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INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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Texas Comptroller’s Office Holds Roundtable on Proposed Regulation Targeting IT, Pharmaceutical Industries

by and | Aug 9, 2016 | , , ,

On August 4, 2016, representatives of the Texas Comptroller of Public Accounts held a limited-invite roundtable to discuss the proposed amendments to 34 Tex. Admin. Code 3.584, relating to the reduced rate available under the Texas Franchise Tax for retailers and wholesalers. As previously reported, these proposed revisions were published in the Texas Register on May 20, 2016 and have the potential to double the tax rate for a substantial number of businesses – namely those in the information technology and pharmaceutical industries.

Members of the Comptroller’s office present included Karey Barton, Associate Deputy Comptroller for Tax, Theresa Bostick, Manager of Tax Policy, William Hammer, Special Counsel for Tax and Jennifer Burleson, Assistant General Counsel. Several representatives of businesses and trade groups, along with legal and accounting professionals, were also present.

Ms. Bostick opened the meeting by reiterating the language of the statute and the proposed regulation, and clarifying the application of the proposed regulation’s language. To briefly summarize, the proposed rule provides that a retailer is considered to produce the products it sells (and therefore may be disqualified from the lower Franchise Tax rate available for retailers) if it “acquires the product and makes modifications to the product that increase the sales price of the product by more than 10 percent.” See proposed Rule 3.584(b)(2)(C)(i). A business will also be considered a producer if it “manufactures, develops, or creates tangible personal property that is incorporated into, installed in, or becomes a component part of the product that it sells.” See proposed Rule 3.584(b)(2)(C)(ii). The proposed Rule offers two examples of businesses that will now be considered “producers” rather than retailers: (1) a business that produces a computer program, such as an application or operating system, that is installed in a device that is manufactured by a third party; and (2) a business that produces the active ingredient in a drug that is manufactured by an unrelated party. These proposals represent substantial changes to both the current version of Rule 3.584 and prior Comptroller interpretations of the retailer/producer distinction, and are not supported by the language of the statute that the Rule purports to interpret.

Ms. Bostick explained that the Comptroller had received several comments on the 10 percent rule (some of which were reiterated at the roundtable, including comments that the 10 percent rule should be interpreted as a safe harbor rather than a ceiling and that it should be applied to both modification and development), and that the Comptroller will consider how to define “modification” in the context of Rule 3.584(b)(2)(C)(i) (such language was not provided at the roundtable). She then focused on Rule 3.584(b)(2)(C)(ii) and the examples provided thereunder, explaining that these provisions are meant to convey that if a taxable entity produces (with “development” being equivalent to “production” in this context) tangible personal property that is incorporated into, installed in, or becomes a component part of a product it sells, that business is considered a producer of the product. Because the Comptroller’s representatives view [...]

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Breaking News: Physical Presence Requirement Bill Introduced in Congress

by , and | Jul 15, 2016 | , , , , ,

Yesterday, Congressman Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016 (H.R. 5893) in the US House of Representatives (House).  The bill would codify the physical presence requirement established by the US Supreme Court in Quill.  The bill would specifically define physical presence, creating a de minimis threshold, and would significantly affect existing state efforts to expand the definition of physical presence and overturn Quill.

Not only would the bill preempt the ‘nexus expansion’ laws, such as click-through nexus provisions, affiliate nexus provisions, reporting requirements and marketplace collection bills, but it would likely halt the South Dakota and Alabama (and other state litigation) specifically designed to overturn Quill.  It would also move all future litigation on this issue to federal courts.

The bill would be effective as of January 1, 2017.  The bill was referred to the House Committee on the Judiciary, which Rep. Sensenbrenner is a sitting member of (and former Chairman).

Summary

The bill defines “seller”, and provides that states and localities may not: (1) obligate a person to collect a sales, use or similar tax; (2) obligate a person to report sales; (3) assess a tax on a person; or (4) treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

Persons have a physical presence only if during the calendar year the person: (1) owns or leases real or tangible personal property in the state; (2) has one or more employees, agents or independent contractors in the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or (3) maintains an office in-state with three or more employees for any purpose.

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Pennsylvania General Assembly Passes Revenue Package with Significant Digital Tax Expansion

by , and | Jul 14, 2016 | , , , ,

Yesterday, a legislative conference committee was appointed to approve an already agreed-upon $1.3 billion revenue package, which was immediately approved by both the House (116-75) and Senate (28-22) and sent to Governor Wolf for approval.  The governor subsequently issued a press release confirming that he “will sign this revenue package.”  A copy of the conference committee report (in full) that passed is available here.

The final revenue package includes (among a host of other revenue raising changes) a new tax on digital content and services, as described in more detail below.  Specifically, the expansion captures most (if not all) digital goods within the sales and use tax imposition by defining them as tangible personal property.  A number of digital services are also captured in the broadly defined language.  (more…)



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Breaking News: Federal Court Finds Delaware’s Unclaimed Property Enforcement “Shocks the Conscience”

by , and | Jun 29, 2016 | , , , , ,

On June 28, 2016, the much-anticipated memorandum opinion of the US District Court for the District of Delaware in Temple-Inland, Inc. v. Cook et al., No. 14-654-GMS was released on the parties’ cross-motions for summary judgment, finding Delaware’s extrapolation methodology and audit techniques collectively violate substantive due process.  According to Judge Gregory M. Sleet, “[t]o put the matter gently, [Delaware has] engaged in a game of ‘gotcha’ that shocks the conscience.”  The opinion also specifically called third-party auditor Kelmar Associates LLC’s formula used for estimation into question, noting that the use of a holder’s calendar sales as the denominator in the ratio used to estimate liability raises questions given the lack of connection between abandoned property and the economy.  In sum, this opinion is a “must read” for any unclaimed property advisor or holder going through a Delaware audit and is likely to have a drastic impact on both on-going and future unclaimed property audits.  Holders should contact their unclaimed property advisors immediately to begin discussing how to proceed based on this groundbreaking development.

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Unclaimed Property Hunger Games: States Seek Supreme Court Review in ‘Official Check’ Dispute

by , and | Jun 10, 2016 | , , , , , , , , , , , , , , , , , , , , , , , ,

Background

As detailed in our blog last month, MoneyGram Payment Systems, Inc. (MoneyGram) is stuck in between a rock and a hard place as states continue to duel with Delaware over the proper classification of (and priority rules applicable to) MoneyGram’s escheat liability for uncashed “official checks.”  The dispute hinges on whether the official checks are properly classified as third-party bank checks (as Delaware directed MoneyGram to remit them as) or are more similar to “money orders” (as alleged by Pennsylvania, Wisconsin and numerous other states participating in a recent audit of the official checks by third-party auditor TSG). If classified as third-party bank checks, the official checks would be subject to the federal common law priority rules set forth in Texas v. New Jersey, 379 U.S. 674 (1965) and escheat to MoneyGram’s state of incorporation (Delaware) since the company’s books and records do not indicate the apparent owner’s last known address under the first priority rule. However, if the official checks are classified as more akin to money orders under the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Act), as determined by TSG and demanded by Pennsylvania, Wisconsin and the other states, they would be subject to the special statutory priority rules enacted by Congress in response the Supreme Court of the United States’ Pennsylvania v. New York decision and escheat to the state where they were purchased. See 12 U.S.C. § 2503(1) (providing that where any sum is payable on a money order on which a business association is directly liable, the state in which the money order was purchased shall be entitled exclusively to escheat or take custody of the sum payable on such instrument).

In addition to the suit filed by the Pennsylvania Treasury Department seeking more than $10 million from Delaware covered in our prior blog, the Wisconsin Department of Revenue recently filed a similar complaint in federal district court in Wisconsin, alleging Delaware owes the state in excess of $13 million. Other states participating in the TSG audit (such as Arkansas, Colorado and Texas) also recently made demands to MoneyGram and Delaware.

It is interesting to note that in 2015, Minnesota (MoneyGram’s former state of incorporation) turned over in excess of $200,000 to Pennsylvania upon its demand for amounts previously remitted to Minnesota for MoneyGram official checks. Apparently not only do the states in which the transaction occurred disagree with but even a former state of incorporation took the majority path.   (more…)



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Breaking News: Texas Comptroller Publishes Retroactive Rule Targeting IT, Pharmaceutical Retailers; Clock Running on Comment Period

by , and | May 20, 2016 | , ,

On May 20, 2016, the Texas Comptroller of Public Accounts published proposed amendments to 34 Tex. Admin. Code 3.584 – relating to the reduced rate available under the Texas Franchise Tax for retailers and wholesalers – in the Texas Register. As previously reported, these proposed revisions have the potential to double the tax rate for a substantial number of businesses – namely those in the information technology and pharmaceutical industries.

The proposed changes to Rule 3.584 were first circulated as draft amendments to interested parties in April.  Although some interested parties opposed the draft, the official published version has remained unchanged after that initial informal review.  To summarize, entities “primarily engaged in retail or wholesale trade” are subject to a Texas Franchise Tax rate that is half the rate imposed on other businesses – 0.375 percent versus 0.75 percent for reports originally due on or after January 1, 2016.  To qualify for this reduced rate, a business must (among other statutory requirements) earn less than 50 percent of its retail or wholesale trade revenues from the sale of products it or an affiliate entity “produces.”  Tex. Tax Code § 171.002(c).  In a substantial change from the current version of Rule 3.584, the proposed amendments – which have a retroactive effective date of January 1, 2008 – provide that a retailer is considered to produce the products it sells if the business “manufactures, develops, or creates tangible personal property that is incorporated into, installed in, or becomes a component part of the product that it sells.”  See proposed Rule 3.584(b)(2)(C)(ii). The proposed Rule offers two examples of businesses that will now be considered “producers” rather than retailers: (1) a business that produces a computer program, such as an application or operating system, that is installed in a device that is manufactured by a third party; and (2) a business that produces the active ingredient in a drug that is manufactured by an unrelated party.  As discussed in prior coverage, these proposed changes create a regulation that is neither consistent with the language of the statute it purports to interpret nor supported by the common sense understanding of what it means to be a “producer” versus a “retailer.”

Although the proposed changes to Rule 3.584 have the potential to double the tax rate for those retailers and wholesalers who also engage in “development” activities and a retroactivity period of over eight years, the Chief Revenue Estimator, Tom Currah, has determined that “for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government” – and there is “no significant anticipated economic cost to individuals who are required to comply with the proposed rule.”  Mr. Currah also has determined that for each year of the first five years the rule is in effect, the anticipated public benefit will be “conforming the rule to current legislation and policy.”  No statement of fiscal implications for small businesses is [...]

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SALT Implications of Proposed Section 385 Debt/Equity Regulations

by | May 18, 2016 | , , , , ,

On April 4, 2016, without warning, the US Department of the Treasury proposed a new set of comprehensive regulations under section 385. There had been no advance indication that regulations were even under consideration. Although the Treasury indicated that the proposed regulations were issued in the context of addressing corporate inversions, their application went well beyond the inversion space and they apply to inter-corporate debt regardless of whether it occurs in an international context. The following is a discussion of the state and local tax consequences of the proposed regulations; for a detailed discussion of the proposed regulations themselves, see this previous article.

Read the full article.



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Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

by , and | May 6, 2016 | , , , , ,

Last Friday, the Alabama Court of Civil Appeals handed the Department of Revenue (Department) a significant loss in their continued attempt to tax non-enumerated services and tangible property provided in conjunction with those services under the sales tax.  See State Dep’t of Revenue v. Omni Studio, LLC, No. 2140889 (Ala. Civ. App. Apr. 29, 2016).  Specifically, the appellate court affirmed the taxpayer’s motion for summary judgment granted by the trial court, which set aside the Department’s assessment on the basis that photographs provided by a photography studio are merely incidental to the nontaxable photography services provided by the studio.  While the prospective effect of the holding in the photography context is unclear due to recent amendments to the photography regulation (effective January 4, 2016), the case is significant in that it strengthens the “incidental to service” (or “true object”) precedent in Alabama and should be seen as a rebuke to the Department for ignoring judicial precedent in favor of their own administrative practices and guidance.

This decision is important in analyzing the taxability of mixed/bundled sales to Alabamans (i.e., where services and some degree of tangible personal property are provided as part of the same transaction).  As with any decision, taxpayers should consider potential refund claims. (more…)



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Massachusetts’ First Really Good Amnesty Program Since 2002

by and | May 5, 2016 | , , ,

The Massachusetts Department of Revenue (Department) is widely promoting a new amnesty program with significant taxpayer benefits.  Our experience with Massachusetts amnesty suggests that this is the broadest program offered by the Department since 2002.

Individual and business taxpayers may participate in the program for taxes due on or before December 31, 2015. To participate in the program, taxpayers must complete an amnesty return online and submit payment for the full amount of tax and interest electronically by Tuesday, May 31, 2016.

The amnesty program, which waives most types of penalties, offers three special features for taxpayers to consider.

Taxpayers in Audit Can Participate

First, unlike many other state amnesty programs, the current Massachusetts program is available to taxpayers who are under audit. The Department’s auditors have been notifying taxpayers of the program, and Department personnel have confirmed with us that taxpayers under audit are eligible for the program. Department personnel have asked that taxpayers who wish to participate in the program simply notify their auditor.

Refunds Permitted

Second, unlike many other amnesty programs, taxpayers who participate in the Massachusetts program do not lose appeal rights or otherwise forfeit their right of refund for amounts that are disputed in the audit or that they later conclude were mistakenly paid under amnesty. A recent Technical Information Release provides that participation in the amnesty program and the payment of any tax and interest “does not constitute a forfeiture of statutory rights of appeal or an admission that the tax paid is the correct amount of liability due.”

Non-Filers Can Participate

Third, for the first time since 2002, non-filers may participate in the amnesty program.  Participating taxpayers will receive a three-year limited look-back period.

Taxpayers with eligible liabilities should seriously consider whether to participate in the program.



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No Surprises in Ohio CAT Nexus Oral Argument

by and | May 4, 2016 | , , , , , ,

Oral argument before the Ohio Supreme Court took place on May 3 in the three cases challenging Ohio’s Commercial Activity Tax (CAT) nexus standard.  Crutchfield, Inc. v. Testa, Case No. 2015-0386; Mason Cos. Inc. v. Testa, Case No. 2015-0794; Newegg, Inc. v. Testa, Case No. 2015-0483.  Ohio imposes its CAT on a business that has more than $500,000 in annual gross receipts in the state, even if the business has no physical presence in the state.  These three taxpayers have challenged this standard as violating the Commerce Clause substantial nexus test.

The oral argument in the cases proceeded as expected.  The majority of the time for both parties was taken up by questions from the bench.  Several judges quizzed the taxpayers’ counsel about the assertion that no business was conducted in Ohio.  The judges focused on activities such as products being received by customers in Ohio and software being placed on customers’ computers in Ohio to facilitate ordering or to track customer activity in Ohio.  The taxpayers’ counsel vigorously disagreed with this construction of the facts – noting that whatever happened in Ohio, all of the taxpayers’ actions occurred elsewhere.  He stated that the activities called out by the judges were no different than receiving and reviewing a catalog in the state.

The taxpayers’ counsel repeatedly cited to Tyler Pipe as the controlling law in this case – noting that before a state could impose a tax on a business, that business had to do something in the taxing state (or have something done on its behalf) that helped it establish and maintain a market in the state.  According to the taxpayers’ counsel, it was not enough that a market exists in the taxing state; the taxpayer had to be doing something in the taxing state.  He asserted that the taxpayer conducted no business activities in the state and thus Tyler Pipe prevented the state from imposing the CAT on them.  This became the taxpayers’ mantra throughout the argument. (more…)



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