Wrapping Up August – and Looking Forward to September

Upcoming McDermott Will & Emery SALT Activities in September:

September 14, 2017: Robin Greenhouse, Kristen Hazel, Sandra McGill and Alysse McLoughlin will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about local tax updates and ethics.

September 15, 2017: Jane Wells May is speaking in Austin, TX at the ABA Tax Section Meeting about “False Claims Acts and State Taxes.”

September 18, 2017: Mary Kay Martire is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about “Third Party Tax Enforcement Actions.”

September 19, 2017: Arthur Rosen is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about sales tax nexus –“Son of Quill: The Sequel.”

September 19, 2017: Stephen Kranz is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about uncollectible debts – “Breaking Bad from Bad Debt.”

September 26, 2017: Cate Battin and Mary Kay Martire are presenting a “National Update on Key SALT Issues” in Rolling Meadows, IL, at the 18th Annual SALT Conference of the Taxpayers Federation of Illinois.

September 28, 2017: Eric Carstens and Nick Furtwengler will be speaking at the TEI Emerging Tax Professionals Seminar, taking place in McDermott’s Chicago, IL office, about the SALT portions of “Acquiring or Expanding a Business,” “Integration and Compliance” and “The Audit Notice Arrives: Now What?”

Wrapping up August:

Our August 2017 blog posts are available on insideSALT.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

August 1, 2017: Implications of Federal Partnership Audit Rules for State and Local Taxation

August 8, 2017: MTC Offers 18 State Marketplace Seller Amnesty Initiative

August 14, 2017: Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

August 15, 2017: Illinois Court Upholds Cook County’s Beverage Tax Finding It Passes Constitutional Muster and Related Developments

August 16, 2017: Delaware (Re)Proposes Unclaimed Property Reporting and Examination Manual Regulation

August 18, 2017: MTC Marketplace Seller Voluntary Disclosure Initiative Underway

MTC Marketplace Seller Voluntary Disclosure Initiative Underway

Yesterday, the application period opened for the limited-time MTC Marketplace Seller Voluntary Disclosure Initiative opened and it will close October 17, 2017. Since our last blog post on the topic detailing the initiatives terms, benefits and application procedure, six additional states (listed below) have signed on to participate in varying capacities. The lookback period being offered by each of the six states that joined this week is described below.

  1. District of Columbia: will consider granting shorter or no lookback period for applications received under this initiative on a case by case basis. DC’s standard lookback period is 3 years for sales/use and income/franchise tax.
  2. Massachusetts: requires compliance with its standard 3-year lookback period. This lookback period in a particular case may be less than 3 years, depending on when vendor nexus was created.
  3. Minnesota: will abide by customary lookback periods of 3 years for sales/use tax and 4 years (3 look-back years and 1 current year) for income/franchise tax. Minnesota will grant shorter lookback periods to the time when the marketplace seller created nexus.
  4. Missouri: prospective-only for sales/use and income/franchise tax.
  5. North Carolina: prospective-only for sales/use and income/franchise tax. North Carolina will consider applications even if the entity had prior contact concerning tax liability or potential tax liability.
  6. Tennessee: prospective-only for sales/use tax, business tax and franchise and excise tax.

Practice Note

The MTC marketplace seller initiative is now up to 24 participating states. It is targeting online marketplace sellers that use a marketplace provider (such as the Amazon FBA program or similar platform or program providing fulfillment services) to facilitate retail sales into the state. In order to qualify, marketplace sellers must not have any nexus-creating contacts in the state, other than: (1) inventory stored in a third-party warehouse or fulfillment center located in the state or (2) other nexus-creating activities performed by the marketplace provider on behalf of the online marketplace seller.

While Missouri, North Carolina and Tennessee have signed on to the attractive baseline terms (no lookback for sales/use and income/franchise tax), Minnesota and Massachusetts are requiring their standard lookback periods (i.e., 3+ years). Thus, these two states (similar to Wisconsin) are not likely to attract many marketplace sellers. The District of Columbia’s noncommittal case-by-case offer leaves a lot to be determined, and their ultimate offer at the end of the process could range from no lookback to the standard three years.

Delaware (Re)Proposes Unclaimed Property Reporting and Examination Manual Regulation

On August 1, the Delaware Department of Finance (DOF) published a revised version of its proposed reporting and examination manual regulation addressing audit procedures and method of estimation.  See 21 DE Reg 123 (Aug. 1, 2017). The revised proposed regulation is substantially similar to the first draft proposed earlier this year, but contains a dozen or so notable differences (described in more detail below). Because the former draft of the regulation was never finalized, the 60-day time period for eligible holders to convert to the Voluntary Disclosure Agreement (VDA) Program (administered by the Secretary of State) or an expedited audit has not started to run, and will not commence until the final DOF regulation is published in the monthly Register of Regulations. Based on the fact that the DOF is accepted comments through August 31, 2017 (and likely needs at least a month to take them into consideration), the final regulation is not expected to be published before October 1, 2017, giving eligible holders at least three more months before the looming conversion deadline.

Our summary of the initial regulations proposed by the DOF and Secretary of State (SOS) on April 1, 2017 is available here. The final SOS VDA estimation regulation was published on July 1, 2017, without substantive amendments. See 21 DE Reg 50 (July 1, 2017). Below is a brief summary of the key differences between the old and new proposed DOF reporting and examination manual that holder’s should be aware of.

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Illinois Court Upholds Cook County’s Beverage Tax Finding It Passes Constitutional Muster and Related Developments

On July 28, Circuit Judge Daniel Kubasiak dismissed the Complaint filed by the Illinois Retail Merchants Association and a group of retailers challenging the constitutionality of the Cook County, Illinois Sweetened Beverage Tax (Tax). A copy of the court’s Order is linked here (Order). The Order also dissolved the June 30 temporary restraining order which had halted the county’s imposition of the Tax, on which we have previously reported. In response to the Order, the county required Tax collection to begin on August 2. The county also announced that by September 20, retailers must remit a “floor tax” on the inventory of sweetened beverages in their possession as of August 1.

The Order rejected both of the constitutional arguments raised by the Complaint. The court held that Plaintiffs raised a good faith Illinois Uniformity Clause challenge, and thereby shifted the burden of proof to the county, because the Tax applied to pre-made, but not made-to-order sweetened beverages. The court went on to hold, however, that the county met its burden to justify this arbitrary tax classification by alleging that pre-made sweetened beverages were more widely available and therefore more likely to be purchased and consumed than made-to-order beverages (thus generating more tax revenues) and by arguing that imposing the Tax on made-to-order beverages would be administratively burdensome. The court then held that Plaintiffs had failed to meet their burden of establishing that the county’s justifications were insufficient in law or unsupported by the facts. According to the court, the “County has set forth a real and substantial difference between the people taxed, who purchase ready-to-drink, pre-made sweetened beverages, and those not taxed, who purchase on-demand, custom sweetened beverages.” (Order at 9.)

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Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

On August 9, 2017, the US Court of Appeals for the Third Circuit (Third Circuit), overruling the US District Court for the District of Delaware (District Court), allowed a claim by a holder seeking to prevent an unclaimed property audit by Delaware on due process grounds to proceed. See Plains All American Pipeline L.P. v. Cook et al., No. 16-3631 (3d Cir. Aug. 9, 2017).  The procedural due process claim challenges Delaware’s use of auditors that have a stake in the assessment. Consistent with the District Court decision, the Third Circuit held that challenges to Delaware’s estimation methodology were ruled not ripe. The case has been remanded to the District Court for further proceedings.

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MTC Offers 18 State Marketplace Seller Amnesty Initiative

The Multistate Tax Commission (MTC) is moving quickly to implement a multistate amnesty program through its current National Nexus Program (NNP) for sellers making sales through marketplaces. The new MTC marketplace seller amnesty program is limited to remote sellers (3P sellers) that have nexus with a state solely as the result of: (1) having inventory located in a fulfillment center or warehouse in that state operated by a marketplace provider; or (2) other nexus-creating activities of a marketplace provider in the state. Other qualifications include: (1) no prior contact/registration with the state; (2) timely application during the period of August 17, 2017 through October 17, 2017; and (3) registration with the state to begin collecting sales and use tax by no later than December 1, 2017, and income/franchise tax (to the extent applicable) starting with the 2017 tax year.

The baseline guarantee is prospective-only (beginning no later than Dec. 1, 2017) tax liability for sales and use and income/franchise tax, including waiver of penalties and interest. The program also attempts to ensure confidentiality of the 3P seller’s participation by prohibiting the states and MTC from honoring blanket requests from other jurisdictions for the identity of taxpayers filing returns. Note, however, that the confidentiality provision would still allow for disclosure of the content of the agreement in response to: (1) an inter-government exchange of information agreement in which the entity provides the taxpayer’s name and taxpayer identification number; (2) a statutory requirement; or (3) a lawful order.

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Finishing SALT: Inside SALT’s Monthly Recap

Wrapping up July—and Looking Forward to August

SALT Activities for August:

August 2, 2017: Diann Smith is moderating a panel at the 50th Multistate Tax Commission Annual Conference in Louisville, Kentucky about “The Significance of the MTC – Past, Present, and Future – from the Outside.”

August 5, 2017: Stephen Kranz is presenting about Unclaimed Property at the National Conference of State Legislatures (NCSL) SALT Task Force Meeting in Boston, Massachusetts, and will cover the following topics:

  • Lessons learned from the first legislative season in which the Revised Uniform Unclaimed Property Act was considered, and in some cases adopted in part.
  • The MoneyGram case, currently before the United States Supreme Court under its original jurisdiction to handle cases brought by one state against another, which may rewrite the rules regarding which state has priority over custody of unclaimed funds.

Wrapping up July:

Our July 2017 blog posts are available on insidesalt.com, or may be read below by clicking on the titles. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

July 6, 2017: Connecticut Will Make You Disclose Personal Customer Data!

July 7, 2017: Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget

July 7, 2017: Illinois Unclaimed Property Law Substantially Revised As Part of Revenue Package Supporting Illinois Budget

July 12, 2017: Beverage Tax Wars Continue as Parties Head Back to Court for a Preliminary Injunction Hearing on the Cook County, Illinois Tax

July 13, 2017: What Is Minimal Substantial Nexus?

July 24, 2017: House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow

Implications of Federal Partnership Audit Rules for State and Local Taxation

The new federal partnership income tax audit rules, scheduled to take effect on January 1, 2018, will have significant implications for the state and local taxation of partnerships and their partners. Most, but not all, states that impose a net income-based tax adopt by reference the federal definition of taxable income, but those that do typically adjust that income to reflect differences between state and federal tax policies. Moreover, state revenue departments generally do not regard themselves as being bound by Internal Revenue Service interpretations of the Internal Revenue Code even when substantive Code provisions are incorporated into state law by reference. The federal statutory rules relating to partnership audits are procedural rules and not ones of substantive tax law, so they will not be automatically adopted by states that generally conform to Internal Revenue Code provisions relating to taxable income. State legislatures may decide to adopt some or all of the federal statutory rules, or they may decide to adopt none of them. Arizona has already adopted its own version of the federal rules, and other state revenue departments are considering recommending to their legislatures that the legislatures take similar action, but most states have not reacted to the federal rules at this time. Continue Reading

House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow

The No Regulation Without Representation Act of 2017 (NRWRA) is scheduled for a hearing before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Tuesday, July 25 at 10:00 am EDT in 2141 Rayburn House Office Building. The bill was introduced by Congressman Jim Sensenbrenner (R-WI) last month with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in more detail below, the bill would codify the Bellas Hess “physical presence” requirement upheld by the US Supreme Court in Quill and make that requirement applicable to sales, use and other similar transactional taxes, notice and reporting requirements, net income taxes and other business activity taxes. Extending the concept to an area far beyond state taxation, the bill would also require the same physical presence for a state or locality to regulate the out-of-state production, manufacturing or post-sale disposal of any good or service sold to locations within its jurisdictional borders.

In the last Congress, the Business Activity Tax Simplification Act of 2015 (BATSA) would have codified a physical presence requirement in the context of business activity taxes (e.g., net income and gross receipts taxes). However, the scope of NRWRA’s limitations on interstate regulation and tax differs from the standard set forth in BATSA. Specifically, under BATSA, assigning an employee to a state constitutes physical presence, whereas under NRWRA a company does not have physical presence until it employs more than two employees in the state (or a single employee if he or she is in the state and provides design, installation or repair services or “substantially assists” in establishing or maintaining a market). Under NRWRA, activities related to the potential or actual purchase of goods or services in the state or locality are not a physical presence if the final decision to purchase is made outside of the jurisdiction. Continue Reading

What Is Minimal Substantial Nexus?

Can a seller have nexus with a state – so as to be obligated to collect and remit that state’s sales and use taxes – only in connection with certain sales that seller makes into that state?  In this article, the authors explore the concept that only certain transactions may be subject to that obligation, depending on the extent of the seller’s connection with that state.

Read the full article.

Originally published in State Tax Notes, July 3, 2017.

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