Washington, DC Update – March 2017

Litigation on State Marketplace Fairness Legislation Could Have its Day in U.S. Supreme Court

On March 6, 2017, the South Dakota Sixth Judicial Circuit ruled a state law unconstitutional that would have required remote retailers to collect and remit sales tax if they exceed a statutory threshold of sales into the state each year. The case, South Dakota v. Wayfair, Inc., potentially brings the decades-long debate on taxing remote sales a step closer to returning to the U.S. Supreme Court. When South Dakota passed the law in early 2016, it became the first state to implement a remote sales tax law, which was challenged almost immediately. Several states have since followed in efforts to adopt similar legislation, all in response to the lack of action by the U.S. Congress to enact remote sales tax legislation.

Because lower courts must follow U.S. Supreme Court precedent, the decision was not unexpected. The South Dakota court was simply following the Court’s decision in Quill v. North Dakota (1992), which held that states could not require retailers without any in-state physical presence to collect sales tax. The South Dakota legislature drafted the law to specifically and directly challenge that standard. Since the 1992 decision, the Internet has substantially changed the retail marketplace. Billions of sales occur over the Internet every year as more and more customers opt to shop online rather than in traditional brick-and-mortar stores. Due to this evolution of the retail marketplace, the applicability of the standard established in Quill has been questioned more frequently in recent years. Most notably, in the 2015 U.S. Supreme Court case Direct Marketing Association v. Brohl, Justice Kennedy criticized Quill, acknowledging that times have changed since then and stating that the justice system “should find an appropriate case for this Court to reexamine Quill.”

The state is now expected to appeal the decision to the South Dakota Supreme Court. And just as the lower court was bound to follow the Supreme Court’s precedent, South Dakota’s highest court will do the same. Upon that result, it will then be up to the U.S. Supreme Court to decide whether it wants to review the case, potentially opening the door to overturn Quill.

 

SEC Proposes Amending Exchange Act Rule 15c2-12

On March 1, 2017, the Securities and Exchange Commission (SEC) proposed amending Exchange Act Rule 15c2-12 to include additional event notices under continuing disclosure undertakings. Rule 15c2-12 requires bond dealers to review issuers’ official statements before underwriting municipal bonds and to reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website. The proposed amendments would add to the list of event notices to be included in continuing disclosure undertakings.

Specifically, the amendments require information be provided about: 1) the incurrence and terms of bank loans; direct purchases of securities by banks and other non-publicly offered debt; leases; guarantees; derivative instruments; and monetary obligations resulting from judicial, administrative and arbitration proceedings; and 2) the occurrence of defaults, acceleration, and termination events; and modifications of terms or other similar events with respect to such debt.

GFOA has expressed serious concerns about the broad scope and potential unintended consequences of the proposed amendments. The SEC is seeking public comment on the proposed amendments by May 15, 2017, 60 days following publication in the Federal Register. Please stay tuned for information you need to know if your jurisdiction plans to comment on the proposed amendments, or contact Emily Brock, director of GFOA’s Federal Liaison Center.

 

154 Members of Congress Join Letter Supporting Municipal Bonds in Advance of Tax Reform

Thanks to grassroots support from state and local issuers and the dedicated support from many members of Congress, the House Municipal Finance Caucus garnered 154 co-signers on a letter addressed to Chairman Kevin Brady (R-TX) and Ranking Member Richard Neal (D-MA) about protecting munis from the potential threat of elimination through comprehensive tax reform. The letter describes the municipal bond as a “reliable and efficient means of financing” infrastructure that directly contributes to the strength of the U.S. The support is a positive sign of support in advance of comprehensive tax reform; however, the exemption on municipal bond interest may still face a significant threat through comprehensive tax reform.

Are your members of Congress on the letter? Contact them and thank them for their support!

If your members of Congress are not on the letter? Contact them and remind them what bonds have built in your jurisdiction (#builtbybonds).