On the Cutting Edge

Chinese actress Fan Bingbing models a Montblanc watch

Disappearing Fan Bingbing

Chinese actress Fan Bingbing has mysteriously disappeared after being accused of tax evasion -- and she's started disappearing from her fashion sponsorships as well. Do fashion companies have a responsibility to keep her as the face of their brands? How should fashion brands adapt to China's political culture? Associate Director spoke with the New York Times about ethics, strategy, and the important Chinese market:
Jeff Trexler, associate director of the Fashion Law Institute at Fordham University, said displays of conspicuous wealth are seen as an affront to the message being promoted by the Chinese government: that everyone in the country is rising upward on an economic wave. “The more wealthy your spokespeople are, the greater the risk is,” he said. Companies also worry that if they upset the Chinese government by continuing to promote someone who has fallen from favor, as Ms. Fan appears to have, they might suffer in a variety of ways, from taxes audits to obstacles opening new stores.
What does this mean for marketing strategy? That was a central theme of our longer discussion with the Times -- and that will be the topic of a more extensive analysis to follow!

Disappearing Fan Bingbing

Chinese actress Fan Bingbing has mysteriously disappeared after being accused of tax evasion -- and she's started disappearing from her fashion sponsorships as well. Do fashion companies have a responsibility to keep her as the face of their brands? How should fashion brands adapt to China's political culture? Associate Director spoke with the New York Times about ethics, strategy, and the important Chinese market:
Jeff Trexler, associate director of the Fashion Law Institute at Fordham University, said displays of conspicuous wealth are seen as an affront to the message being promoted by the Chinese government: that everyone in the country is rising upward on an economic wave. “The more wealthy your spokespeople are, the greater the risk is,” he said. Companies also worry that if they upset the Chinese government by continuing to promote someone who has fallen from favor, as Ms. Fan appears to have, they might suffer in a variety of ways, from taxes audits to obstacles opening new stores.
What does this mean for marketing strategy? That was a central theme of our longer discussion with the Times -- and that will be the topic of a more extensive analysis to follow!

Fakespotting with Tyra Banks

Here's a look at Professor Scafidi's 2007 classic appearance on the Tyra Show, where they take their scissors to authentic and fake Gucci bags to see what makes the real difference. For a look at the latest in counterfeit-detection techniques, join us this Friday for our 8th anniversary event, Know Your Faux: New Tactics and Tech for Fighting Fakes! First segment: Second Segment: Bonus unedited version of the second segment from the now-deleted Tyra Show website -- originally in a Flash file!

Sales Tax, SCOTUS, and Retail Technology

The Supreme Court has overruled decades of precedent establishing that sales tax could be required only when the seller has a physical presence in the state. As a result, online sales can now be subject to taxation in the state and local jurisdictions where consumers make their purchases, even if the seller has no other link to where the transaction takes place.

The case, South Dakota v. Wayfair, Inc., Overstock.com Inc., and Newegg.com, Inc., was a topic of discussion in the lively tax panel at the Fashion Law Institute's most recent symposium. As the panel noted, the Supreme Court's sales tax jurisprudence prior to the new ruling in Wayfair arguably cost states billions of dollars in tax revenue from online transactions, a problem that the South Dakota law at issue in Wayfair sought to solve by requiring online sellers to collect tax "as if the seller had a physical presence in the state." Although this law was deemed invalid by lower courts applying long-established precedent, the state called for the Court to overturn its earlier decisions in light of the new economic environment created by the robust online market.

Fashion and the law before Wayfair

Wayfair has at least a couple direct connections to fashion. One of the respondents challenging the South Dakota law, Overstock.com, is a longtime online seller of clothing, jewelry, and accessories. To see why it would oppose the South Dakota law imposing sales tax on online sales, we need only look to the company's FAQs, which as of this post date still reflect the law before the Supreme Court's Wayfair ruling. As the Overstock.com FAQs note, pre-Wayfair companies had to collect sales tax only in states in which they resided, which meant that Overstock.com only customers in two states had to pay sales tax. This gave Overstock.com, along with other online retailers, a decided advantage over brick-and-mortar shops: where the online sellers were not collecting sales tax, Overstock.com items effectively enjoyed an automatic discount.

Overstock.com FAQ stating that retailers have to collect sales tax only in states in which they are residents

As it happens, the physical presence doctrine, which Wayfair overruled, itself went back more than five decades to a fashion case: National Bellas Hess v. Dept. of Revenue. In this 1967 decision, the Supreme Court found that an apparel mail-order catalog company did not have to pay sales tax on purchases sent to states where it did not have a physical presence, such as a brick-and-mortar shop, warehouse, or employees. According to National Bellas Hess, for a state to collect sales tax on catalog purchases and other transactions where the retailer lacked a physical presence in the jurisdiction would be "an unconstitutional burden upon interstate commerce," a conclusion later upheld in Quill Corp. v. South Dakota.

Changing technology --> changing law

Mail-order catalogs were an analog ancestor of today's digital merchants, but the Wayfair Court sees digital sales as distinct in both substance and scale. The majority opinion holds that exempting online transactions distorts the market in a way that is itself unconstitutional, inasmuch as the resulting discount arbitrarily skews the market in favor of sellers without a physical presence in a particular state. The centrality of evolving tech to Wayfair is particularly evident in the following passage from the majority opinion:

The Quill Court itself acknowledged that the physical presence rule is “artificial at its edges.” 504 U. S., at 315. That was an understatement when Quill was decided; and when the day-to-day functions of marketing and distribu­ tion in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety.

Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. In a footnote, Quill rejected the argument that “title to ‘a few floppy diskettes’ present in a State” wassufficient to constitute a “substantial nexus,” id., at 315, n. 8. But it is not clear why a single employee or a single warehouse should create a substantial nexus while “physi­cal” aspects of pervasive modern technology should not. For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers’ computers. A website may leave cookies saved to the customers’ hard drives, or cus­ tomers may download the company’s app onto their phones. Or a company may lease data storage that is per­ manently, or even occasionally, located in South Dakota. Cf. United States v. Microsoft Corp., 584 U. S. ___ (2018) (per curiam). What may have seemed like a “clear,” “bright-line tes[t]” when Quill was written now threatens to compound the arbitrary consequences that should have been apparent from the outset. 504 U. S., at 315.

The “dramatic technological and social changes” of our “increasingly interconnected economy” mean that buyers are “closer to most major retailers” than ever before— “regardless of how close or far the nearest storefront.” Direct Marketing Assn. v. Brohl, 575 U. S. ___, ___, ___ (2015) (KENNEDY, J., concurring) (slip op., at 2, 3). Be­tween targeted advertising and instant access to most consumers via any internet-enabled device, “a business may be present in a State in a meaningful way without” that presence “being physical in the traditional sense of the term.” Id., at ___ (slip op., at 3). A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores. Yet the continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State.

Knitting yarn and the devils in the details

In holding that sales tax may be imposed on transactions in which a seller does not have a traditional physical presence in a particular jurisdiction, the Wayfair Court has created a new sales tax landscape for sellers of all sizes, from multibillion-dollar companies to small-scale designers on Etsy. As Chief Justice Roberts notes in his dissent, this has the potential to expose sellers across the country to a dizzying array of rules over 10,000 state and local jurisdictions, many of which are not obvious: for example, "New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters."

However, as the Wayfair opinion notes, in practice the legal situation may not be so complex. Tech itself provides a solution to the problem it could create, inasmuch as there is already software that can process transactions across products and jurisdictions. Moreover, not all sales tax laws would extend to smaller sellers; the South Dakota statute at issue, for instance, "applies only to sellers that deliver more than $100,000 of goods or services into South Dakota orengage in 200 or more separate transactions for the delivery of goods and services into the State on an annual basis." In this regard, as noted in the symposium, sales tax administration in the U.S. is already developing adaptive standardization akin to the new value-added tax system in the European Union, where the collection and distribution of the VAT is being streamlined to reduce the burden on sellers.

What next?

Whatever one's perspective on the outcome, the Wayfair ruling illustrates a recurring theme in both the symposium and the Institute's upcoming Silicon Valley edition of Fashion Law Bootcamp: new technology can give rise to new law.




National Bellas Hess cover courtesy of Sensibility.com.

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