In a recently issued guidance, the Massachusetts Department of Revenue indicated that the emergency telecommuting rules it put in place during the Massachusetts COVID-19 state of emergency would cease to be in effect as of September 13, 2021. Under the telecommuting rules, which were effective beginning March 10, 2020, wages paid to a non-resident employee who worked remotely (i.e., working from home or a location other than their usual work location) because of the COVID-19 pandemic were sourced based on where the employee worked prior to the state of emergency. Effective September 13, 2021, wages will generally be sourced based on where the employee’s work is actually performed.
Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.
As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers. (more…)
Illinois’ July 2017 Revenue Bill for the 2018 fiscal year included the Invest in Kids Act (Act), which creates a new program, effective January 1, 2018, that provides up to $75 million in income tax credits for Illinois taxpayers making contributions to eligible organizations that grant scholarships to students attending private and parochial schools in Illinois. The Act allows approved Illinois taxpayers to receive state income tax credits of 75 percent of their total qualified contributions to Scholarship Granting Organizations (SGOs), up to $1 million annually per taxpayer. For example, a contribution of $100,000 to an SGO allows an approved taxpayer to claim a $75,000 income tax credit. The program is administered by the Illinois Department of Revenue (Department). The Department will allocate the credits among taxpayers on a first-come, first-served basis.
The Act is intended to benefit students who are members of households whose federal adjusted gross income does not exceed 300 percent of the federal poverty level before the scholarship and does not exceed 400 percent of the federal poverty level once the scholarship is received. The Illinois State Board of Education will annually provide the Department with a list of eligible private and parochial schools that may participate in the program and receive scholarship contributions from SGOs. As of December 18, 2017, the list of eligible private and parochial schools for 2018 has not been published. (more…)
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.
Another Taxpayer Victory in Illinois False Claims Act Litigation, Affirming a Taxpayer’s Right to Rely On Qualified Third Parties For Tax Return Preparation
On August 30, 2016, following a one day bench trial, Cook County Circuit Judge Thomas Mulroy ruled in favor of Treasury Wine Estates (“TWE”) in Illinois False Claims Act (“Act”) litigation filed by the law firm of Stephen B. Diamond, PC (“Relator”). Relator alleged that TWE had violated the FCA by knowingly failing to collect and remit Illinois use tax on the shipping and handling charges associated with its internet sales of wine shipped to Illinois customers. State of Ill. ex rel. Stephen B. Diamond, P.C. v. Treasury Wine Estates Americas Company, d/b/a Treasury Wine Estates, No. 14 L 7563 (Cir. Ct. of Cook County, Ill. Aug. 30, 2016) (“Order”). The Court held that Relator failed to prove that TWE knowingly violated the FCA or that it acted in reckless disregard of any Illinois tax collection obligation.
The Court confirmed that an “extreme version of ordinary negligence” standard applies to prove that a defendant “knowingly” violated the FCA by acting in “reckless disregard” of an obligation to pay or transmit money to the State. The Order describes “[t]his standard … [as] meant to reach defendants who intentionally close their eyes, hide their heads in the proverbial sand, and do not make simple inquires which would inform them that false claims are being made.” Order at 14. The Court’s interpretation of the “reckless disregard” standard is consistent with the standard recently established by the Illinois Appellate Court in State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC, 2016 IL App (1st) 150526, ¶ 39 (Aug. 1, 2016) and is very favorable for defendants defending against FCA claims. (“Significantly more than an error, mistake, or ordinary negligence is required … to demonstrate reckless disregard in the context of a False Claims Act violation. Relator … needed to prove that defendant ignored obvious warning signs, buried its head in the sand, and refused to learn information from which its duty to pay money to the State would have been obvious.”), aff’g, No. 12 L 84 (Cir. Ct. of Cook County, Ill. Oct. 23, 2014) (citations omitted).
Analyzing the evidence produced at trial, the Court held that it was reasonable for TWE to rely on third party tax consultants to prepare and file its Illinois tax returns, even though TWE did not review the returns before they were filed. The Order states:
Defendant relied on its consultants to do the job for which they were hired, to do the right thing and to be acquainted with Illinois sales tax law.Defendant relied on its preparers’ expertise, experience in the field and representations to ensure its ST-1 forms were accurate. Defendant was faced with the task of filing hundreds of tax returns in many states which have different and conflicting laws. Defendant did what a prudent business would do: it asked for help with navigating the murky waters of Illinois tax law and the challenging task of correctly preparing an Illinois sales tax return. Defendant did not [...]
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.
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.
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).
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 [...]
In this article, McDermott partner Arthur R. Rosen interviews Art Rosen, whom he claims to “know quite well,” about vexing state tax litigation. One instance that he found troubling came after he and two other taxpayer representatives presented their explanation of a case during a settlement hearing, only to have a Department of Revenue representative respond that they weren’t there to discuss the issues!
Settlements of tax audits are typically memorialized in closing agreements between the department of revenue and the taxpayer. Negotiating these agreements can be an important part of any settlement.
The department of revenue may have standard printed form closing agreements, and the taxpayer should determine the extent, if any, to which the standard form can and should be changed. If department representatives are reluctant to change the printed form, one possibility would be to add an appendix that elaborates on—and even contradicts—the provisions of the form.
The agreement should indicate whether it is effective with respect to similar issues in future years. Part of the settlement may be an agreement as to how certain items will be treated in future years; if so, this should be explicitly stated. On the other hand, if the intent is that the agreement will not govern the treatment of settled items in future years, this too should be explicitly stated. We have had cases in which this was not made clear, and, when the taxpayer in future years departed from the agreed treatment of certain items, the auditors said that the taxpayer was reneging on a deal. When the taxpayer pointed out that the agreement specifically said that the settlement was not to apply to future years and did not necessarily reflect the opinions of the parties as to the proper tax treatment of any item, the auditors backed down, but they were still somewhat resentful. The best approach is to pin down precisely the effect, if any, of the agreement on future years.
The department of revenue may want to provide that it can reopen the audit years if it discovers tax avoidance transactions. While the auditors are thinking about abusive tax shelters, their suggested language is often broad and can apply to routine business transactions where tax considerations have been taken into account. One government draft closing agreement that recently crossed our desks would have allowed the department to reopen the audit in the case of any “scheme, product, or transaction structured with the intent of evading or avoiding federal or state taxes.” This language could apply to the most routine business transactions where taxes were taken into account, such as a decision to sell a business in a tax-free reorganization as permitted by section 368 of the Internal Revenue Code (the Code) rather than in a taxable sale. Taxpayers should try to limit any such provisions to objectively determinable tax shelters such as “listed transactions” within the meaning of the Code or comparable state law. While the desire of state tax officials to be able to challenge abusive transactions is understandable, the typical closing agreement occurs only after an audit has gone on for some time and the taxpayer’s books have been carefully checked, so there is no reason why any significant transaction should not have come to light. The department should not be allowed to reopen an audit or address routine business transactions just because they [...]