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Massachusetts Department of Revenue Releases Guidance on a De Minimis Exception for Use Tax on Rolling Stock

The Massachusetts Department of Revenue (DOR) recently released Directive 23-1, which outlines the conditions for a de minimis exception where the Commissioner will not require a taxpayer to pay the use tax for rolling stock used or stored within the state. This directive comes at a time when the DOR is auditing many companies that use trucks and trailers and is currently assessing use tax on rolling stock if no sales tax was collected at the time of sale.

Directive 23-1 provides that “the Commissioner will consider the in-state use [of rolling stock] to be de minimis and will neither impose, nor require the taxpayer to pay, use tax on the use or storage of the rolling stock” where the taxpayer can prove “that the rolling stock that it owns or leases for 12 months or longer was used or stored in Massachusetts for no more than six days during a 12-month period” (emphasis added).

Companies “can demonstrate the frequency with which rolling stock was used or stored in Massachusetts through sufficient records that show the dates of travel into and in Massachusetts, such as GPS logs.” Additionally, a credit against the Massachusetts use tax is allowed if the taxpayer has paid a sales tax legally due to another state and that state allows a corresponding credit for sales or use tax paid to Massachusetts.




Meaningful Statute of Limitations for Unclaimed Property Audits and Enforcement Actions? Michigan Court of Appeals Says Yes!

On January 19, 2023, the Michigan Court of Appeals affirmed two 2022 trial court orders, holding that initiating an unclaimed property audit does not toll (or freeze) the running of the statute of limitations (time-bar) for the Michigan State Treasurer to commence “an action or proceeding” with respect to a duty of a holder.[1] As most holders are well aware, unclaimed property audits are extremely invasive and burdensome and, unlike other types of audits conducted by states, often drag on for a decade or more before the state will issue a formal notice and demand—covering multiple years and looking back from the date of the original audit notice (often 10 or 15 years). This dynamic has created an audit framework that sets holders up for failure (really, who has complete books and records that far back?) and results in millions of unclaimed property being reported to states because of record limitations alone and third-party audit firms being handsomely paid for their time spent.

The Michigan Court of Appeals’ decision calls this entire model (some would say scheme) into question and could drastically change how holder audits look, feel and proceed in the unclaimed property world going forward. Even more importantly for holders currently under audit, these decisions could drastically narrow the scope of the open periods covered by the audit for Michigan and other states with similar unclaimed property statute of limitations.

Practice Note: While the common sense holding in this case is well established in the tax realm, it has long been the position of unclaimed property administrators and their third-party audit firms that the commencement of an audit alone freezes the statute of limitations and allows them to enforce the duties of holders looking back from that date. This (now precedential) Michigan Court of Appeals decision flies in the face of that long-standing view and calls into question whether peer states with similar unclaimed property statute of limitations are barred from enforcing transaction years being reviewed under pending audits. Because the Michigan unclaimed property statute of limitations is modeled off a provision contained in the 1981 Uniform Unclaimed Property Act (which has been adopted by many states and incorporated in the Revised Uniform Unclaimed Property Act approved in 2016), this is not a Michigan-specific victory and one that should be explored further for holders under audit by other states as well. Showing the nationwide importance of these Michigan cases, the National Association of State Treasurers filed an amicus brief through its affiliate, the National Association of Unclaimed Property Administrators, with the Michigan Court of Appeals in July 2022; however, their arguments were not enough to convince the Court to modify the trial court decision interpreting the plain language of the statute of limitations and uphold the trial court ruling in favor of the holders.

The State Treasurer filed an application for leave to appeal the Michigan Court of Appeals opinion to the Michigan Supreme Court (the state court of last resort, which has [...]

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Pennsylvania Supreme Court Rules Coupon Amounts Are Not Subtracted from Sales Tax Base Unless Sales Receipt Adequately Describes Taxable Item and Coupon

Overturning a 6-1 en banc decision by the Pennsylvania Commonwealth Court, the Pennsylvania Supreme Court held that a coupon does not reduce the price upon which sales tax must be collected unless the coupon is adequately described and “linked” with the taxable item in accordance with Pennsylvania Department of Revenue (DOR) regulations. The case was brought by a retail customer seeking a sales tax refund on the difference between the retail price of the product and the discounted price as the result of a coupon. The decision instructs retailers on the application of coupon discounts when collecting sales tax. The decision may also provide comfort to retailers facing class action lawsuits in Pennsylvania for collecting sales tax on full invoice prices without taking discounts from coupons into account.

The case examined three transactions between a retailer and customer. In two of the transactions, the customer purchased a single taxable item and used a single coupon. In the other transaction, the customer purchased six taxable items and used five coupons of varying amounts. The receipt provided in each transaction identified each coupon as a “SCANNED COUP” and identified the discount provided with each coupon but did not further describe the coupon nor link the coupon as a discount to any specific item purchased. In all three transactions, the retailer collected sales tax on the full purchase price without taking the coupons into account. The customer sought a sales tax refund from the DOR, maintaining that sales tax should have been collected on the discounted price. The DOR denied the refund claim.

The Pennsylvania Supreme Court agreed with the DOR’s position that under Pennsylvania regulations, “sales tax is owed on the full purchase price” (disregarding any coupons) unless an invoice or receipt (1) separately states and identifies the amount of the taxable item and the coupon and (2) provides a description of both the taxable item and the coupon. Further, the Court agreed that a satisfactory description in the receipt must contain a “linking” element, meaning the coupon must be adequately described to show that it applied to a specific item. The Court explained that such a description on the receipt was necessary because, under Pennsylvania law, “there are discounts or coupons that do not establish a new [taxable] purchase price, such as a discount for shopping on a specific day, discounts from a minimum purchase amount, and sales tax absorption coupons.”

In recent years, state tax departments have been very aggressive in asserting that coupons and discounts do not reduce the sales tax base. This decision serves as a reminder to retailers that the description of coupons on invoices is critical in determining the amount of sales tax to collect. In Pennsylvania, the coupon must be separately identified and “linked” to the taxable product upon which the discount is applied.

This decision highlights the dilemma many retailers face when collecting tax on discounted products: if they collect on the full retail price, they face the potential for customer class action suits [...]

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“Voluntary” in Name Only? New Jersey Introduces Transfer Pricing Initiative

The New Jersey Division of Taxation (Division) has announced a “voluntary” transfer pricing initiative beginning June 15, 2022, and continuing through March 2, 2023. According to the Division, the initiative is targeted toward companies that have intercompany transactions that would be subject to transfer pricing adjustment.

The initiative is broadly available to taxpayers with related party intercompany pricing, even if those taxpayers are currently under audit or have a case pending before the Division’s Conference and Appeals Branch. However, the initiative does not apply to matters in litigation.

Taxpayers must agree in writing to participate in the initiative by September 15, 2022, and comply with Division deadlines thereafter (including by providing “all required transfer pricing, tax, and financial information and documentation” to the Division by October 31, 2022). As part of any agreement reached with a taxpayer, the Division will agree to waive all applicable penalties and all rights to assess any additional tax, interest or penalties except for adjustments relating to federal corrections.

Notably, the Division is warning taxpayers that do not reach an agreement through the initiative that in the future it will: (1) “assess all applicable penalties;” (2) “not waive any penalties;” and (3) audit according to the Division’s “regular audit schedule” without agreeing “to a methodology or settlement for any unaudited open tax years.”

Evidently, the Division has hired Dr. Ednaldo Silva, Founder & Director of RoyaltyStat, to assist with the initiative. Sources familiar with the initiative report that the Division will consider prospective-only settlement agreements under the initiative, under the right circumstances.




CDTFA Proposes Significant Revisions to Chapters 4 and 13 of the Sales Tax Audit Manual

On February 2, 2022, the California Department of Tax and Fee Administration (CDTFA) held an interested parties meeting (IPM) to discuss proposed amendments to sales tax audit manual (AM) Chapter 13, “Statistical Sampling,” and Chapter 4, “General Audit.”

Prior to the IPM, the CDTFA released a lengthy discussion paper outlining the extensive proposed changes to the AM, which includes:

1. Removing the three error rule. The current text of AM 1308.05 explains that when a sample produces only one or two errors, the auditor must evaluate whether these errors are representative or whether it is possible they indicate problems in certain areas that could be examined separately. Under the proposed amendment, the same evaluation standards would still be in place without the minimum error requirement. According to the CDTFA, the proposed removal of the three error rule is because of the fact that “the number of errors identified in a sample does not give any indication whether the sample is representative or not…If the combined evaluation evaluates within Department [CDTFA] standards, it is justified to project the results even if one or two errors are found.”

2. Requiring 300 minimum sample items per stratum unless the auditor obtained approval from CAS to select fewer than 300. Currently, the “minimum sample size of at least 300 items of interest is to be used in all tests, except where the auditor can support a smaller sample size and it evaluates well.” (AM 1303.05) Under the new subsection titled “Materiality,” a minimum of 300 sample items per test stratum is recommended. Computer Audit Specialist (CAS) approval is required for selecting less than 300 sample items per test stratum.

3. Refunding Populations: A minimum of 100 sample items per stratum is required. In the section addressing sampling refund populations (AM 1305.10), the proposed amendment would permit auditors to select as few as 100 sample items per test stratum without CAS approval, provided the expected error rate is sufficiently high (greater than 20%). No such rule exists under the current text of Chapter 13.

4. Contacting CAS when the prior audit had 300 hours charged to it is now mandatory. In contrast, under the current rule, it is mandatory that CAS be contacted when the prior audit expended 400 or more hours or if CAS was involved in the prior audit.

5. Replacing Credit Methods 1, 2 and 3 with one recommended approach to handling credits in a statistical sample. The subsection (AM 1303.25) currently lists three types of credit methods that can be used for a statistical sample. The CDTFA now only recommends one credit method for use in a stratified statistical sample, which is referred to as “Method 1” in the current AM text. When auditors review electronic data, attempts should be made to match credit invoices to original invoices (including partially) if it is certain that the credit invoices are related to the original invoice. For all credit memos that are not matched to original invoices, those credits will be removed from [...]

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COVID-19 State Tax Relief for Illinois | Quarterly Estimated State Income Tax Payments Still Due 4/15/20

Illinois has announced the following tax-related relief measures related to COVID-19. Taxpayers who file quarterly estimated returns should note that unlike the federal government, Illinois has not extended the April 15, 2020 due date for first quarter estimated tax payments.

I. Extension of Filing and Payment Deadlines for Illinois Income Tax Returns

The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Illinois income taxes on April 15, 2020, have been automatically extended until July 15, 2020. This relief applies to all individual returns, trusts and corporations. The relief is automatic; taxpayers do not need to file any additional forms or call the Illinois Department of Revenue (IDOR) to qualify. For additional details, click here for the guidance issued by IDOR on March 25, 2020.

Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020.

Even though the deadline has been extended, IDOR has encouraged taxpayers expecting a refund to file as soon as they can. Taxpayers who have already filed a return can check the status of their return by using the Where’s My Refund? link located at mytax.illinois.gov

Note: This extension does NOT impact the first and second installments of estimated payments of 2020 taxes that are due on April 15 and June 15. Although the federal government has extended the date for the payment of first quarter estimated tax payments to June 15, 2020, Illinois has not followed this practice. Illinois taxpayers are still required to estimate their tax liability for 2020 and make four equal installment payments to IDOR, starting on April 15, 2020.

II. Sales Tax Deferral for Bars and Restaurants

To help alleviate some of the unprecedented challenges facing bars and restaurants due to COVID-19, Governor Pritzker has directed IDOR to defer sales tax payments for eating and drinking establishments that incurred less than $75,000 in sales tax liabilities last year. Qualifying businesses are still required to timely file their sales tax returns, but will not be charged penalties or interest on their late payments due in March, April or May 2020. The IDOR estimates this will give relief to nearly 80% of the bars and restaurants in Illinois.

Taxpayers taking advantage of this relief will be required to pay their sales tax liabilities due in March, April and May in four installments, starting on May 20 and extending through August 20. For more information, please view IDOR’s informational bulletin available at tax.illinois.gov.

III. Small Business Loans

The US Small Business Administration has approved the state’s eligibility for disaster assistance loans for small businesses facing financial hardship in all 102 Illinois counties due to COVID-19. Eligible businesses can apply for up to $2 million in low-interest loans here.




Victory? Delaware Suggests an End to Contingency Compensation for Unclaimed Property Contract Auditors

For years, Delaware has used contract audit firms to enforce their unclaimed property laws and paid them based, at least partially, on the amount recovered. Motivated by this financial reward and empowered as an agent of the state, the contract-auditing firms with the State’s complicity harass holders, inflate liabilities by deploying aggressive estimation techniques and engage in other questionable practices to maximize their bounty.

Maybe not anymore. In a federal court filing on January 10, Delaware’s brief appended as an exhibit its most recent contract signed December 31, 2019, with Kelmar, one of the more notorious unclaimed property contract audit firms. The new contract states that Kelmar will be paid at set hourly rates for general ledger work, instead of their prior compensation, which was largely seen to be contingent upon recovery. (Securities-related work remains contingency-based.)

It will be welcome news if this heralds an end to the madness of contingency compensation for contract auditors. Holders have voiced complaints for decades, often forced to litigate to prove Kelmar’s method incorrect. The US Chamber has detailed the flaws of using contract auditors and urged a ban to the practice, and judges have tried to rein in their behavior. The National Conference of State Legislatures adopted a resolution disapproving of the practice. After all of these years and horror stories, the message might have finally gotten through.




An Uneven Playing Field: Judicial Deference to State Tax Administrator Interpretations

Judicial deference to state tax agencies puts taxpayers at a steep disadvantage and wastes time and resources on costly tax disputes. A united advocacy effort can help promote passage of state-level legislation that takes the tax administrator’s thumb off the scales of justice in administrative and judicial review of tax determinations.

Access the full article.

Learn more here about the Deference Coalition and how McDermott can help.




Finishing SALT: May Wrap-Up and June Highlights

Top Hits You May Have Missed

New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates

Oregon Bars Use of Three Factor Apportionment Formula

McDermott Defeats New York False Claims Act Case Alleging Starbucks Failed to Collect and Remit Sales Tax

Looking Forward to June

June 1, 2018: Stephen Kranz presented “Diverse Routes to Resolving SALT Audit Issues” at the Georgetown Law Advanced State and Local Tax Institute in Washington, DC.  Stephen discussed numerous complex audit issues facing tax administrators and taxpayers alike, including avenues for equitable resolution of complex audit issues and evaluation of when litigation is the best means of resolution.

June 5, 2018: Alysse McLoughlin is presenting “Partnership Audit Regulations: The Great Unknown” at the Federation of Tax Administrators Annual Meeting in Nashville, TN.

June 21, 2018: Britt Haxton, Kristen Hazel, Enrica Ma, Jane May, Sandra McGill, Alysse McLoughlin, Maureen O’Brien and Diann Smith are presenting at Tax in the City® New York about the various impacts of tax reform on state and local taxes, digital commerce, cross-border transactions, and compensation structures and fringe benefits. There will also be a CLE/CPE session on the ethical considerations around tax reform. Email Maria Dubinets at mdubinets@mwe.com to register.

June 25, 2018: Alysse McLoughlin is presenting “State Implications of the Federal Partnership Rules” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.

June 26, 2018: Stephen Kranz is presenting “Taxability of Digital Goods and Services” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC. Stephen will present an overview of US digital taxation, the characterization of tangible personal property, related legislative and administrative developments, and an update on recent litigation in digital tax. He will also provide an overview of best practices, including minimizing sales and use tax on software related transactions as well as audit tips.

June 27, 2018: Jane May is presenting “State Payroll Audits” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.

June 28, 2018: Stephen Kranz is speaking at the National Conference of State Legislatures (NCSL) Executive Committee Task Force on State and Local Taxation, Lake Tahoe NV, regarding federal tax reform and next steps on the remote sales tax. He will also present an overview of the South Dakota v. Wayfair Supreme Court oral arguments and upcoming decision.




McDermott Defeats New York False Claims Act Case Alleging Starbucks Failed to Collect and Remit Sales Tax

On April 9, 2018, the New York State Supreme Court granted Starbucks’ motion to dismiss claims that it had failed to collect more than $10 million of sales tax at its New York stores. Lawyers from McDermott’s State and Local Tax (SALT) group and its White Collar and Securities Defense team handled the matter.

A unique feature of New York law is that the attorney general and private qui tam plaintiffs are permitted to bring New York False Claims Act (NYFCA) actions under New York Financial Law for “claims, records, or statements made under the tax law.” Fin. L. 198(4)(a)(i)-(iii). Under federal law and the law of most states, there is no False Claims Act liability for tax issues. But in New York, the attorney general and private plaintiffs can pursue False Claims Act cases for failure to comply with tax law. There have been numerous large settlements and judgments issued against major companies under the NYFCA, including one settlement for $40 million. See A.G. Schneiderman Announces $40 Million Settlement With Investment Management Company for Tax Abuses, Marking Largest Whistleblower Recovery in Office’s History (April 18, 2017). If successful, qui tam plaintiffs can recover a 25 – 30 percent share of the amount recovered, together with costs and attorneys’ fees. Fin. L. § 190(6)(b).

In this case, two private relator plaintiffs alleged that Starbucks failed to collect sales tax on warmed and “to-go” food items over a 10-year period. The relators filed a complaint, under seal, on or about June 11, 2015, with the New York Attorney General (AG). The AG declined to intervene. On June 30, 2017, the relators elected to proceed on their own with the lawsuit and filed a complaint seeking a judgment for at least $10 million in allegedly unpaid sales tax, as well as treble damages, civil penalties and attorneys’ fees. There was no allegation that Starbucks had failed to properly pay New York taxes that it had previously collected and was holding improperly. The relators’ allegations were solely based on their claim that Starbucks had under-collected sales tax from its New York customers.

On behalf of Starbucks, McDermott filed a motion to dismiss, arguing that Starbucks properly collects and pays its taxes to the State of New York and that Starbucks has consistently worked cooperatively with auditors from the New York State Department of Taxation and Finance. McDermott further argued that the relators “survey” of purchases at Starbucks locations and anecdotal conversations with Starbucks employees failed to properly allege that Starbucks violated the tax law or engaged in any fraud.

On November 10, 2017, the court held oral argument. On April 9, 2018, the Honorable James d’Auguste agreed with McDermott’s arguments and dismissed the case. See State of New York ex rel. James A. Hunter & Keenan D. Kmiec v. Starbucks Corporation, No. 101069/15, Dkt No. 40 (Sup Ct. April 9, 2018). The court held that the relators failed to properly allege that Starbucks had knowingly avoided or recklessly disregarded [...]

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