provided guidance to all US attorneys regarding enforcement of cannabis laws and allowed states to implement their existing laws. However, Sessions is not bound by that memo and has not offered any guidance other than to hint that he is OK with medical cannabis laws.

Until Congress actually takes action to deschedule cannabis from the CSA, this is probably the next-best alternative. Preventing spending does tie the hands of DoJ and allows the state experiments to continue, even while the manufacture and sale of cannabis remain illegal under federal law.

What Michigan tells us about the future of DtC wine shipping

I had the pleasure of writing a guest post at Hinman and Carmichael’s Booze Rules blog called Michigan: Canary in the DtC Coal Mine? I hope you can check it out and let me know your thoughts.

To me, the timeline that I outlined at the top of the piece was a very interesting confluence of events. The fact that Michigan got sued for a third time on DtC legislation is pretty fascinating on it’s own. However what’s really interesting to me is that the events in Michigan followed almost exactly the events that occurred shortly before in Illinois.

Illinois wholesalers had taken matters into their own hands, and then forced more involvement by the Illinois Liquor Control Commission. That was followed by much more restrictive legislation (including potential felony penalties), which led to a lawsuit against the state. Sound familiar?

So, is this a pattern? Should we expect similar events to play out in additional states? It seems like it. As we speak, Minnesota is considering similarly restrictive legislation. Wineries, retailers, third party providers, and fulfillment houses that operate in the DtC wine world should be sure to stay on top of all of these changes and step up their compliance game.

In Michigan, the legislation seemed to be enabled significantly by the “Wine Direct Shipping Research and Analysis” report out out by the Michigan wholesalers. I’d like to take a closer look at this report in a future post. Some of the methodology, assumptions, and conclusions in the report need a closer review in my opinion.

Check out the piece and let me know what you think!