Interest and Penalties

The Illinois Department of Revenue (Department) announced that it will grant abatement of late filing penalties for taxpayers that file their Illinois business income tax returns on or before November 15 and request penalty waivers for reasonable cause. The Department stated that it will waive late penalties due to the “complexity” of recent federal tax reform and possible taxpayer challenges in meeting the October 15 extended filing deadline for federal and state purposes.

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.

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.

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

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

Last Friday, the Delaware Senate released a substituted version of the bill (Senate Bill 79) introduced last month as a technical corrections bill to Senate Bill 13—the unclaimed property rewrite legislation enacted earlier this year.

The Senate substitute differs from the introduced version of Senate Bill 79 as follows:

  1. It does not strike § 1147(a)—the provision that limits the ability of a holder to assign or otherwise transfer its obligation to pay or deliver property or to comply with the unclaimed property law to others (aside from a parent, subsidiary or affiliate of the holder).
  2. It would delay the timeline that Delaware must promulgate regulations to December 1, 2017.
  3. It would make changes to the State Escheator’s authority to grant waivers of interest and penalties under § 1185 as follows:
    1. Removes the language in the introduced bill that made the discretionary waiver of penalties only applicable to late filed property remitted while under examination.
    2. Gives State Escheator the following waiver authority for property remitted before January 1, 2019:
      1. Waive, in whole or in part, the calculable interest under § 1183 of this title for unclaimed property remitted to the State with a required report under § 1142 (the general holder report section) or § 1170 (the compliance review section) of this title.
      2. Waive, in whole or in part, the calculable interest under § 1183 of this title for unclaimed property remitted to the State as a result of securities examinations in which estimation is not required under §§ 1171 and 1172 of this title.
      3. Waive up to 50 percent of the calculable interest under § 1183 of this title for all unclaimed property remitted to the State and not provided for in paragraphs (b)(1) or (b)(2) of this section.
    3. Gives State Escheator the following waiver authority for property remitted on or after January 1, 2019:
      1. Waive, in whole or in part, the calculable interest under § 1183 of this title for unclaimed property remitted to the State with a required report under § 1142 (the general holder report section) or § 1170 (the compliance review section) of this title.
      2. Except for examinations expedited under § 1172(c) of this title, waive up to 50 percent of the calculable interest under § 1183 of this title for all unclaimed property remitted to the State and not provided for in paragraph (c)(1) of this section.

Continue Reading Substitute Alert ‒ Delaware Technical Corrections Bill

Just days away from the May 31 close of its regular legislative session, the Illinois General Assembly has yet to enact the comprehensive series of tax and budget reforms that were first proposed by the Illinois Senate leadership late last year. Yesterday, the Senate passed a modified version of Senate Bill (SB) 9, the tax proposal we described in a previous post, without any Republican support. SB 9 now moves to the Democratically-controlled House for consideration. Even if approved by the House, it seems likely that Illinois’ Republican Governor will veto the legislation. Continue Reading Illinois Bills to Watch

Another federal judge slams Delaware’s unclaimed property audit methodology but rejects the holder’s reliance on the priority rules as a defense to the audit demands. See Marathon Petroleum Corp. et al. v. Cook et al., No. 1:16-cv-00080-LPS (D. Del., Sept. 23, 2016)The court recognized the unjustness of Delaware’s audit approach, but followed a previous case finding the priority rules can only be raised by states with competing claims. Continue Reading New Delaware Unclaimed Property Decision Further Complicates Landscape

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.

Chicago’s Department of Finance currently is offering an amnesty program called the Debt Relief Program (Program).  The Program gives individuals and businesses the opportunity to resolve outstanding debt and avoid certain interest and penalties. The Program is outlined in Article IV of the Management Ordinance enacted with the City of Chicago’s (City’s) Fiscal Year 2016 Budget.   It is unrelated to the Chicago Department of Finance’s recent Voluntary Disclosure offer to providers and customers with respect to the Personal Property Lease Transaction Tax, which we covered in a previous blog post.

The Program runs from November 15, 2015 to December 31, 2015, and offers amnesty for three types of “debt,” defined as follows:

  1. Unregistered Taxpayers or Unregistered Tax Collectors: Includes tax liabilities for tax periods prior to January 1, 2012, for any taxpayer or tax collector that is not currently registered with the City for the tax.
  1. Final Tax Assessments: Includes tax assessments issued prior to January 1, 2012, where the taxpayer failed to respond to the Department of Finance’s findings that taxes were owed.
  1. Real Property Transfer Taxes: Includes real property transfers that took place prior to January 1, 2012.

We think the better reading of the City’s reference to “unregistered” taxpayers is that the registration is tax specific, meaning that a taxpayer registered to pay a particular tax would not, by the fact of that registration, be precluded from participating in the amnesty program with respect to another type of tax for which the taxpayer had not registered.  (City of Chicago Debt Relief Ordinance of 2015, Section 2; Form 2015 Debt Relief Application – Unregistered Taxpayers and Tax Collectors, Section 2).

The Program’s main benefit includes the waiving of interest and penalties. In order to receive this benefit, the eligible tax debt must be paid in full and the applicable tax returns must be filed with the City by December 31, 2015. If the eligible tax debt is not paid in full by December 31, 2015, regular interest and penalty amounts will be assessed.

The following taxes are not eligible for the Program:  regulatory, compensation or franchise fees, special assessments, the cigarette tax, the automatic amusement device tax, wheel tax license fees, the Chicago Transit Authority portion of the real property transfer tax, and the Metropolitan Pier and Exposition Authority airport departure tax. Also ineligible are tax debts in pending legal activity or for which the City has obtained an order from the Department of Administrative Hearings or a judgment from a court of competent jurisdiction. All other taxes imposed under the Municipal Code of Chicago or by ordinance passed by the Chicago City Council are eligible for the Program.

Unregistered taxpayers and taxpayers with outstanding tax debts to the City of Chicago should consider whether to participate in the Program. To apply for tax debt relief through the Program, taxpayers need to complete a Tax Debt Relief application with the City, accompanied by the applicable tax returns. The Tax Debt Relief applications can be found here.

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.