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In-depth coverage of legal issues surrounding state and local tax
INSIDE SALT
In-depth coverage of legal issues surrounding state and local tax
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SCOTUS: Colorado Notice and Reporting Challenge Not Barred by the Tax Injunction Act

by , and | Mar 3, 2015 | , , , , ,

The United States Supreme Court released a unanimous decision today holding that the Tax Injunction Act (TIA), 28 U.S.C. § 1391, does not bar suit in federal court to enjoin the enforcement of Colorado notice and reporting requirements imposed on noncollecting out-of-state retailers. See Direct Marketing Ass’n v. Brohl, No. 13-1032, 575 U.S. ___ (March 3, 2015), available here. These requirements, enacted in 2010, require retailers to (1) notify Colorado purchasers that tax is due on their purchases; (2) send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state; and (3) report information on Colorado purchasers to the state’s tax authorities. See Colo. Rev. Stat. § 39-21-112(3.5). The TIA provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.”

The Court’s Opinion

The Court held that although the notice and reporting requirements are part of Colorado’s overall assessment and collection process, none of the requirements constitute an “assessment,” “levy,” or “collection” within the meaning of the TIA. Specifically, the Court looked to the Internal Revenue Code (IRC) to determine that the terms are “discrete phrases of the taxation process that do not include informational notice or private reports of information relevant to tax liability.” See Slip Op. at 5-8 (noting that no “assessment” or “collection” within the meaning of the IRC occurs until there is a recording of the amount the taxpayer owes the Government, which the notice and reporting requirements precede).  Justice Thomas, who authored the opinion, concluded that “[t]he TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.” Id. at 9.

The Court rejected the Tenth Circuit’s reliance on (and expansive interpretation of) the term “restrain” in the TIA.  Justice Thomas explained that such a broad reading of the statute would “defeat the precision” of the specifically enumerated terms and allow courts to expand the TIA beyond its statutory meaning to “virtually any court action related to any phase of taxation.” Id. at 11.  Instead, he assigned the same meaning to “restrain” that it has in equity for TIA purposes, which is consistent with its roots and the Anti-Injunction Act (the TIA’s federal counterpart).  Therefore, the Court concluded that “a suit cannot be understood to ‘restrain’ the ‘assessment, levy or collection’ of a state tax if it merely inhibits those activities.” Id. at 12.

The Court’s decision took “no position on whether a suit such as this one might nevertheless be barred under the ‘comity doctrine,’” under which federal courts – as a matter of discretion, not jurisdiction – refrain from “interfering with the fiscal operations of the state governments in all cases where the Federal rights of persons could otherwise be preserved unimpaired.” Id. at 13. The Court left it to the Tenth Circuit on remand [...]

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Inside the New York Budget Bill: 30-Day Amendments

by | Feb 23, 2015 | ,

On Friday, February 20, 2015, Governor Andrew Cuomo’s office released the 30-Day Amendments to the 2015–2016 New York State Executive Budget Legislation (Budget Bill).  This year, instead of the usual set of corrections and minor changes to the Budget Bill, the 30-Day Amendments focused primarily on the governor’s five-point ethics reform plan, with only very few corrections and minor changes included with respect to the Revenue Bill.  Those few corrections and changes focused on credits and incentives (e.g., technical corrections and clarifications to the New York State School Tax Relief (STAR) Program, the real property tax credit, the Brownfield Cleanup Program, and the credit for alternative fuel and electric vehicles) leaving any changes to the proposed sales tax provisions, corporate franchise tax technical correction provisions and New York City conformity provisions to the legislative process.  Please see our On the Subject related to the Budget Bill’s proposed significant changes to New York’s sales and use tax statutes.



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Inside the New York Budget Bill: Proposed Sales Tax Amendments

by | Feb 16, 2015 | ,

Governor Andrew Cuomo’s 2015–2016 New York State Executive Budget Bill proposes several significant changes to New York’s sales and use tax statutes. Several of these changes, while touted by the governor as “closing certain sales and use tax avoidance strategies,” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.

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Arizona’s 2015 TPT Amendments Have 99 Problems, but Origin Sourcing ain’t One

by , and | Jan 29, 2015 | , , , ,

Actually, there are really only two issues, but they are big issues.

Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system.  Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state.  That is not to say that these amendments are benign.  Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person.  Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions.   Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.

Background: Arizona Transaction Privilege and Use Tax

For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity.  The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer.  Ariz. Rev. Stat. § 42-5001.13.  A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona.  Ariz. Rev. Stat. § 42-5034.A.9.  A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers.  Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.

The second tax, the Arizona Use Tax, complements and backstops the TPT.  The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer.  Ariz. Rev. Stat. § 42-5155.  Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions.  Ariz. Rev. Stat. §§ 42-5155, 42-5160.  Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both.  Ariz. Rev. Stat. § 42-5159.A.1.

The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds.  Exactly where that line is drawn, however, is not as clear.  The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state.  The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer [...]

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Rate Reduction for D.C. QHTC Capital Gains to Begin… in 2019

by , and | Jan 23, 2015 | , ,

Investors keeping a close eye on pending legislation (the Promoting Economic Growth and Job Creation Through Technology Act of 2014, Bill 20-0945) promoting investments in D.C. Qualified High Technology Companies (QHTC) will be happy to know it passed—but not without a serious caveat. While the bill was originally set to allow investors to cash in their investments after being held continuously for a 24-month period, the enrolled Act (D.C. Act 20-514) was amended to make the rate reduction applicable January 1, 2019 (at the earliest).

Background

In September 2014, the D.C. Council began reviewing a proposal from Mayor Gray that would lower the tax rate to 3 percent for capital gains from the sale or exchange of eligible investments in QHTCs, as previously discussed by the authors here. As introduced, the bill was set to be applicable immediately; however, all that changed when an amendment was made on December 2 that restricts applicability of the Act to the latter of:

  • January 1, 2019 to the extent it reduces revenues below the financial plan; or
  • Upon implementation of the provisions in § 47-181(c)(17).

As noted in the engrossed amendment, this was done to “ensure that the tax cuts . . . codified by the 2015 Budget Support Act (BSA) take precedence.” These cuts, previously discussed by the authors here and here, include the implementation of a single sales factor, a reduction in the business franchise tax rate for both incorporated and unincorporated businesses, and switch from cost of performance sourcing to market-based sourcing for sale of intangibles and services.

The Act was quickly passed on December 22 with the amendment language included and a heavy dose of uncertainty regarding when the reduced rate will apply (if at all), since it is tied to the financial plan and BSA. Practically, this leaves potential investors with the green light to begin purchasing interests in QHTCs, since the Act is effective now, yet leaves these same investors with uncertainty about the applicability of the reduced rate.

Practical Questions Unresolved 

The enrolled Act retains the same questionable provisions that were originally present upon its introduction, raised by the authors here. Specifically the language provides that the Act applies “notwithstanding any other provision” of the income tax statute and only to “investments in common or preferred stock.” The common or preferred stock provisions appear to arbitrarily exclude investments in pass-through entities, despite the fact that they are classified as QHTCs, disallowing investors that otherwise would be able to take advantage of the rate reduction. In addition, the Act lacks clarity regarding the practical application of basic tax calculations, such as allocation and apportionment. The Act seems to stand for the proposition that the investments should be set apart from the rest of the income of an investor, but to what extent? Absent regulations or guidance from the Office of Tax and Revenue (OTR), taxpayers [...]

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The New “Click-Through”?: New York Budget Proposal Requires Marketplace Providers to Collect Tax

by and | Jan 22, 2015 | , , , , ,

On January 21, Governor Cuomo delivered his State of the State address, along with proposing the new budget. The budget has a number of new tax proposals. One of those proposals would have a significant impact on e-commerce companies. Part X of the budget proposal amends the sales tax statutes to require marketplace providers to collect and remit sales tax on sales to New York customers. A marketplace provider is a person who, pursuant to an agreement with a seller, “facilitates a sale, occupancy, or admission” by the seller. A person can be a marketplace provider if they facilitate the sale, or are an affiliate of a person facilitating the sale. For purposes of this definition, affiliate companies are companies that have common ownership of 5 percent.

“Facilitates a sale, occupancy, or admission” means:

(1) such person, or an affiliated person, collects the receipts, rent or amusement charge paid by a customer, occupant or patron to a marketplace seller; and

(2) such person performs either of the following activities:

(A) provides the forum in which, or by means of which, the sale takes place or the offer of occupancy or admission is accepted, including a shop, store or booth, or an internet website, catalog or a similar forum; or

(B) arranges for the exchange of information or messages between the customer, occupant or patron, as the case may be, and the marketplace seller.

A marketplace provider meeting these requirements would be required to collect as if the marketplace provider were the vendor.

Under current law, a seller is required to collect and remit tax on sales made to New York customers. Under the budget proposal, a seller would no longer be required to collect if the marketplace provider provides a collection certificate to the seller. (The Division of Taxation is required to develop procedures to administer the certificate). If a marketplace provider does not provide a collection certificate, but does use language approved by the Division of Taxation and Finance in a publicly-available agreement, that will have the same effect as the provision of a collection certificate.

The imposition under the proposal is directly on the marketplace provider. There does not appear to currently be any provision that would allow a seller in a marketplace to collect instead of the marketplace provider, if the seller so desired.

Marketplace providers are relieved of liability if the information provided to them by the seller is incorrect. However, there is no provision in the bill requiring the marketplace sellers to provide any information to the marketplace provider.

The law does not change existing nexus or ‘doing business’ requirements. It appears that a marketplace provider would be required to collect only if the marketplace provider has nexus with New York under the Commerce Clause.

This proposal would have a significant effect on e-commerce companies, and could have an impact reminiscent of the impact of the click-through statutes. Companies that sell through a [...]

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Illinois Law Firm Continues to Clog Court System with Tax-Related False Claims Act Allegations—but Proposed Legislation May Offer Relief

by | Jan 13, 2015 | , ,

As many readers of this blog know, over the past 12 years the Circuit Court of Cook County, Illinois has been deluged with lawsuits filed by a Chicago law firm against internet retailers as a “whistleblower” under the Illinois False Claims Act.  The factual support for the lawsuits comes solely from internet-based investigations, including purchases made on retailer websites.  The lawsuits typically allege that the retailers have knowingly failed to collect and remit sales and use tax on some aspect of their internet sales shipped to Illinois.  See 740 ILCS 175/1 et seq.  Substantial damages are claimed, including up to three times the tax allegedly owed to the State, attorneys’ fees, and a penalty assessment for each tax filing that failed to disclose the tax due.

An initial wave of approximately 90 lawsuits was filed in 2003 and 2004 against retailers that did not collect Illinois tax on their internet sales.  In 2011, the whistleblower firm began to file a second round of lawsuits against retailers that collected tax on their internet sales of merchandise, but not on the shipping and handling charges associated with those sales.  To date, more than 200 of these “shipping and handling” tax lawsuits have been filed.  Most recently, the whistleblower firm has filed claims against defendants in the liquor industry, alleging a failure to collect sales and use tax and, in some instances, the failure to remit Illinois’ gallonage tax on sales of alcohol.

The validity of these lawsuits is hotly contested.  Many lawsuits have been dismissed, and at least two shipping and handling tax cases have resulted in trial rulings against the whistleblower firm and in favor of the retailer defendants.  It remains to be seen how the courts will determine the viability of Relator’s most recent claims, which appear on their face to be flawed.

Many other cases, including those that raise only nuisance value damages, have been settled to avoid the cost of litigation.  These settlements appear to have fueled the whistleblower firm’s continued voracious appetite for this type of litigation.

Although the State of Illinois has the right to intervene and lead the prosecution of these actions, for the past several years the Office of the Illinois Attorney General has generally declined to intervene in these actions.  Unfortunately, when this occurs, the Illinois False Claims Act permits a whistleblower claimant to proceed on its own with the litigation.  In almost all cases in which the State has declined to intervene, the whistleblower firm has elected to proceed on its own with its tax-related claims.

The continued activity in this area underscores the need for the Illinois General Assembly to address and pass House Bill 0074 – legislation carefully crafted, through negotiations with the Illinois Attorney General’s office, to modify the procedure for state tax-related False Claims Act litigation in Illinois.  The legislation would vastly improve the current False Claims Act situation by modifying the law as follows:

  1. Requiring whistleblowers with state tax-related claims to first disclose their claims [...]

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More Tax Money for the City of Chicago in 2015: Broader Bases, Increased Rates and Lesser Credit

by | Jan 8, 2015 | , , , , ,

The City of Chicago’s (City’s) 2015 budget includes a number of changes to taxing ordinances found in titles 3 and 4 of the Chicago Municipal Code.  The City of Chicago Department of Finance has notified taxpayers and tax collectors of the amendments, effective January 1, 2015, via a notice posted on its website.  The text of the amendments can be found on the Office of the City Clerk’s website.  The amendments, designed to bolster the City’s coffers, affect multiple City taxes by enlarging tax bases, increasing tax rates and tightening credit mechanisms.  The amendments include:

  • Hotel Accommodations Tax(Section 3-24-020(A))
    • The definition of “operator” (the tax collector) was amended to include: (1) any person that receives or collects consideration for the rental or lease of hotel accommodations; and (2) persons that facilitate the rental or lease of hotel accommodations for consideration, whether on-line, in person or otherwise.
    • A definition of “gross rental or leasing charge” (the tax base) was added that excludes “separately stated optional charges” unrelated to the use of hotel accommodations.
  • Use Tax for Non-titled Personal Property(Section 3-27-030(D))
    • A credit is available for sales and use “tax properly due” and “actually paid” to another municipality against the City’s 1 percent use tax imposed on the use in the City of non-titled tangible personal property that was purchased outside of the City.  The added definitions of “tax properly due” and “tax actually paid” exclude other municipal taxes that are rebated, refunded, or otherwise returned to the taxpayer or its affiliate.
  • Personal Property Lease Transaction Tax
    • The exemption from the tax for a “car sharing organization” (i.e., Zipcar) was eliminated.  (Sections 3-32-020(A) (definition) and 3-32-050(A)(13) (exemption))
    • The definition of “lease price” or “rental price” (the tax base) was amended to exclude nontaxable, separately-stated charges only if they are optional.  (Section 3-32-020(K))
    • The tax rate was increased from 8 percent to 9 percent.  (Section 3-32-030(B))
  • Amusement Tax
    • The amusement tax was amended to be imposed on the full charge paid for the privilege of using a “special seating area” such as a luxury suite or skybox (Section 4-156-020(F)).  Credit against this tax is available in the amount of any other taxes the City imposes on the same charges (for example, food and beverage charges) if the taxes are separately-stated and paid.  Previously, tax was imposed on 60 percent of the charge for a special seating area and did not include a credit mechanism.
    • Credit against the amusement tax was eliminated for franchise fees paid to the City for the right to use the public way or to do business in the City.  (Section 4-156-020(J))
    • The amendments eliminated the additional tax imposed on ticket sellers (Section 4-156-033).  The tax was imposed on sellers selling tickets from a location other than where the taxable amusement occurs on the amount of the service fee (as distinguished from the taxable admission charge).  Now, all ticket sellers must [...]

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Currency Conversion Concerns: New York Issues Guidance on Virtual Currencies

by | Dec 23, 2014 | , , , , ,

On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S.  This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes.  The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.

The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses.  Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency.  When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.

The IRS Notice only relates to “convertible virtual currency.”  Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”

The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition.  The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.

For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax.  Thus, the transfer of virtual currency itself is not subject to tax.  However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.

The Department should be applauded for issuing guidance on virtual currency.  It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.

However, the Department’s guidance is incomplete.  There are a couple of unanswered questions that taxpayers will still need to ponder.

First, the definition of convertible virtual currency is somewhat broad and unclear.  The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin.  Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.

Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment.  This is likely a very small issue at this point in time, but the Department will, [...]

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Texas Comptroller Defies the Laws of Physics

by | Dec 22, 2014 | , , ,

In this article, the authors examine a recent Texas administrative law judge’s opinion that says an out-of state company has nexus with Texas through downloaded software that it licenses to Texas customers.  They argue that the state comptroller’s adoption of the decision allows sales and use tax liability to be based on economic nexus instead of physical nexus and is therefore unconstitutional.

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