Minnesota has several bills pending that would address the Minnesota state tax implications of various provisions of the federal tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act).

HF 2942

HF 2942 was introduced in the House on February 22, 2018. This bill would provide conformity to the Internal Revenue Code (IRC) as of December 31, 2017, including for corporate taxpayers. The bill makes clear that, with respect to the computation of Minnesota net income, the conformity to the Internal Revenue Code as amended through December 31, 2017, would be effective retroactively such that the federal provisions providing for the deemed repatriation of foreign earnings could have implications in Minnesota. Continue Reading Overview of Minnesota’s Response to Federal Tax Reform

It’s been nearly three months since the federal tax reform bill (commonly referred to as the Tax Cuts and Jobs Act, or “TCJA”) was enacted and states continue to respond to the various provisions of the TCJA. Recently, there have been notable legislative efforts in New York, Idaho, Iowa and Minnesota.

New York

Starting with the release of the Governor’s Budget Bill in January 2018, the 30-day amendments to that Bill on February 15, and the amendments to the Assembly Bill and Senate Bill this month, there has been much action this legislative session concerning the potential response to federal tax reform. The proposed response in the two latest bills—the Assembly Bill (AB 9509) and the Senate Bill (SB 7509)—is discussed below. Continue Reading More States Respond to Federal Tax Reform

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 September 11, 2014, Michigan Governor Rick Snyder signed legislation (SB 156) retroactively repealing the Multistate Tax Compact (Compact, formerly codified at MCL § 205.581 et seq.) from the state statutes, effective January 1, 2008.  Among other things, the bill’s passage ostensibly supersedes the Michigan Supreme Court’s decision in Int’l Bus. Machines Corp. v. Dep’t of Treasury, 496 Mich. 642 (2014) (holding that (1) the enactment of a single sales factor under the Business Tax Act (codified at MCL § 208.1101 et seq.) did not repeal Compact by implication and (2) the state’s modified gross receipts tax fell within the scope of Compact’s definition of “income tax” which the taxpayer could calculate using Compact’s three-factor apportionment test) and relieves the Department of Treasury from having to pay an estimated $1.1. billion in refunds to taxpayers.  While many commentators have rightfully focused on the constitutional validity of retroactively repealing the Compact in Michigan in such a manner (including our own Mary Kay Martire in her recent blog post), we think it is equally as important to consider whether the repeal compromises the validity of prior interstate audit assessments authorized pursuant to the Compact.

Background

Article VIII of the Compact provides the specific rules governing participation in interstate audits conducted by the Multistate Tax Commission (MTC) via their Joint Audit Program (Program).  Unlike other provisions of the Compact, Article VIII is “in force only in those party states that specifically provide therefore by statute.”  Section 8 of the Compact provides this authority, simply stating “Article VIII [of the Compact] shall be in force in and with respect to this state.” See MCL § 205.588 (repealed by SB 156).  This threshold matter must be satisfied before the MTC is authorized to audit and assess businesses and review their books and records on behalf of any particular state.

The MTC and its participating audit states have taken the controversial position that membership and participation in the Program is independent from a state’s Compact status (e.g. Massachusetts, Nebraska, Tennessee, and Wisconsin have not adopted the Compact, yet participate in the Program).  Further, even when authorized, states have the discretion to elect not to participate in the Program by simply opting out for one or both of the taxes audited (income and franchise, or sales and use).

Minnesota offers an example of a state that may have withdrawn from the Compact correctly while maintaining the State’s ability to participate in MTC audits.  In May 2013, the legislature enacted legislation repealing the Compact (H.F. 677, repealing Minn. Stat. § 290.171) (this legislation does not appear to be retroactive).  In doing so, the legislature included a separate provision authorizing continued participation in audits performed by the MTC. See Minn. Stat. § 270C.03 subd. 1(9), amended by H.F. 677.  While Minnesota ultimately opted not to participate in these audits, they have statutory authority if they so choose (but as noted above, the Compact itself may not allow for this).

Implications

Unlike Minnesota, the recent repeal in Michigan failed to reserve the right to participate in the Program and made the repeal retroactive to Jan. 1, 2008.  These significant differences likely mean that Michigan taxpayers audited pursuant to an interstate audit conducted by the MTC were subject to now-unauthorized audits.  The implications of this retroactive invalidity are not entirely clear, but there are several interesting issues.  For example, taxpayers audited by the MTC on behalf of Michigan may have a breach of taxpayer confidentiality claim based on the lack of audit authority during their audits conducted after 2007.  There may be refund opportunities based on due process or other procedural violations as well (subject to statute of limitations and similar hurdles).

If Michigan’s retroactive repeal of the Compact is declared to be invalid —which we firmly believe it should be—the interstate audit provision is itself elective for the State and not subject to the same due process and compact law restrictions.  As previously discussed, the status of the Compact in a state does not govern participation in the Program and the state can opt out (at any time, for any reason).  Thus, it is possible that by enacting SB 156 Michigan legislators failed to properly retroactively repeal the Compact itself (e.g. the three-factor election) due to constitutional and compact law limits on retroactivity, while manifesting an unambiguous election to not participate in the Program (retroactive to Jan. 1, 2008).  Therefore, Michigan taxpayers audited pursuant the MTC Joint Audit Program should be entitled to some type of relief—regardless of the outcome of the inevitable Compact litigation on the horizon.