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 Massachusetts Department of Revenue (Department) has just issued Directive 17-2 revoking Directive 17-1 which adopted an economic nexus standard for sales tax purposes. Directive 17-2 states that the revocation is in anticipation of the Department proposing a regulation that would presumably adopt the standards of Directive 17-1. It appears that the Department took seriously, perhaps among other concerns, internet sellers’ arguments that Directive 17-1 was an improperly promulgated rule. Internet sellers that recently received letters from the Department regarding Directive 17-1 (see our previous blog post) may need to reconsider their approach.

Recently, the Massachusetts Department of Revenue (Department) sent letters to several companies regarding Directive 17-1. The Directive announces a “rule” requiring remote internet sellers to register for and begin collecting Massachusetts sales and use tax (sales tax) by July 1, 2017, if they had more than $500,000 in Massachusetts sales during the preceding year. The legal premise behind the rule is that the Department believes sellers with more than $500,000 in annual Massachusetts sales must have more than a de minimis physical presence so that requiring sales tax collection would not be prohibited by Quill Corp v. North Dakota, 504 US 298 (1992). The Directive’s examples of such physical presence include the presence of cookies on purchasers’ computers, use of third-party carriers to make white-glove deliveries and the use of online marketplaces to sell products. The Directive also states that sellers who fail to collect tax beginning July 1, 2017 will be subject to interest and penalties (plus, of course, any uncollected taxes).

We think the Directive is contrary to law on three main grounds. First, we believe that the items that the Department asserts create physical presence are insufficient to establish more than a de minimis physical presence. For example, the presence of cookies on computers in a state appears to be less of a physical presence than the floppy disks the seller in Quill sent into North Dakota (which were used by its customers to place orders) that the United States Supreme Court viewed as de minimis. Second, the Directive violates the state administrative procedures act because it constitutes an administrative rule that was not validly adopted. Third, the Directive’s rule violates the Internet Tax Freedom Act, a federal statute, because the rule discriminates against internet sellers.

By its own terms, the Directive applies only prospectively. The Directive does not assert a blanket rule that internet sellers are liable for sales tax for periods prior to July 1, 2017, if they met a certain sales threshold. The risks from non-collection for such periods are dependent on a company’s specific facts. The letters advise sellers that they may be eligible for voluntary disclosure for such prior periods.

Companies have two general options: (1) register and begin collecting or (2) not register or collect. Litigation has been brought on behalf of a number of sellers to challenge the Directive on the grounds identified above. One important aspect of that litigation is the request for an injunction barring the enforcement of the Directive pending a court decision; an injunction would likely prompt many sellers to take a “wait and see” approach. Ultimately, sellers must make a business decision based on their own facts and business circumstances.

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.

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

The Massachusetts Department of Revenue (the Department) released a draft administrative procedure introducing a pilot Voluntary Disclosure Program (the Program) for the settlement of uncertain tax issues for business taxpayers on January 19. The Department introduced this Program in response to a suggestion made by Scott Susko, an author of this article, and another practitioner, both of whom serve as taxpayer professional representatives on the Department’s Advisory Council. We commend the Department for reacting to this suggestion in such a proactive manner.

The Program will provide “a process through which uncertain tax issues may be resolved on an expedited basis, generally within four months” (All quotations in this post are from the Department’s draft administrative procedure).

We think this Program will be particularly helpful to public companies in resolving issues related to their financial statement reserves.

The Program defines an “uncertain tax issue” as an issue “for which there is no clear statutory guidance or controlling case law, and which has not been addressed by the Department in a regulation, letter ruling, or other public written statement,” and “for which a taxpayer would be required to maintain a reserve in accordance with ASC 740: Accounting for Uncertainty in Income Taxes (formerly Fin 48).” The issue also “must not have been addressed as part of a prior audit of the taxpayer, a prior application for abatement or amended return filed by the taxpayer, or a prior ruling request made by the taxpayer.”

To qualify for the Program, “any potential tax liability attributable to the uncertain tax issue(s) must be $100,000 or more, exclusive of interest and penalties.” A taxpayer that is under audit or has received notice of an impending audit is not eligible for the Program. The Department has the “discretion to determine that the Program is not appropriate for specific cases.”

The Department “will consider settlement of an uncertain tax issue(s) where: (1) the taxpayer has presented its position on the issue(s) and the Department agrees that the tax treatment of the issue(s) is uncertain; and (2) the taxpayer has fully disclosed and documented the issue(s) and the facts associated with that issue(s).”

A taxpayer may initiate the process by submitting an anonymous letter to the Department, which will respond to the taxpayer within 30 days. If the Department accepts the taxpayer into the Program, the taxpayer may submit an application, including a settlement proposal and identifying the taxpayer, within 45 days of receiving the Department’s acceptance letter.

The Department will waive penalties related to the uncertain tax issue for a taxpayer that reaches an agreement with the Department pursuant to the Program, as well as for a taxpayer that does not reach an agreement with the Department “provided the taxpayer acted in good faith.”

The Department requested practitioner comments on the draft administrative procedure by February 1, and MWE submitted two technical comments.

Our first comment was that following the initial evaluation, the Department should issue to the taxpayer a one-page technical position explaining whether it does or does not agree with the taxpayer’s position and responding to the taxpayer’s settlement proposal. The Department’s position would not be final, but it would be a helpful starting point to the taxpayer in terms of determining whether it would like to participate in the program before identifying itself to the Department.

Our second comment was that following the initial evaluation, the Department should provide a range or framework for a potential deal with the taxpayer. The potential deal would not be binding, but it would give the taxpayer some comfort in moving forward with the program.

The Massachusetts Department of Revenue (DOR) likely will have significantly less employees starting July 1, 2015, due to a Massachusetts employee retirement incentive program.  Governor Charlie Baker recently signed legislation establishing the program on May 4, 2015 (see 2015 Mass. Acts Chapter 19, An Act Relative to State Personnel).  With more than half of DOR’s employees eligible to participate in the program, DOR is the state agency with the potential to lose the highest percentage of employees.

The program allows employees who already are eligible to retire but have not reached their maximum pension benefit to add up to five years onto their age, years of service or a combination of both, so they can retire immediately with a higher pension.  The program limits total workforce reductions in Massachusetts to 5,000 employees.  Eligible employees must submit an application to the State Board of Retirement between May 11 and June 12, 2015, to participate.  The retirement date and last day of work for approved employees will be June 30, 2015.  The Baker administration can use up to 20 percent of the savings from the retired employees to hire replacement staff, but it is unclear when such hiring will take place and how much funding will be allocated to DOR versus other state agencies affected by the program.

What does this mean for taxpayers and tax practitioners?  We are hearing that there may be a potential shortage of staff at DOR, particularly in the Audit Division.  Audits may be slowed and relationships that have been developed over years with auditors may end abruptly.  Consequently, taxpayers and their representatives might aim to quickly resolve any matters they have outstanding with DOR sooner rather than later as DOR may be forced to slow down following the reduction in staff this summer.

It is unclear what effect the program will have on the Litigation Bureau and other sections of DOR.  A loss of litigators could slow cases currently before the Appellate Tax Board.

Although disagreements may exist with various DOR positions, we are pleased with the institutional strength of DOR.  We hope that steps will be taken to retain the institutional knowledge of long time DOR personnel.

On May 18, the U.S. Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus be subject to taxation on all of their income in both states.

Although New York State grants a credit to residents for taxes paid to another jurisdiction, that credit is only for taxes paid “upon income derived” from those other jurisdictions. N.Y. Tax Law § 620. As such, New York State does not grant a credit for taxes paid to another jurisdiction on income earned from intangible property, such as stocks, because income earned from intangible property is not ‘derived from’ any specific  jurisdiction.

To illustrate using an example, suppose an investment banker is unquestionably a domiciliary of New Jersey and has an apartment, i.e., permanent place of abode, in New York that he uses only occasionally. Further, suppose that the investment banker spends more than 183 days in New York during a tax year by going to his office in New York on most workdays. In such a case, the investment banker is a resident of both New Jersey and New York and subject to tax as a resident in both states on his entire worldwide income. New York does not give a credit for taxes paid to New Jersey on income derived from intangible property, and thus the investment banker pays tax on this income twice, once to New Jersey and once to New York, clearly disadvantaging interstate commerce and resulting in double taxation.

This is not some hypothetical example. This is actually the fact pattern in In the Matter of John Tamagni v. Tax Appeals Tribunal of the State of New York, 91 N.Y.2d 530 (1998). In that case, the New York Court of Appeals (New York State’s highest court) held that New York State’s taxing scheme did not violate the dormant Commerce Clause and did not fail the internal consistency test. The validity of the Court of Appeals’ decision is seriously called into question under the Wynne case.

The Court of Appeals, relying upon Goldberg v. Sweet, held that the dormant Commerce Clause did not apply to residency-based taxes because those taxes were not taxing commerce, but rather a person’s status as a resident. However, the U.S. Supreme Court’s decision in Wynne not only repudiates the very dicta from Goldberg v. Sweet cited by the New York Court of Appeals in Tamagni, but the U.S. Supreme Court also determined that even if a state has the power to impose tax on the full amount of a resident’s income, “the fact that a State has the jurisdictional power to impose a tax [under the Due Process clause of the Constitution] says nothing about whether that tax violates the Commerce Clause.” After Wynne, it is clear that the dormant Commerce Clause applies to residency-based personal income taxes.

The second reason that the vitality of the Tamagni decision is in question is its application of the internal consistency test. The Court of Appeals held that even if the dormant Commerce Clause applied, the internal consistency test was not violated because the tax at issue was imposed upon a purely local activity and thus could not violate the Complete Auto tests. However, as discussed above, New York State’s lack of a credit for taxes paid to other jurisdictions mirrors the lack of a credit under Maryland’s county income tax scheme.

New York State taxpayers should be cognizant of the Wynne decision and should consider filing refund claims if they have paid— or will pay—tax to New York State as a statutory resident (i.e., not as a New York domiciliary). One would expect the New York State Department of Taxation and Finance to be quite resistant to granting such refunds and likely to vigorously defend the existing taxing scheme.

It may be worthwhile to note that this problem of double taxation was acknowledged and addressed in an agreement executed in October 1996 by the heads of the revenue agencies of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. Under that agreement, the “statutory resident” state would provide a credit for the taxes paid by the individual on his or her investment income to his/her state of domicile. Unfortunately, that agreement was never implemented through legislation— maybe now is the time for that to be done.

Finally, a word about New York City: New York City imposes a personal income tax on residents, allowing no credit for taxes paid to other jurisdictions. However, New York City does not impose a tax on non-residents, making its personal income tax different than the Maryland county income tax. Thus, the constitutionality of the New York City personal income tax is not specifically addressed by the U.S. Supreme Court’s decision. However, similar to the New York State definition of resident, a person can be a resident in two different jurisdictions under the New York City definition of resident. As such, New York City’s personal income tax could be imposed twice on a person if the person is a domiciliary of one state and a statutory resident in another. Thus, the tax potentially fails the internal consistency test.

Allied Domecq Spirits & Wines USA, Inc. v. Comm’r of Revenue, 85 Mass. App. Ct. 1125 (2014)

In a unique case, the Massachusetts Appeals Court affirmed a ruling of the Appellate Tax Board (ATB) that two corporations could not be combined for corporation excise tax purposes for 1996 through 2004. The distinctive aspect of this case was that a company was found not to have nexus with Massachusetts even though it rented property in the state and had employees in the state. If the company had been found to have nexus, it could have applied its losses to offset the income of an affiliated Massachusetts taxpayer in a combined report. The Appeals Court pointed to factual findings of the ATB that the transfer of employees located in Massachusetts to the company “had no practical economic effect other than the creation of a tax benefit and that tax avoidance was its motivating factor and only purpose.” The Massachusetts Supreme Judicial Court denied the taxpayer further review on August 1, 2014. Although this case is notable because the sham transaction doctrine rarely, if ever, has been applied to find that a company did not have nexus, a similar factual scenario likely would not occur today because Massachusetts adopted full unitary combination in 2009.

First Marblehead Corp. v. Comm’r of Revenue, 470 Mass. 497, 23 N.E.3d 892 (2015)

In a case that attracted the attention of, and an amicus brief from, the Multistate Tax Commission, the Supreme Judicial Court addressed how the property factor of a taxpayer subject to the Financial Institution Excise Tax (FIET) should be apportioned. The taxpayer, Gate Holdings, Inc. (Gate), had its commercial domicile in Massachusetts and held interests in a number of Delaware statutory trusts that purchased student loan portfolios. Below, the ATB held that Gate’s loans should be assigned to Massachusetts, resulting in a 100-percent property factor for apportionment purposes. The Supreme Judicial Court agreed and interpreted the Massachusetts sourcing provisions at issue, which are based on a model from the Multistate Tax Commission and incorporate the Solicitation, Investigation, Negotiation, Approval and Administration (SINAA) rules, as sourcing Gate’s loans to Massachusetts where Gates had its commercial domicile. The Supreme Judicial Court’s decision may be of interest in Massachusetts and other states because several states have adopted sourcing rules for financial institutions that are based on the Multistate Tax Commission’s model.

Genentech, Inc. v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No. C282905, C293424, C298502, C298891 (2014)

The ATB held that Genentech, Inc., a biotechnology company, was engaged in substantial manufacturing and thus required to use single sales factor apportionment. Genentech is appealing the ruling.

National Grid Holdings, Inc. v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No.  C292287; C292288; C292289 (2014); National Grid USA Service v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No. C314926 (2014)

The ATB addressed whether an international utility corporation’s deferred subscription arrangements constituted debt for corporate excise purposes. The ATB held that it did not. In reaching its decision, the ATB noted that for United Kingdom tax purposes, the arrangements constituted debt; but that for United States, federal tax purposes the arrangements did not constitute debt. The ATB followed the United States federal tax treatment, which resulted in the taxpayer’s deduction of a liability against its net worth being disallowed. A few months later, in a related appeal, the ATB determined that by reporting federal changes to the Commissioner on a duplicative application for abatement, the taxpayer raised no new facts warranting a second application for abatement concerning the same assessment that was challenged earlier.

Direct, LLC v. Dep’t of Revenue, SJC-11658 (Feb. 18, 2015)

Two satellite television providers, DirecTV and Dish Network, challenged G.L. c. 64M, § 2, which imposes a five percent excise tax on satellite television services, as violating the dormant commerce clause since the tax does not apply to cable television services. The Supreme Judicial Court affirmed the Superior Court’s grant of summary judgment to the Department of Revenue. The court determined that the excise tax was not discriminatory because cable companies are subject to a variety of local government franchise fees that can be imposed at a rate of up to five percent, and that the differences between the satellite television and cable television industries, especially the heightened federal and local regulatory requirements imposed on cable providers, were significant enough to permit discrepancies in taxes imposed on the industries. The court noted that other courts have considered and rejected the satellite companies’ challenges to similar laws in other states.

Excel Orthopedic Specialists v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No. C318083 (2014)

The ATB agreed with the taxpayer that braces sold by an orthopedic practice were exempt from use tax as artificial devices because the braces were individually designed, constructed or altered for the specific use of each of the taxpayer’s patients.

Regency Transportation, Inc. v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No. C310361 (2014)

The ATB found a multi-state freight business liable for use tax on the full sales price of its vehicles that it stored and used in Massachusetts. In an interesting twist, the Department of Revenue attempted to assert penalties even though the taxpayer’s position was based on a departmental ruling. The ATB held that penalties should be abated for multiple reasons, including:  (i) the “taxpayer’s prior successful reliance on the ruling and the fact that its vehicles are exempt from tax in every state of purchase”; and (ii) that the “Commissioner continues to publish [the ruling] in the official compendium of public written statements without any caveat or other signal to taxpayers that its content was erroneous and should not be relied on”; and (iii) that “the Department’s own auditor with 30 years of experience came to a preliminary conclusion that [the ruling] was applicable to the [taxpayer’s] use of vehicles in the Commonwealth.”

The Problem

On September 23, 2014, the District of Columbia Council enacted market-based sourcing provisions for sales of intangibles and services as part of the 2015 Budget Support Act (BSA), as we previously discussed in more detail here.  Most notably the BSA adopts a single sales factor formula for the DC franchise tax, which is applicable for tax years beginning after December 31, 2014.  But the market-based sourcing provisions in the BSA did not align with the rest of the tax legislation.  Specifically, the BSA market-based sourcing provisions were made applicable as of October 1, 2014—creating instant tax implications on 2014 returns.  Absent a legislative fix, this seemingly minor discrepancy will trigger a giant compliance burden that will require a part-year calculation for both taxpayers and the Office of Tax and Revenue (OTR) before the 2014 franchise return deadline on March 15.  For example, taxpayers filing based on the new BSA provisions, as originally enacted in September, will have to use the cost-of-performance approach for the first nine months of the 2014 tax year and the new market-based sourcing approach for the remaining three.

The Fix

Citing to the unintended compliance burden, the Council recently enacted emergency legislation to temporarily fix the unintended compliance burden.  However they have not solved the problem going forward.  On December 17, 2014, Finance and Revenue Committee Chairman Jack Evans introduced identical pieces of legislation that included both a temporary and emergency amendment to quickly fix on the problem (both pieces of legislation share the name “The Market-Based Sourcing Inter Alia Clarification Act of 2014”).  These legislative amendments explicitly make the applicability of market-based sourcing provisions synonymous with the other provisions of the BSA, beginning for tax years after December 31, 2014.  In DC, “emergency” legislation may be enacted without the typical 30-day congressional review period required of all other legislation, but is limited to an effective period of no longer than 90 days.  Because the emergency market-based sourcing legislation was signed by Mayor Muriel Bowser on January 13, it will expire on April 13.  Important to DC franchise taxpayers, this date is before the September 15 deadline for extended filers.

The second piece of legislation was introduced on a “temporary” basis.  Unlike emergency legislation, temporary legislation simply bypasses assignment to a committee but must still undergo a second reading, mayoral review and the 30-day congressional review period.  The review period is 30 days that Congress is in session (not 30 calendar days).  Because the temporary Act is still awaiting Mayor Bowser’s approval at the moment, which is due by this Friday (February 6), it will not become effective until after the 2014 DC Franchise Tax regular filing deadline of March 15—even if it is approved by the Mayor and not subjected to a joint-resolution by Congress.  Neither the House nor Senate is in session the week of February 15, which pushes the 30-day review period to roughly April 1 (assuming it is immediately submitted to Congress).  However, once passed, temporary legislation in the District may remain in effect for up to 225 days.

Practice Note:  Given the apparent intent of the Council to fix this problem, we are confident that a more permanent solution is on the way to correct the disconnect within the BSA provisions.  The Council should act sooner rather than later to ensure taxpayers have a sense of clarity prior to the September filing deadline.  While the Council appears to have their bases temporarily covered, any mishap in the passage of the temporary Act will leave DC taxpayers and the OTR with a significant compliance burden beginning on April 13.  We are closely monitoring the temporary Act, the likely introduction of a permanent fix and the much-anticipated release of market-based sourcing regulations by the OTR (discussed below).  We will update readers with any significant development in this area.

Additional Developments – Regulations Pending

Legislative mishap aside, OTR is nearing completion on a set of market-based sourcing regulations that are modeled off of the recently finalized Massachusetts guidance, but with fewer examples.  The Multistate Tax Commission (MTC) Uniformity Committee is also working to develop model-market sourcing rules and is using the Massachusetts rules as its starting draft.  As with similar uniformity efforts in the past, it will be interesting to see how uniform the DC regulations and MTC model regulations turn out to be.  For example, if the final product in DC substantially conforms to the Massachusetts model, taxpayers may be able to cite to the extended examples provided in the Massachusetts or MTC regulations when taking a tax position.  If history holds true, the one thing that is certain is that the uniformity effort won’t be entirely uniform.