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.

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.

Continue Reading MTC Offers 18 State Marketplace Seller Amnesty Initiative

This month the New Jersey Economic Development Authority (the Authority) provided businesses with guidance, in the form of Frequently Asked Questions, on how to elect to have their unpaid Business Employment Incentive Program (the Program or BEIP) grants converted into tax credits pursuant to N.J. Rev. Stat. § 34:1B-129.

Under the Program, New Jersey awarded qualifying businesses cash grants for hiring new employees in the state for a term of up to 10 years.  Since the Program’s inception in 1996, the Authority has executed 499 BEIP agreements valued at nearly $1.6 billion.  However, since 2013, the New Jersey legislature has not funded the Program, and thus many businesses have not received grant payments owed by the state.

In January, Governor Christie signed P.L. 2015, c. 194 into law, permitting the voluntary conversion of outstanding BEIP grants into tax credits. The option to convert a BEIP grant to a tax credit is New Jersey’s attempt to provide relief to those businesses that have been awarded grants but have not received grant payments. The law, unfortunately, was short on details.

Businesses that wish to take advantage of the grant conversion must elect to convert the grant into a tax credit by July 11, 2016. Once the election is made, it is irrevocable.

Because a business cannot predict with any certainty whether the New Jersey legislature will fund the Program in future years, a business has to decide whether to opt to convert its grant. If a business does not elect to convert its grant, it risks losing all of its unpaid BEIP grants. On the other hand, if a business makes the election and the Program is funded in future years, the business will have no choice but to receive tax credits even though a cash payment might be more valuable to the business.

If a business elects to convert its grant commitments to tax credits, the credits will be issued over a period of years as set forth in the statute.   This delayed payment means that the business will suffer an additional loss of money owed by New Jersey on account of the time value of money. The statute provides that the BEIP tax credit must be used in the designated years and may not be carried forward. The credit is a priority credit and should be applied before all other credits. Accordingly, it is important to consider whether the other credits claimed by a business are refundable when deciding whether to make the election and calculating the potential benefit of conversion.

In anticipation of the July 11, 2016, deadline for businesses to opt to convert their grant into a tax credit, the Authority has provided guidance on how to make the election. This guidance, as mentioned above, is informal and not a regulation. The guidance provides that to make the election, a business must submit an executed Amendment to Agreement. The form Amendments to Agreement for different tax types are available on the Authority’s website.  Once a business opts to convert its grant into a tax credit, New Jersey will issue an annual certificate for the tax credit, which the business will attach to its return for that year to substantiate the BEIP tax credit. If a business has no tax liability in a particular year (before taking other tax credits into account), New Jersey will issue a cash refund in the amount of the certificate.

Pursuant to the Authority’s guidance, a business that is not filing corporate business tax in New Jersey must elect by the same deadline of July 11, 2016, whether to receive a tax credit transfer certificate. Such a business may apply for a tax credit transfer certificate and sell the credit for at least 75 percent of face value before considering present value adjustments. The purchaser of the credit may not sell to a third party.

Northeastern University, the Trustees of Boston University, Wellesley College and 131 Willow Avenue, LLC prevailed in their appeal of the Massachusetts Department of Revenue’s (the Department) rejection of their Brownfields tax credit applications in Massachusetts Superior Court. 131 Willow Avenue, LLC v. Comm’r of Revenue, 2015 WL 6447310 (2015). The taxpayers argued, and the court agreed, that the Department improperly denied their applications based on the unlawful use of Directive 13-4 issued by the commissioner of revenue (the Commissioner). At issue was the validity of Directive 13-4’s prohibition on nonprofit and transfer Brownfields tax credit applicants from receiving or transferring credits based on documentation submitted in a taxable year that commenced before the effective date of a 2006 amendment expanding the Brownfields tax credit statute to include nonprofit organizations and allow for credit transfers. The court held that the directive was “unreasonable and [the Department’s] denial of the applications based on that directive was unlawful.” Continue Reading Massachusetts Court Holds Department of Revenue’s Guidance to Be Unreasonable

States are competing aggressively to attract data centers with various tax incentives. Data center companies and their business customers are taking them up on their offers. But are these incentives really a good deal for the businesses? Tax incentives that seem attractive at first glance may not be beneficial when they are examined in the context of the entire tax picture, especially in the unique, uncertain, and developing world of state taxation of technology and computer services.

With the rise of global commerce, cloud computing, streaming video and a wide array of other internet-related businesses, data centers have become big businesses.  In 2014, the colocation data center industry reached $25 billion in annual revenue globally, with North American companies accounting for 43 percent of that revenue.[1]

To get in on the action, states have been trying to outdo one another by offering a slew of competing tax breaks to the industry. According to the Associated Press, states have provided about $1.5 billion in data center tax breaks over the past 10 years.[2]   Some states have gone even further, providing tax incentives to the entire data center industry through changes in the tax laws themselves. Such incentives can include reductions or exemptions from sales and use taxes on data center products or services, favorable income tax rates for data center companies and favorable property tax rules for data center assets. According to a recent analysis by the Associated Press, at least 23 states provide such statutory data center tax incentives.[3] Just a few of the most recent examples include a sales tax exemption for data center equipment in Michigan,[4] a broadening of the sales tax exemption for data center electricity and equipment in North Carolina[5] and a favorable apportionment formula for data centers in Virginia.[6]  Importantly, many of these incentives apply not only to the data centers themselves, but also to their customers.

Businesses considering whether to take advantage of these incentives would be well advised to consider not only the potential benefit from any particular tax incentive, but also whether the decision would affect their tax picture as a whole. Because of the current uncertain and changing landscape for state and local taxation of technology and computer services, the analysis of these incentives for data centers and their customers can be particularly complex.

One item that a taxpayer might overlook when considering whether to take advantage of an incentive program is what affect, if any, the choice of location might have on the taxpayer’s property factor for income tax apportionment purposes. Obviously, location of a company’s technology equipment in a data center under a colocation agreement will cause the company’s in-state property factor to increase due to its equipment being located in the state. However, data center customers also should be aware that local tax authorities might also argue that the colocation payments themselves constitute consideration for the use of real or tangible personal property and thus the customer’s in-state property factor should be further increased by the amount of those charges. Our Firm has seen the tax authority in one state argue this precise issue.

Therefore, although a data center customer might pay less in sales tax by choosing a data center in a state that provides certain incentives, the customer should also carefully evaluate any potential increase in tax due to colocation in a state, such as a potential increase of their income tax liability due to higher apportionment from the property factor.

Another consideration that data center customers should keep in mind is the sourcing of receipts. For tax purposes, most states source the sale of technology products based on the location of the user, which usually will be the location of the customer’s employees.[7] However, where a vendor provides a product by way of a server, at least one state tax authority has determined that such receipts should be sourced to the location of the server.[8] These contrasting source rules present the risk that a business will essentially be subject to “double tax” on its purchase of technology services. Where IT-sourcing rules are not codified or their interpretation is uncertain, businesses should be cognizant of the risk of other tax authorities adopting this position, especially in light of the growth in services provided by data centers.

These issues demonstrate that although data centers and their customers stand to reap significant benefits from the wide array of state tax incentives available, any decision should include an analysis of the overall tax picture. Even the most attractive tax break may be outweighed by potential increases in other taxes.

[1] Yevgeniy Sverdlik, Global Data Center Colocation Market Reaches $25B, Data Center Knowledge (December 23, 2014) (accessible at: http://www.datacenterknowledge.com/archives/2014/12/23/multitenant-colocation-data-center-market-reaches-25b/).

[2] Yevgeniy Sverdlik, North Carolina Makes Data Center Tax Breaks Easier to Get, Data Center Knowledge (October 1, 2015) (accessible at: http://www.datacenterknowledge.com/archives/2015/10/01/north-carolina-makes-data-center-tax-breaks-easier-to-get/).

[3] Id.

[4] SB 616, 2015 Leg., 1st Reg. Sess. (MI., 2015).

[5] HB 117, 2015 Leg., 1st Reg. Sess. (N.C., 2015).

[6] SB 1142, 2015 Leg., 1st Reg. Sess. (VA., 2015).

[7] See, e.g., New York Dep’t. of Tax’n and Fin., TSB-A-11(17)S (Jun. 1, 2011).

[8] Tenn. Dep’t of Rev., Ltr. Rul. 11-58 (Oct. 10, 2011).

Yesterday, the City of Chicago (City) Department of Finance (Department) published an Information Bulletin that provides additional guidance on the Personal Property Lease Transaction Tax (Lease Tax) and extends a new Voluntary Disclosure Agreement (VDA) offer to providers and customers. The updated guidance includes an overview of the Lease Tax, a description of the amendments included in the FY 2016 Revenue Ordinance that passed on October 28, 2015, and answers to 15 FAQs. The details on the Department’s controversial interpretation of the Lease Tax in Ruling #12 and the recent amendments to the Lease Tax have been covered by the authors in prior blog posts, available here and here. The new VDA offer is a significant development that may be enticing to certain providers and customers. However, before providers and customers rush to sign up to pay the Lease Tax for the foreseeable future, they should carefully evaluate whether any Lease Tax obligation is in fact due and whether they qualify under the loose terms outlined in the Bulletin (discussed in detail below). It should be noted at the outset that the guidance (and accompanying VDA offer) do not relate to the City’s amusement tax, which has also been of concern after a ruling was issued this summer interpreting the tax to apply to streamed digital content.

VDA Offer Terms

The most significant component of yesterday’s guidance is the VDA offer beginning on page 6 of the Bulletin. While the VDA may seem enticing, we encourage providers and customers alike to proceed with caution as the practical application of the ambiguous (and discretionary) terms are tainted with uncertainty.

As a threshold to qualifying, the provider or customers must qualify (i.e., be a qualified discloser) for the City standard voluntary disclosure program. Under the standard program, a taxpayer must not be under audit or investigation (i.e., has not received a written notice relating to an audit or investigation for the tax at issue) and must “waive their right to an administrative hearing or claim for refund or credit, and agree not to initiate or join any lawsuits for the payments made under the program.” This is significant because we believe a challenge to the Lease Tax is imminent and those that participate in the VDA program will not benefit if any such challenge is successful.

Even if a taxpayer is considered a qualified discloser under the standard program, to qualify for the more favorable Lease Tax offer providers and customers must file an application by January 1, 2016, and come into compliance with the Lease Tax Ordinance by the same date (or such later date that the Department may agree to). If all of these requirements are met, they will receive the following terms:

  1. As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for tax, interest or penalties based on those charges for any periods ending before January 1, 2016.
  2. As to charges for other nonpossessory computer leases (i.e., charges for nonpossessory computer leases that do not meet the requirements of paragraph 1 above), payment of tax for the period of January 1, 2015 through December 31, 2015 (one year), and no liability for interest or penalties.
  3. As to any other taxes owed (in other words, Lease Tax based on leases other than nonpossessory computer leases, or taxes other than Lease Tax), the terms of the City’s standard voluntary disclosure program will apply. Thus, for those other tax liabilities, penalties will be waived, and there will be no more than four (4) years of liability for tax and interest.

Unlike most VDA programs, there is no indication in the Bulletin that taxpayers can request acceptance of the voluntary disclosure on an anonymous basis. Instead, the Bulletin simply provides that “[a]ny provider or customer who wishes to accept the Department’s offer should send an email indicating such to taxpolicy@cityofchicago.org with their business name, taxpayer contact name, and telephone number.”

The main concern with the VDA offer is that there is no guidance on which charges for nonpossessory computer leases qualified for Exemption 11 under the Department’s former interpretation of the exemption (i.e., before the issuance of Ruling #12). Because qualification for Exemption 11 under the old standard is a prerequisite to receiving a prospective-only VDA, we anticipate controversy over whether charges would have qualified—something no VDA applicant wants to deal with. Since there appears to be no opportunity for anonymity, once a business signs up with the Department, it may be stuck paying one year of taxes if the Department disagrees. Providers and customers interested in participating in the Lease Tax VDA offer should consult their advisors before contacting the City.

Earlier this month, the Governmental Accounting Standards Board (GASB) approved Statement No. 77, Tax Abatement Disclosures, which requires state and local governments to report on foregone revenue from tax abatement agreements. This will significantly increase scrutiny of negotiated tax incentives, particularly at the local level. Businesses need to consider how this may change their local incentive strategies.

To summarize, Statement 77 requires state and local governments to disclose basic information about their current incentive agreements, or other agreements, that reduce tax revenue:

  • Dollar amounts by which the government’s tax revenues were reduced as a result of tax abatement agreements;
  • The name and purpose of each tax abatement program;
  • The specific taxes being abated;
  • The authority under which the tax abatement agreements are entered into;
  • The criteria that make the recipient eligible to receive a tax abatement;
  • The mechanism by which the taxes are abated;
  • The provisions for recapturing abated taxes (e., clawbacks);
  • The types of commitments made by tax abatement recipients; and
  • Any other commitments made by the government as part of the agreements.

For tax abatements where a government has reduced its own revenue, disclosed information should be organized by each major tax incentive program. For incentives where one government’s revenue has been reduced by a different government’s abatement (e.g. a municipal property tax incentive reducing a school district’s revenue), disclosed information is based on the government that entered into the abatement agreement and the type of tax being abated.

Statement 77 permits the reporting government to decide whether to report the required information individually or in the aggregate. If agreements are disclosed individually, the government must establish a quantitative threshold to determine which agreements to disclose—it cannot disclose selectively. A reporting government is permitted to omit specific information if it is legally prohibited from disclosures, such as via state confidentiality laws or a confidentiality provision in the agreement itself.

The disclosure provisions of Statement 77 apply only to tax abatement agreements, which are negotiated agreements where a government agrees to forego tax in exchange for some benefit. Tax incentives that do not require an agreement are not affected. Negotiated grants or other non-tax incentives are also not affected.

Practice Note

Statement 77 will significantly change the world of incentives, particularly at the local level where negotiated agreements reducing property or sales taxes are common. The disclosures of the amounts of forgone revenue associated with tax abatement programs will provide ammunition to groups criticizing incentives, and gone are the days that The New York Times has to spend 10 months gathering state and local incentive data, as they did in 2012. Businesses should expect increased scrutiny during the approval process as governments become more sensitive to whether they are getting a “good deal.” Companies with existing agreements should also be concerned: local governments may seek to renege on their commitments as the costs become more apparent, particularly when new politicians come into office who were not part of the original deal.

One consideration in negotiating incentives will be to insist on strong confidentiality protections in an agreement. Statement 77 envisions governments limiting reporting if legally prevented from doing so. Securing confidentiality provisions in an incentive agreement, even going so far as to specify the level of detail of financial reporting, will help a business avoid surprise public disclosures, particularly in situations where the amount of incentive benefits may reflect confidential business information.

As more and more states offer refundable tax credits to induce economic development, it is critical for businesses weighing incentive offers to take into consideration the federal income tax implications of an award. While a payment may be called a “credit” and claimed on a state tax return, that payment might nonetheless constitute taxable income for federal tax purposes. Imposition of federal income tax on incentive payments can materially reduce their value and should be considered when weighing the potential benefit of an award. A recent United States Tax Court decision, Maines v. Commissioner, demonstrates that risk.

Read the full article.

Now is the time to begin brownfield redevelopment projects in the State of New York. Reauthorization of and reforms to New York’s Brownfields Cleanup Program, which provides tax credits to redevelop contaminated properties, came into effect on July 1, 2015. The program has been reauthorized until 2026, giving businesses and developers a chance to remediate brownfields while generating millions of dollars in refundable credits.

State brownfield tax credit programs encourage remediation of contaminated property that might otherwise remain abandoned. New York, with its industrial heritage, has more than its share of such locations. The Brownfields Cleanup Program was started in 2003 as a way to encourage redevelopment of these properties. Once a participating project is granted a certificate of completion, it generates credits calculated as percentages of the site preparation costs and groundwater remediation costs, and of the costs of tangible property (buildings and capital equipment). The site preparation and groundwater remediation costs are the environmental expenses, which generate credits ranging from 22 to 50 percent of costs. The tangible property costs are the redevelopment (generally non-environmental) expenses, which generate credits ranging from 10 to24 percent of costs. Tangible property credits are capped as a multiplier of site preparation and groundwater remediation costs: three times the costs for most projects and six times the costs for manufacturing projects. All brownfields credits are refundable to the extent that they exceed the taxpayer’s income tax or franchise tax otherwise due. Essentially, under the Brownfields Cleanup Program, New York will pay for up to half of a project’s environmental remediation costs and a quarter of other redevelopment costs.

In recent years, the program came under criticism for allegedly excessive credit awards, which sometimes exceeded the overall costs of remediation. The program had been scheduled to expire at the end of the year, and a short-term extension of the program through March 2017 was vetoed by Governor Cuomo as not providing needed reform. The reforms package and reauthorization were enacted with the FY 2016 budget. L. 2015, ch. 56, pt. BB (S. 2006-B / A3006-B). With proposed regulations for some definitional terms pending, the reformed law came into effect for projects approved by the Department of Environmental Conservation on or after July 1, 2015. Preexisting projects are grandfathered in under the old provisions as long as they are completed by the end of 2019 (and projects approved before June 23, 2008, must be completed by the end of 2017). New projects will have until March 31, 2026, to obtain certificates of completion under the reformed Brownfields Cleanup Program.

Key reforms coming into effect include the following:

  • To address a sense that projects do not need as many incentives in the tight New York City real estate market, projects in the city now have to meet one of three special criteria to qualify for the tangible property component of the credits. This special requirement is for tangible property credits only; site preparation and groundwater remediation credits are unrestricted. The three ways to qualify are:
    • Locating the project within designated environmental zones.
    • Having a property that is “upside down” or “underutilized.” “Upside down” means that remediation costs exceed 75 percent of property value. Under the proposed regulatory definition, “underutilized” property must be more than 50 percent vacant for the past five years, require government assistance for redevelopment to be feasible and meet other criteria for being distressed.
    • Proposing an affordable housing project for the redeveloped brownfield, which generally means that the project will qualify for a federal, state or municipal affordable housing program.
  • The criteria for accepting a project into the Brownfields Cleanup Program now require that there be contamination measured at levels exceeding applicable soil cleanup objectives or other health or environmental standards. This test replaces a more subjective standard of whether development was complicated by the presence or potential presence of a contaminant.
  • The definitions of eligible site preparation costs and groundwater remediation costs now are only those necessary for investigating the property, remediating the contamination and obtaining a certificate of completion, and the definitions include numerous specific examples of qualifying costs. Essentially, these classifications are intended to reflect environmental costs only. Non-environmental costs that previously were considered site preparation costs (g., foundations) instead may count toward the tangible property credit.
  • The definition of qualifying tangible property costs was narrowed. Now, qualifying property must have a useful life 15 years or more or be non-portable equipment or structures.
  • A “BCP-EZ” program will be offered for streamlined review of remediation projects for developers that agree to waive the brownfield tax credits but want the environmental liability release of the Brownfield Cleanup Program.

Even with these reforms, New York continues to have a very attractive brownfield redevelopment program. As brownfield redevelopment is a process that lasts years, businesses interested in participating should contact their advisers about getting started on potential projects.

Corporations with Illinois Economic Development for a Growing Economy (EDGE) credit agreements giving credit for retained jobs can breathe a sigh of relief: The litigation challenging the state’s ability to grant EDGE credits for retained jobs has been dismissed by an Illinois Circuit Court.

Illinois EDGE credits are discretionary income tax credits awarded by the Illinois Department of Commerce and Economic Opportunity (DCEO). The credits are generated as a percentage of employee wage withholding. Sometimes DCEO has awarded credits for retained jobs as well as new jobs.

Back in January 2015, the Liberty Justice Center, acting on behalf of several taxpayers, filed a complaint alleging that it was illegal for Illinois to give credits for retained jobs. Jenner v. Illinois Department of Commerce and Economic Opportunity, No. 15-MR-16 (Cir. Ct. 7th Jud. Cir., Sangamon Cty.). The plaintiffs’ theory was that the EDGE credit statute authorized awards only for new jobs, and thus DCEO’s regulation allowing credits for retained jobs exceeded statutory authorization.

In March 2015, the state moved to dismiss for lack of standing. The plaintiffs claimed that they had standing as taxpayers challenging illegal use of state funds, but the Circuit Court now has agreed with the Attorney General: on May 12, 2015, the motion to dismiss was granted. The plaintiffs plan to appeal the decision.

This ruling is in line with the general trend of rejecting taxpayer standing in challenges to tax credit programs, including economic development tax credits. See, e.g., DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006); Arizona Christian School Tuition Org. v. Winn, 131 S. Ct. 1436 (2011).