NCSL Task Force on SALT Meets in Anticipation of Active Legislative Sessions

On Saturday, January 14, the National Conference of State Legislatures (NCSL) Task Force on State and Local Taxation (Task Force) met in Scottsdale, Arizona to discuss many of the key legislative issues that are likely to be considered by states in 2017. The Task Force consists of state legislators and staff from 33 states and serves as an open forum to discuss tax policy issues and trends with legislators and staff from other states, tax practitioners and industry representatives.

Below is a short summary of the key sessions and takeaways from the first Task Force meeting of 2017. PowerPoints from all sessions are available on the Task Force website.

Nexus Expansion Legislation Expected to Continue

With lawsuits pending in South Dakota and Alabama over actions taken by states in 2016, MultiState Associate’s Joe Crosby provided an overview of 2016 nexus expansion legislation (as well as legislation introduced thus far in 2017), with NCSL’s Max Behlke pointing out that he expects a lot of states to act on this trend this year.

In particular, it was pointed out that the US Supreme Court’s denial of cert in DMA v. Brohl (upholding the decision of the 10th Circuit) should give states confidence about their ability to constitutionally adopt similar notice and reporting laws. Last month, Alabama Revenue Commissioner Julie Magee publicly stated that Alabama plans to introduce notice and reporting legislation similar to Colorado, along with at least two other states.

Economic nexus laws directly challenging Quill, similar to South Dakota SB 106 passed last year, are also expected to be prevalent in 2017—with five states (Mississippi, Nebraska, New Mexico, Utah and Wyoming) already introducing bills or formal bill requests that include an economic nexus threshold for sales and use tax purposes. Notably, the Wyoming bill (HB 19) has already advanced through the House Revenue Committee and its first reading by the Committee of the Whole and is expected to receive a final vote in the House this week. The Nebraska bill (LB 44) takes a unique approach in that it would impose Colorado-style notice and reporting requirements on remote sellers that refuse to comply with the economic nexus standard.

Behlke pointed out that he doesn’t see Congress acting on the remote sales tax issue in early 2017 due to other priorities—including federal tax reform. With a final resolution of the kill-Quill efforts by the US Supreme Court most likely not possible until late 2017 (or later), state legislatures are likely to feel the need to take matters into their own hands. From an industry perspective, this presents a host of compliance concerns and requires companies currently not collecting based on Quill to closely monitor state legislation. This is especially true given the fact that many of the bills take effect immediately upon adoption.

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Breaking News: Delaware Unclaimed Property Legislation – Lipstick on a Pig?

The Delaware General Assembly has introduced legislation that would significantly rewrite the Delaware unclaimed property statute by repealing the three current subchapters and replacing them with a single unclaimed property subchapter. This article highlights key proposed changes in the bill.

Read the full article.

California FTB Schedules Interested Parties Meeting on Short Notice to Discuss Issues in the Regulations on Sourcing Income from Services and Intangibles

The California Franchise Tax Board has scheduled an Interested Parties Meeting to discuss proposed changes to its apportionment regulations. Several years ago, when the statute called for sourcing receipts from services and intangibles at the location of income producing activity, based on cost of performance, the FTB, after a series on interested parties meetings, adopted new regulation 25137-14 sourcing receipts for mutual fund service providers and asset management service providers not at the location of the service provider, but at location of customers.  That was good news for California service providers and bad news for out-of-state service providers.

The FTB scheduled on December 22, 2016 an Interested Parties Meeting for January 20, 2017 to discuss a series of issues arising under the new market- based sourcing regulations. A Discussion Topic Paper (attached) was issued on January 3, 2017, and included (1) draft examples of souring income from asset management fees, (2) a discussion of “reasonable approximation”, including who makes that reasonable approximation, (3) clarification of the term “benefit of a service” in several contexts, including timing, government contracts, R&D contracts and patent sales, (4) dividend assignment, (5) a freight forwarding example, (6) interest received from a business entity borrower and (7) marketing intangibles.

The FTB takes these Interested Parties Meetings seriously.  Taxpayers should pay immediate attention to whether any of these issues are of significance to them, and consider participating.

BREAKING NEWS: US Supreme Court Denies Cert in Direct Marketing Association v. Brohl

This morning, the US Supreme Court announced that it denied certiorari in Direct Marketing Association v. Brohl, which was on appeal from the US Court of Appeals for the Tenth Circuit. The denied petitions were filed this fall by both the Direct Marketing Association (DMA) and Colorado, with the Colorado cross-petition explicitly asking the Court to broadly reconsider Quill. In light of this, many viewed this case a potential vehicle to judicially overturn the Quill physical presence standard.

Practice Note:  Going forward, the Tenth Circuit decision upholding the constitutionality of Colorado’s notice and reporting law stands, and is binding in the Tenth Circuit (which includes Wyoming, Utah, New Mexico, Kansas and Oklahoma as well). While this development puts an end to this particular kill-Quill movement, there are a number of other challenges in the pipeline that continue to move forward.

In particular, the Ohio Supreme Court recently decided that the Ohio Commercial Activity Tax, a gross-receipts tax, is not subject to the Quill physical presence standard. A cert petition is expected in this case, and could provide another opportunity for the US Supreme Court to speak on the remote sales tax issue. In addition, litigation is pending in South Dakota and Alabama over economic nexus laws implemented earlier this year. A motion hearing took place before the US District Court for the District of South Dakota last week on whether the Wayfair case should be remanded back to state court. If so, the litigation would be subject to the expedited appeal procedures implemented by SB 106 (2016), and would be fast tracked for US Supreme Court review. Tennessee also recently adopted a regulation implementing an economic nexus standard for sales and use tax purposes that directly conflicts with Quill that is expected to be implemented (and challenged) in 2017. While Governor Bill Haslam has praised the effort, state legislators have been outspoken against the attempt to circumvent the legislature and impose a new tax. Notably, the Joint Committee on Government Operations still needs to approve the regulation for it to take effect, with the economic nexus regulation included in the rule packet scheduled for review by the committee this Thursday, December 15, 2016.

All this action comes at a time when states are gearing up to begin their 2017 legislative sessions, with many rumored to be preparing South Dakota-style economic nexus legislation for introduction. While DMA is dead as an option, the movement to overturn Quill continues and the next few months are expected to be extremely active in this area. Stay tuned to Inside SALT for the most up-to-date developments.

Happy Holidays from McDermott’s SALT Practice

In our holiday tradition, as a thank you to all of our Inside SALT readers and subscribers, we are pleased to present our annual Inside SALT Crossword Puzzle Contest. We hope you’ll enjoy this little diversion that tests your knowledge of key state and local tax developments this year.

To enter, please download and print the puzzle by clicking on the image below. After you complete the puzzle, please send it as a PDF file to skranz@mwe.com no later than December 31, 2016, at 11:59 pm EST. The first eligible entrant to submit a complete and correct puzzle wins a $200 Amazon gift card.

The contest is open to registered Inside SALT email subscribers from the United States and District of Columbia who are age of majority or older. (To become a subscriber, please enter your email address in the box on the right side of your screen.) Contest ends at 11:59 pm EST on December 31, 2016. Participation is subject to the Official Rules. For complete details, click here to view the Official Rules.) This contest is void outside the US and DC and where prohibited, restricted or taxed.

Please also share your feedback about what topics you would like to hear more about in the comments section below. We look forward to hearing from you and to bringing you timely SALT updates and analysis in the coming year!

Click puzzle to enlarge and download.

Revised Uniform Unclaimed Property Act Finalized for State Enactment—Legislative Drafting Notes and Interpretative Comments Added

The fourth iteration of a uniform unclaimed property act—entitled the Revised Uniform Unclaimed Property Act (RUUPA or Act)—has been finalized by the Uniform Law Commission for state enactment. The new Prefatory Note, Legislative Notes, and Comments components offer further explanatory guidance on the Act.

Read the full article.

BREAKING NEWS: No Physical Presence Required for Ohio CAT Imposition

Today, the Ohio Supreme Court issued its much-anticipated slip opinions in the three companion cases challenging Ohio’s Commercial Activity Tax (CAT) economic nexus standard. See Crutchfield Corp. v. Testa, Slip Op. No. 2016-Ohio-7760; Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762; and Mason Cos., Inc. v. Testa, Slip Op. No. 2016-Ohio-7768.

In ruling 5-2 in favor of the state, the Ohio Supreme Court first held that physical presence is not a necessary condition for imposing the CAT because the CAT’s $500,000 sales-receipts threshold is adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial under the dormant Commerce Clause. In reaching this conclusion, the court specifically stated that “[o]ur reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT.” (emphasis in original) Note that the court held this was the case regardless of whether the business-privilege tax is measured by income or receipts. In rebuking the taxpayer’s argument that Tyler Pipe affirmatively required some physical presence in the taxing state, the court held that physical presence is a sufficient (but not necessary) condition for imposing a business-privilege tax. See our prior blog on the oral argument for a more detailed description of the Tyler Pipe argument.

Second, the Ohio high court viewed the burdens imposed by the CAT on interstate commerce as not clearly excessive in relation to Ohio’s legitimate interest in imposing the CAT evenhandedly on sales receipts of in-state and out-of-state sellers. Citing these two bases, the Ohio Supreme Court affirmed the Board of Tax Appeals’ (BTA) decisions affirming the CAT assessments against the three appellants. The dissenting opinion viewed Quill as the proper standard for the Ohio CAT, and would have remanded the cases to the BTA for a determination of whether the taxpayer had physical presence.

Practice Note:

These companion cases were viewed by many as a potential vehicle to seek review of the continued viability of the Quill physical presence requirement (as Justice Kennedy called for in his widely-cited DMA concurrence last year). However, the narrow scope of the Ohio Supreme Court’s decision makes it difficult for this case to become the vehicle for the US Supreme Court to review Quill’s continuing viability for sales and use tax nexus.

SALT Implications of Final Section 385 Debt-Equity Regulations

The recently released final regulations under Internal Revenue Code Section 385, addressing the circumstances under which related company debt will be classified as equity for federal income tax purposes, will have a significant impact on state and local taxes. Federal tax practitioners, as well as state and local tax practitioners, must address their implications.

Read the full article here.

Digital Tax Update – Local Edition

After the highly publicized administrative lease transaction and amusement tax expansions in Chicago last year, more cities around the country are taking steps to impose transaction taxes on the sale or rental of digital content. Unlike tax expansion efforts at the state level (such as the law recently passed in Pennsylvania), which have almost all been tackled legislatively, the local governments are addressing the issue without clear legislative authority by issuing administrative guidance and taking aggressive positions on audit. As the local tax threat facing digital providers turns from an isolated incident to a nationwide trend, we wanted to highlight some of the more significant local tax developments currently on our radar.

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Illinois Appellate Court Delivers Another Blow to Relator in False Claims Act Litigation

On Monday, October 17, the Illinois Appellate Court issued another taxpayer-friendly opinion in an Illinois False Claims Act case alleging a failure to collect and remit sales tax on internet and catalog sales to customers in Illinois (People ex. rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp., 2016 IL App. (1st) 151580)). The opinion, partially overturned a Circuit Court trial verdict in favor of the Relator, Beeler, Schad & Diamond, PC (currently named Stephen B. Diamond, PC).

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