Just days away from the May 31 close of its regular legislative session, the Illinois General Assembly has yet to enact the comprehensive series of tax and budget reforms that were first proposed by the Illinois Senate leadership late last year. Yesterday, the Senate passed a modified version of Senate Bill (SB) 9, the tax proposal we described in a previous post, without any Republican support. SB 9 now moves to the Democratically-controlled House for consideration. Even if approved by the House, it seems likely that Illinois’ Republican Governor will veto the legislation. Continue Reading
In two recent General Information Letters (GILs), the Illinois Department of Revenue (Department) reaffirmed that computer software provided through a cloud-based delivery system is not subject to tax in Illinois. The Department announced that while it continues to review cloud-based arrangements and may determine they are taxable at some point, any decision to tax cloud-based services will be applied prospectively only. The GILs also recognize Quill’s physical presence requirement for Commerce Clause nexus.
Earlier this year, an unclaimed property rewrite bill (HB 2603) was introduced in the Illinois House that would require holders to retroactively report a number of property types currently exempt. The provision would require a retroactive period of 10 report years. Items that are currently exempt that would become reportable include gift cards and property resulting from business-to-business (B2B) transactions.
Last month, a bill (The False Claims Amendment Act of 2017, B22-0166) was introduced by District of Columbia Councilmember Mary Cheh that would allow tax-related false claims against large taxpayers. Co-sponsors of the bill include Chairman Jack Evans and Councilmember Anita Bonds.
Specifically, the bill would amend the existing false claims statute to expressly authorize tax-related false claims actions against persons that reported net income, sales, or revenue totaling $1 million or more in the tax filing to which the claim pertained, and the damages pleaded in the action total $350,000 or more.
The bill was referred to the Committee of the Whole upon introduction, but has not advanced or been taken up since then. Nearly identical bills were introduced by Councilmember Cheh in 2013 and 2016.
On Saturday, April 1, 2017, the Delaware Department of Finance (DOF) promulgated two regulations that would repeal all existing unclaimed property regulations and replace them with a single DOF regulation containing a revised Reporting and Examination Manual. The Secretary of State (SOS) also promulgated a regulation that outlines the method of estimation to be used for participants in the Voluntary Disclosure Agreement (VDA) Program. These promulgations are in accordance with the General Assembly’s instructions to do so in Senate Bill 13, which was passed in January and enacted by Governor John Carney on February 2, 2017.
Any written submission in response to these regulations must be sent to the respective agency by Wednesday, May 3, 2017 at 4:30PM EST.
In an effort to resolve Illinois’ 20-month budget impasse, the Illinois Senate leadership (Senate Majority Leader John Cullerton and Senate Minority Leader Christine Rodogno) have jointly proposed a series of bills to increase revenue, reduce spending, and respond to the Illinois Governor’s concerns regarding pension reforms, workers compensation reform and property tax relief. A series of twelve bills have been introduced, all of which are interlinked for passage. The bills are termed the Illinois “Grand Bargain.” Most of the tax-related changes are found in Senate Bill 9. The current version of the Senate Bill 9 (Amendment 3) (“Bill”) was submitted on March 3 and includes the following proposed changes: Continue Reading
Illinois Legislators have recently introduced three bills that would amend the Illinois False Claims Act (“Act”) to restrict the ability to bring tax-related claims. Senate Bill 9, the proposed “grand bargain” to resolve Illinois’ budget stalemate, includes language that would eliminate the ability to use the Act to bring tax claims. In addition, Representative Frank Wheeler and Senator Pam Althoff have introduced House Bill 1814 and Senate Bill 1250, respectively, which are identical pieces of legislation that would significantly restrict a private citizen’s right to bring tax-related claims.
Senate Bill 9, if adopted in its current form, would eliminate the ability to bring a tax-related claim under the Act. Currently, the Act only excludes the right to bring income tax-related claims. 740 ILCS 175/3(c). This would effectively conform the Act to the federal False Claims Act, which does not extend to tax claims. Rather, tax-related claims are brought before the Internal Revenue Service’s Whistleblower Office as whistleblower claims.
House Bill 1814 and Senate Bill 1250 (“Bills 1814/1250”) preserve the right to bring tax claims under the Act, and they maintain the prohibition against income tax claims. However, in a significant improvement over current practice, the Bills would amend the Act to restrict the ability of a whistleblower or its counsel to control or profit from the filing of tax claims. In addition, they enhance the role played by the Department of Revenue (“Department”) in determining whether a whistleblower’s tax claim should be pursued. Effectively, the Bills make the filing of state tax-related whistleblower claims more like the procedure for bringing a federal tax violation before the IRS.
Currently, the Act authorizes private citizens, termed “relators,” to initiate litigation to force payment of tax allegedly owed to the State. 740 ILCS 175/4(b). Hundreds of such claims have been filed in Illinois by whistleblowers claiming a failure to collect and remit sales tax on internet sales. Relators file a complaint under seal with the circuit court and serve the complaint on the State. Id. 175/4(b)(2). The Illinois Attorney General’s office then has the opportunity to review the allegations and decide whether to intervene in the litigation. Id. 175/4(b)(2), (3). The Department is not named as a Defendant and there is no requirement to involve the Department in the litigation. If the Attorney General declines to proceed with the litigation, the relator may proceed with the lawsuit on its own and, if successful, is entitled to an award of 25 percent to 30 percent of the proceeds or settlement of the action, plus its attorneys’ fees and costs. Id. 175/4(d)(2). Even if the State intervenes and proceeds with the litigation, eliminating the relator’s day-to-day involvement, the relator is entitled to an award of 15 percent to 25 percent of the proceeds of settlement, plus attorneys’ fees and costs. Id. 175/4(d)(1).
In contrast, Bills 1814/1250 provide that only the Attorney General (“AG”) and the Department have the right to initiate claims under the Act for taxes administered by the Department. Whistleblowers are required to report an alleged tax violation to the Department. The Department must investigate the allegations and make a recommendation to the AG as to whether or not the AG should file suit based on the allegations. Bills 1814/1250, 740 ILCS 175/4.5(b). The AG can accept or reject the Department’s recommendation. It can also bring suit in the absence of a Department recommendation. Id. If the AG initiates litigation based on a whistleblower’s allegations, the whistleblower is entitled to an award of 15 percent to 30 percent of the collected proceeds of the action and “related actions” or settlement, but no attorneys’ fees. Id., 740 ILCS 175/4.5(d). The whistleblower has no ability to proceed with litigation on its own if the Department or AG find the litigation unworthy. These changes would significantly reduce the ability of a whistleblower or its counsel to profit from the filing of nuisance value claims.
Bills 1814/1250 also provide that the Department has discretion to initiate an audit based on a whistleblower’s allegations and affirm that the audited entity has all the rights available to any other taxpayer to dispute any additional assessment of tax, interest and/or penalty charges. Id., 740 ILCS 175/4.5(c). Whistleblowers may not participate in or challenge the Department’s audit determination. If the Department initiates an administrative action based on a whistleblower’s allegations, the whistleblower is entitled to an award of 10 percent to 15 percent of the collected proceeds of the action or settlement. Id., 740 ILCS 175/4.5(d).
Bills 1814/1250 also provide the much-needed ability to reduce the percentage award to a whistleblower under certain circumstances. First, the Department has the discretion to reduce the percentage award to a whistleblower to 10 percent of the proceeds or settlement if it determines that the action (administrative or judicial) against a taxpayer is based primarily on disclosures from other sources. Id., 740 ILCS 175/4.5(e). (This provision is in the present version of the Act, but is a right afforded to the AG, not the Department.) In addition, the Department has discretion to reduce the whistleblower’s award without limitation if it determines the whistleblower planned and initiated the violation of the Act. Id., 740 ILCS 175/4.5(f). The latter change should significantly reduce the ability of whistleblowers to profit from the repetitive filing of tax claims based on transactions initiated by the whistleblower.
Bills 1814/1250 also would reduce the burden on the Circuit Courts with respect to these claims by requiring a whistleblower to file its claim with the Department, rather than the Court in the first instance, and by providing that Department award determinations are appealable exclusively to the Court of Claims. Id., 740 ILCS 175/4.5(g), 705 ILCS 505/8(j).
This is not the first time bills have been introduced to amend the Act. Similar efforts over the past several years have been stymied when the legislature failed to consider the bills in Committee hearings. Hopefully, the Illinois General Assembly will take action to enact one of these much-needed legislative changes this year.
Most states are well off to the races with their 2017 legislative sessions and several states have gift card legislation pending that would impact unclaimed property holders.
On January 9, 2017, a bill (SB 113) was introduced in the Senate that would create a new unclaimed property reporting obligation for gift cards, which would apply to gift cards issued or sold after the effective date of the bill.
SB 113 would accomplish this by amending the state consumer protection law to provide that a cardholder may only redeem a gift card from “[t]he person that a gift card identifies as providing goods or services” and such person “shall transfer to the Department of State Lands, in accordance with [the Uniform Disposition of Unclaimed Property Act], any remaining balance from a gift card that a cardholder has not used within five years after the date of the last transaction that used the gift card for a purchase.” Keeping consistent with the changes above, the bill would also amend the definition of “gift card” to strike the current reference to “issuer” and replace it with the “person identified in the record as providing goods or services in exchange for displaying or surrendering the record.” Finally, the bill provides that “[a] transfer under this paragraph renders the promise to provide goods or services of which the gift card is evidence void and the cardholder may not redeem the remaining balance on the gift card for cash, goods or services after the date of the transfer.”
The bill was referred to the Senate Committee on General Government and Accountability, where the sponsor (Senator Chuck Riley) sits as chair.
The prospect of gift cards becoming reportable prospectively in Oregon is troubling in itself, but the bill would go a step further and redefine who is the issuer in the gift card context by specifying that the retailer or other entity identified on the record as providing goods or services is the issuer and has the remittance obligation—not a third-party issuer (which many retailers currently use and most have historically understood to have the reporting obligation for unredeemed gift cards in states without an exemption). The bill leaves room for the Department of State Lands to establish an expedited process for transferring gift card balances by regulation, but it would still be the onus of the retailer to provide the unredeemed balances and would diminish the benefit of having a third-party gift card processor under Oregon law.
On January 5, 2017, a bill (HB 473) was introduced in the House that would revise the definition of “gift certificate” by (1) removing the existing requirement that the promise be written; and (2) increasing the face value based exemption from $100 to $250. The bill also would increase the face value of a gift certificate that may have an expiration date under the state consumer protection law to $250. As introduced, these changes would take effect January 1, 2018.
HB 473 was referred to the House Commerce and Consumer Affairs Committee on January 17, 2017, and a public hearing was held January 25, 2017. The bill was not advanced out of committee, and several subcommittee work sessions have been scheduled since then.
Issuers of gift certificates with a face value of $250 or less (but over $100) should keep a close eye on HB 473, as it would exempt these gift certificates from a presumption of abandonment. While this is good for gift certificate issuers, removing the requirement that a gift certificate be “written” would likely expand the scope of “gift certificates” subject to the unclaimed property law to include electronic and virtual gift cards and gift certificates. The subcommittee work session may provide an opportunity for the drafters to clarify the intent of the bill. Stay tuned.
On January 16, Governor Cuomo introduced the 2018 New York State Executive Budget Legislation. The bill proposes a number of changes to the New York State sales tax law. Below is a summary of the highlights.
Sales and Use Tax
- “Marketplace Providers”
The governor’s bill proposes to impose sales tax registration and collection requirements, traditionally imposed on vendors, on “marketplace providers.” This provision is essentially an effort to obtain sales tax on sales to New York customers that make purchases over the internet from companies that have no physical presence in New York and do not collect sales tax in New York when those companies make sales through online marketplaces. In the governor’s Memorandum of Support of this bill, he affirmatively states that “the bill does not expand the rules concerning sales tax nexus”. Although, as noted below, this claim may not be true.
The bill effectively shifts the sales tax collection burden from the traditional vendor to the marketplace provider. The bill defines marketplace provider as “a person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by such marketplace seller or sellers.”
A person “facilitates a sale of tangible personal property” if the person meets both of the following conditions:
(i) such person provides the forum by which the sale takes place, including a shop, store, or booth, an internet website, a catalog, or a similar forum; and
(ii) such person or an affiliate of such person collects the receipts paid by a customer to a marketplace seller for a sale of tangible personal property.
The bill caveats that “a person who facilitates sales exclusively by means of the internet is not a marketplace provider for a sales tax quarter when such person can show that it has facilitated less than one hundred million dollars of sales annually for every calendar year after .”
Unlike the definition of the term “vendor” in the current Tax Law, the definition of “marketplace provider” does not contain a doing business or physical presence component. Accordingly, despite the governor’s assertion that the bill does not expand the rules concerning sales tax nexus, this provision may expand the sales tax nexus rules by potentially imposing a sales tax collection obligation on marketplace providers that do not have a physical presence in New York.
In an effort to minimize the number of entities with a collection requirement, the bill provides that if a marketplace seller obtains a certificate of collection from the marketplace provider, it is not required to collect sales tax as a vendor. The bill caveats that if the marketplace provider and the marketplace seller are affiliated parties, and the marketplace provider fails to collect the tax, the marketplace seller will remain liable for the sales tax. For such purposes, parties are affiliated if they have as little as five percent of common ownership.
The proposed legislation would not permit marketplace sellers that sell to customers in New York through a marketplace provider to collect the sales tax themselves. One suggestion is to include a provision that allows marketplace sellers to collect the tax based on an agreement with the marketplace provider.
The bill provides some protection for marketplace providers if their failure to collect the correct amount of tax is due to incorrect information given to the provider by the marketplace seller. Again, affiliated parties would not get this protection.
The bill proposes that the act take effect on September 1, 2017 and apply prospectively.
- Related Entity Sales Tax Issues
The governor’s bill proposes amendments to the resale exclusion in an effort to stop companies from purchasing high-dollar-value property for resale to their affiliates, then leasing the property using a long-term lease or for a small fraction of the property’s fair market value thereby avoiding much of the sales tax on the transaction.
The governor’s bill proposes to solve the problem by eliminating the resale exclusion for (1) sales to a single member LLC or subsidiary that is disregarded for federal tax purposes for resale to its owner or parent company; (2) sales to a partnership for resale to one or more of its partners; and (3) sales to a trustee of a trust for resale to one or more of the beneficiaries of the trust.
This provision is broader than necessary to accomplish its goal since the provision also eliminates the resale exclusion for arms-length, good-faith transactions between related entities, thus potentially subjecting certain transactions to double taxation–once when the property is sold to the single member LLC, for example, and again when it is resold by the LLC to its owner.
The bill proposes that this section take effect immediately.
- Use Tax Exemption for Nonresidents
In response to the New York State Division of Taxation’s and the Attorney General’s recent focus on sales and use tax issues involving the sale of artwork, the governor’s bill proposes to provide an exception to the use tax exemption for the use of property or services in New York purchased by the user while the user was a nonresident. The governor’s goal is to prevent New York residents from creating foreign entities to purchase property (usually artwork) outside of New York and subsequently bringing the property into New York and avoiding the use tax.
The bill provides that the use tax exemption for nonresidents will not apply if the nonresident business has not been doing business outside the state for at least six months prior to the date that such nonresident brought the property or service into New York. This provision does not apply to individual nonresidents.
Again, this provision may be broader than necessary to “catch” those avoiding tax using the use tax exemption. This provision may impact businesses acting in good-faith without a tax avoidance scheme. A better idea may be to provide that a nonresident company will lose the use tax exemption if the company has no valid business purpose and was created solely to avoid tax.
The bill proposes that this section take effect immediately.
- Transportation, Transmission or Distribution of Gas or Electric
The governor’s bill also proposes the making of a technical change to NY Tax Law § 1105-C to clarify that sales tax is imposed on charges for transporting, transmitting, or delivering gas or electricity when the company providing the transportation, transmission, or distribution is also the provider of the commodity. This amendment is intended only to clarify the existing law.
The bill proposes that this section take effect immediately.
On January 26, 2017, the Delaware House approved comprehensive unclaimed property rewrite legislation (SB 13) that was passed by the Senate (with committee amendments) last week. Our summary of many of the key provisions of the bill (as introduced) is available here. Because the amended version of SB 13 has now passed both chambers of the General Assembly, it will be sent to Governor John C. Carney Jr. for signature, and will become effective immediately upon his approval. Rumors are circling that follow-up legislation is likely, and may be considered this session.
The Senate Amendment adopted by both chambers made relatively minor changes to the introduced legislation.
First, it struck all references to and the definition of “net card value” that was used to determine the amount presumed abandoned in the stored-value and gift card context. As passed today, “the amount unclaimed is amount representing the maximum cost to the issuer of the merchandise, goods, or services represented by the card.” The 5 year dormancy period tied to “the later of the date of purchase, the addition of funds to the stored-value card or gift card, a verification of the balance by the owner, or the last indication of interest in the property” was not changed.
Second, the amendment struck all references to and the definition of “virtual currency.” This is significant because the introduced version of the legislation expressly included an expansive definition of virtual currency in the definition of “property” subject to escheat. While the inclusion of virtual currency in the definition of “property” is consistent with the approach taken in the Revised Uniform Unclaimed Property Act (RUUPA) adopted by the Uniform Law Commission (ULC) last year, the introduced Delaware legislation definition of “virtual currency” omitted two exclusions (the software or protocols governing the transfer of the digital representation of value and game-related digital content) contained in the RUUPA definition that were included after careful consideration to limit the potentially vast scope. By removing virtual currency entirely from the Delaware legislation, it will not be presumed to be property subject to escheat.
Third, the Senate Amendment changes the timeframe that holders currently under audit have to submit a written application to participate in the Secretary of State VDA program or expedited audit process. As introduced, the Delaware legislation would have required these decisions to be made by July 1, 2017. As amended (and passed), this period would be extended to within 60 days from the date of the adoption of regulations pertaining to the methods of estimation used.
With the passage of this legislation, there is a lot for holders to consider. In particular, holders with an on-going audit will need to make the decision whether to: (1) make an election to join the Secretary of State VDA program; (2) expedite the audit; or (3) continue as-is. With new penalties and mandatory interest enacted as part of the legislation, securing waiver of penalties and interest should be a top priority and could result in significant savings. This must be balanced with the holder’s ability to timely comply with document request (required by expedited audit) and desire to appeal the final determination (prohibited for VDA program participants). Holders under audit should begin these important discussions now, as Delaware is expected to act quickly in preparing the estimation regulations that are tied to the holders decision deadline.