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.

With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program will be disappointed to know that the authorizing legislation specifically prohibits them from participating in the upcoming amnesty.

The amnesty program is applicable to all “listed taxes” collected by the Department, including sales and use taxes, corporate and personal income taxes, financial institutions tax and gas taxes. See Indiana Code § 6-8.1-1-1 for the complete list. Unlike several of the other amnesty programs discussed that apply to more recent liabilities, the Indiana amnesty is only statutorily authorized for liabilities due before January 1, 2013 (i.e., 2012 or earlier). While the Department is not prevented from settling more recent liabilities incurred in 2013 and 2014, such an arrangement would be outside the scope of the statutory amnesty provisions.

The benefits of the upcoming program include abatement of interest, penalties, collection fees and costs that would otherwise be applicable, release of any liens and no civil or criminal prosecution. Indiana taxpayers should be aware that if an eligible liability is not paid during the amnesty period (and is subsequently discovered by the Department) penalties are doubled under the statute.

Arizona

On March 12, 2015, Governor Doug Ducey approved a budget package that included a bill (SB 1471) creating a tax recovery (amnesty) program for taxpayers with outstanding liabilities. The program is scheduled to run from September 1, 2015, through October 31, 2015, and applies to all taxes administered by the Department of Revenue, except withholding and luxury taxes. Taxpayers that come forward with tax liabilities that could have been assessed before 2014 (or before 2015 in the case of non-annual filers) will receive abatement of all civil penalties and interest. Taxpayers that were a party to a closing agreement with the Department during the liability period are not eligible for the program; however, nothing in the statute would appear to prevent a taxpayer that is currently under audit from participating in the program.

As a consequence of applying to the program, the inclusion of the outstanding debt in a taxpayer’s application is considered to be a waiver of the taxpayer’s administrative and judicial appeal rights.

South Carolina

On June 8, 2015, Governor Nikki Haley signed a bill (S. 526) giving the Department of Revenue (Department) authority to schedule and execute a three-month tax amnesty period at their discretion. The bill specifically allows the Department to waive all penalties and interest (or a portion of them at its discretion) for taxpayers that voluntarily file delinquent returns and pay all taxes owed (i.e., the Department cannot waive penalties and interest on a period-by-period basis). Taxpayers with an appeal pending may only participate in the program if they pay all the taxes owed. While payment of the liability is required to participate, it will not constitute an admission of liability or a waiver of the appeal.

Taxpayers should note that any debts not fully paid within an agreed-upon post-amnesty period will be subject to a 10 percent collection and assistance fee, in addition to the penalties and interest otherwise owed. The bill grants authority for imposition of this fee for up to one year after the close of the extended amnesty period.

Practice Note

Now is the time for taxpayers with outstanding tax obligations in any of the state’s offering amnesty (including Maryland) to consider whether the issues can and should be resolved through the amnesty program. In deciding whether to avail oneself of the amnesty offerings, taxpayers should be aware that failure to participate in many states (including Indiana and South Carolina) can lead to increased penalties and fees (the infamous “amnesty hammer”) if the delinquent obligation subsequently surfaces.

The Missouri General Assembly passed several tax-related bills at the end of the legislative session in mid-May that would have altered the Department of Revenue’s (Department) burden of proof and changed its notice requirements.  While none of these bills ultimately passed due to vetoes by Governor Jay Nixon, the General Assembly is scheduled to review the vetoed legislation during their September 10 veto session. Given the near-unanimous support for each of these bills in the legislature, there is a legitimate possibility that one or more of these vetoes will be overridden.

Burden of Proof

Three of these bills, H.B. 1455, S.B. 829 and S.B. 584, would have vastly expanded the number of tax disputes where the Director of Revenue (Director) is statutorily assigned the burden of proof.  The amendments would have removed a net worth limitation for any partnership, corporation or trust challenging their state tax liability and this would have vastly expanded the number of businesses eligible for the favorable burden.  In addition, the legislation removed a clause that prohibited the burden of proof from falling on the Director with respect to the applicability of tax exemptions.  All in all, the burden of proof legislation would have significantly expanded both the number of taxpayers and the number of types of disputes for which the burden of proof fell on the Director.  As discussed further below, the Governor vetoed these bills.  The Legislature will review the vetoes in September.

The statute that was being amended (Mo. Rev. Stat. § 136.300) strictly construes tax laws and liability determinations against the taxing authority in favor of taxpayers.  The statute was originally enacted in 1978 and subsequently amended in 1999.  The statute assigns the Director the burden of proof with respect to any factual issue relevant to a taxpayer’s liability if three elements are met.  The first two elements are that the taxpayer must (1) have produced evidence that there is a reasonable dispute with respect to the issue and (2) provide the department of revenue with access to adequate records of its transactions.  These elements are unchanged in each of the amending bills being considered.

The bills passed last month would remove the third and final element: the burden of proof does not rest with the Director if the taxpayer is a business taxpayer with either a net worth in excess of $7 million or more than 500 employees, regardless of the other two elements.  This limitation incentivizes the Department to impose artificially high tax assessments on excluded taxpayers. These taxpayers are at a disadvantage because they would bear the burden of proof regarding factual questions, regardless of the detail of the Department’s audit.  The vetoed legislation would have removed this limit and discouraged the Department from making artificially high assessments that would have been difficult to prove.

In addition to the subtraction of an element, the three bills passed in mid-May would have expanded the scope of the section to apply to disputes over exemption applicability, which are currently excluded along with tax credit applicability challenges.

Notice

Two other bills (S.B. 662 and S.B. 612) were also passed that would have required the Department to notify businesses when it makes a change in its interpretation of the state’s sales tax laws.  More specifically, the legislation requires the Department to notify all affected sellers when an item of tangible personal property or service is deemed taxable by a decision of the director or revenue, administrative hearing commission, or court of competent jurisdiction.  Importantly for taxpayers, failure of the Department to notify a seller would relieve the seller of the modified tax burden until the seller is notified.  These bills were also vetoed by the Governor.

Veto

As stated above, all five bills were vetoed.  The bills will be reviewed by the General Assembly in September.  In vetoing the bills, the Governor stated that the bills were not accounted for in the budget and would reduce sales tax revenues dedicated to education and infrastructure improvements.  His press release can be found here.

Given the nearly unanimous support—which transcended party lines—in the initial passage of each of the five bills described above, there is a real possibility that the Governor’s vetoes will be overridden.  At a minimum, the General Assembly will continue to push back from what it considers to be unfair Department practices in the state.  For example, the Missouri Senate recently announced the establishment of a committee to investigate the Department’s processes and policies—further evidencing the General Assembly’s distrust and dissatisfaction with the Department.  The committee chair was recently quoted as saying that Department is “reinterpreting and misinterpreting laws” in a “hidden attempt to collect more taxes.” See 2014 STT 106-3.  The committee plans to release a report by the end of the year.

Practice Note: While the outcome of the political battle over this legislation ultimately will not be settled until September, its popularity across party lines and potential for success in subsequent legislative sessions remains promising.  Missouri taxpayers should keep a watchful eye for revenue-related changes as tension between the General Assembly and executive branch, including the Governor and Department, has peaked over the past few months.

On April 15, 2014, the Supreme Court of Missouri held that income from a trust used to fund an executive deferred compensation plan (a “rabbi trust”) was apportionable business income.  MINACT, Inc. v. Director of Revenue, No. SC93162 (Mo. Apr. 15, 2014).  The taxpayer, MINACT, Inc., is a Mississippi-based corporation that contracts with the federal government to manage its education and job training programs.

MINACT reported the trust income as nonbusiness income on its 2007 Missouri corporate income tax return, allocating all the income to Mississippi.  The Missouri director of revenue disagreed with the taxpayer and determined that the trust income was business income.  MINACT appealed to the Administrative Hearing Commission, which overturned the director’s decision, finding that the trust income was nonbusiness income “because it was ‘not attributable to the acquisition, management, and disposition of property constituting an integral part of MINACT’s regular business. …’”  (Opinion at 3.)  The director appealed the decision to the Missouri Supreme Court.

The Missouri Supreme Court analyzed whether the trust income was business income under the state’s statutory UDITPA definition of “business income,” which Missouri interprets to include both a transactional and a functional test.  (Opinion at 4-5.)  See, e.g., ABB C-E Nuclear Power Inc. v. Dir. of Revenue, 215 S.W.3d 85 (Mo. 2007) (income must fail to satisfy both tests to be nonbusiness income).  The Supreme Court agreed with the Commission that the trust income was not business income under the transactional test (MINACT earned the income from investing, not from its regular business of managing job training programs), but it found that the income was business income under the functional test because MINACT established its executive deferred compensation plan to attract and retain key employees who were engaged in MINACT’s regular business operations.  (Opinion at 5.)  The Court cited California and United States Tax Court cases for the notion that “attracting and retaining key employees is an important business purpose” and found that the employees who benefitted from the rabbi trust furthered MINACT’s business by providing capable leadership. (Opinion at 5, 7.)  Using this same reasoning, the Court also rejected MINACT’s constitutional challenges.

This is the third ruling of which we are aware finding that income earned from investments in employee-related funds meet the functional test for business income.  In Va. Tax Comm’r Ruling, No. 03-60 (Aug. 8, 2003), the Virginia Tax Commissioner held that rabbi trust income as nonbusiness income because “attracting and retaining quality corporate officers is an integral part of the operations of any business . . .”  Similarly, in Hoechst Celanese Corp. v. Franchise Tax Bd., 106 Cal. Rptr. 2d 548, 570-71 (Cal. 2001), the California Supreme Court held that income from an employer’s reversion of pension plan assets was business income under the functional test because the employer created the plan to retain and attract employees, which the court found integral to the employer’s business operations.