Earlier this year, an unclaimed property rewrite bill (HB 2603) was introduced in the Illinois House that would require holders to retroactively report a number of property types currently exempt. The provision would require a retroactive period of 10 report years. Items that are currently exempt that would become reportable include gift cards and property resulting from business-to-business (B2B) transactions. (more…)
Alabama Issues Remote Sellers Use Tax Assessments, Newegg Inc. Appeals
Ever since Alabama’s new economic nexus regulation went into effect, litigation over its constitutionality has been expected given that Alabama Commissioner Julie Magee and Governor Bentley said as much when announcing it (Rule 810-6-2-.90.03, effective January 1, 2016). It appears that they finally got their wish. On June 8, 2016, Newegg Inc. (Newegg) filed a Notice of Appeal in the Alabama Tax Tribunal challenging the Alabama Department of Revenue (DOR) Notice of Final Assessment of Sellers Use Tax (Assessment) that was entered on May 12, 2016. The Assessment is for seller’s use tax, interest and penalties for the months of January and February 2016 (the Assessment Period), which represent the first two months the new regulation was in effect.
The Alabama litigation comes on the heels of the litigation in South Dakota, which also involves Newegg and other retailers. Although the critical issue in both is whether economic nexus is constitutional, given that the Alabama imposition is through a regulation and not a statute, the arguments in each state’s litigation may not be parallel.
DOR Explanation of the Assessment
The DOR asserts that under the new regulation Newegg has a “substantial economic presence” in Alabama. According to Newegg, the DOR “has offered no basis for its determination” that the regulation’s requirements were satisfied during the Assessment Period. Specifically, Newegg notes that the DOR “conclusion appears to be based solely upon the fact that Newegg had ‘significant sales into Alabama,’ i.e., more than $250,000 of retail sales to Alabama customers.”
Newegg’s Grounds for Appeal
Newegg requests that the Tax Tribunal cancel the Assessment, citing the following grounds as the primary basis:
- The application of the new regulation to Newegg (and the Assessment) are unconstitutional because Newegg did not (and does not) have the necessary physical presence required to satisfy the “substantial nexus” standard for sales and use taxes under the Commerce Clause, as described by the US Supreme Court in Quill.
- The new regulation is invalid because retailers must “lack an Alabama physical presence” for it to apply. Therefore, it conflicts with both the Alabama sales and use tax statutes and the US Constitution, each of which requires a physical presence in the state by (or on behalf of) the retailer.
- The application of the new regulation to an internet retailer with no physical presence in Alabama is inconsistent with the authorizing seller’s use tax statute. Specifically, none of the provisions of the sales and use tax statutes (or any other provision in the Alabama Code) authorize the DOR to impose seller’s use tax collection obligations on internet retailers with no physical presence in the state.
The State of Nexus in Other States
The Alabama litigation represents the third prominent nexus case that involves Newegg. Not only is the company involved in South Dakota (see our prior coverage of the South Dakota lawsuits here), but it is also one of the three taxpayers involved in the Ohio Commercial Activity Tax (CAT) litigation (
How Far Back Can a Back Tax Go? Petition for Certiorari in Hambleton Asks Supreme Court to Right Unjust Retroactivity
Retroactivity is an endemic problem in the state tax world. In this year alone, we have seen retroactive repeal of the Multistate Tax Compact (MTC) in Michigan, as well as significant retroactivity issues in New York, New Jersey and Virginia. But after decades of states changing the rules on taxpayers after-the-fact, relief may be on the way if the Supreme Court of the United States grants certiorari in a Washington estate tax case, Hambleton v. Washington, with retroactivity that makes you say “What the heck?”.
The taxpayers filed a petition for certiorari on June 5, 2015. The Court requested a response, which is now due by September 9, 2015. The Tax Executives Institute filed an amicus brief on July 6, 2015.
The case involves two widows’ estates. As stated in the petition:
Helen Hambleton died in 2006, and Jessie Macbride died in 2007. Each was the passive lifetime beneficiary of a trust established in her deceased husband’s estate, and neither possessed a power under the trust instrument to dispose of the trust assets. Under the Washington estate tax law at the time of their deaths, the tax did not apply to the value of those trust assets. In 2013, however, the Washington Legislature amended the estate tax statutes retroactively back to 2005, exposing their estates to nearly two million dollars of back taxes.
In 2005, Washington state enacted an estate tax that was intended to operate on a standalone basis, separate from the federal estate tax. In interpreting the new law, the Department of Revenue issued regulations that the transfer of property from the petitioners’ husbands to the petitioners through a Qualified Terminable Interest Property (QTIP) trust was not subject to the Washington estate tax. The Department then reversed its position and assessed tax. Petitioners, along with other estates, challenged the Department’s position and won in Washington Supreme Court (In re Estate of Bracken, 290 P.3d 99 (Wash. 2012)). Then in 2013, the Washington legislature amended the estate tax to retroactively adopt the Department’s position, going back to 2005. The petitioners challenged this law up to the Washington Supreme Court, which held in favor of the Department and concluded that the retroactive change satisfied the due process clause under a rational basis standard.
The petition urges the Supreme Court to take the case to resolve the uncertainty as to “how long is too long” when it comes to retroactive taxes, citing multiple examples of past and ongoing litigation in which lower courts have taken divergent approaches to the length of retroactivity that is permissible. Of particular interest, one of the cases cited is International Business Machines Corp. v. Michigan Department of Treasury, 852 N.W.2d 865 (Mich. 2014). The retroactive repeal of the MTC election in Michigan is a central issue in that ongoing litigation. If the Supreme Court takes Hambleton, its decision would likely impact the Michigan MTC litigation. The recent decision by the New York Court of Appeals, allowing [...]
Retroactive Revenue Raisers: A Taxpayer Win in New York; Problems Ahead in Virginia
When state legislatures are in need of additional funds – as they often are – it is tempting to enact retroactive legislation to bring more dollars into state coffers. Two recent developments have Due Process Clause questions of retroactivity back in the news in the SALT world. In Caprio v. N.Y. State Dep’t of Taxation & Fin., No. 651176/11, 2014 NY Slip Op. 02399 (N.Y. App. Div. Apr. 8, 2014), a New York court rejected a retroactive amendment reaching back three years into the past. Virginia, however, recently amended its add-back statute (H.B. 5001, § 3-5.11) with an even longer retroactive period of 10 years.
New York’s Three and a Half Year Retroactive Tax Struck Down As-Applied
In Caprio, Florida residents sold their stock in a New Jersey S corporation in exchange for an installment note. The S corporation was a janitorial services company that also did business in New York. The parties to the transaction made an IRC § 338(h)(10) election for treatment as a deemed asset sale, with the installment note thereby deemed to be distributed in liquidation to the shareholders. When the shareholders subsequently received payments on the installment note, they did not report any New York source income because they treated the payments as gain from the sale of stock, not sourced to New York any more than would be a sale of stock in a Fortune 500 company.
Treatment of gain from a nonresident’s sale of S corporation stock as not sourced to New York was upheld by the New York State Division of Tax Appeals in In re Mintz, DTA nos. 821807, 821806 (Jun. 4, 2009) (for a detailed discussion in Mintz, see Inside New York Taxes), but retroactive legislation in 2010 reversed the result. 2010 N.Y. Laws, c. 57, Part C (amending N.Y. Tax Law § 632(a)(2)). Caprio voids the retroactive application of the 2010 amendment to the taxpayers as violating the Due Process Clause.
Applying New York’s three-factor test set forth in James Square Assoc. LP v. Mullen, 993 N.E.2d 374, 377 (N.Y. 2013), aff ’g, 91 A.D.3d 164 (N.Y. App. Div. 4th 2011) (which we discussed recently in State Tax Notes), the Appellate Division considered the factors of (1) taxpayer’s forewarning and the reasonableness of the retroactive change, (2) the length of the retroactive period, and (3) the public purpose of the retroactivity. The majority concluded that the 2010 amendment was unconstitutionally retroactive:
- The taxpayers had no actual forewarning of the 2010 amendment at the time they entered into the transaction, and they reasonably relied on the law as it existed to structure the sale;
- A three and a half year retroactive period was excessive; and
- Raising $30 million for the state budget was not a sufficiently compelling public purpose.
The Questionable Validity of Virginia’s 10 Year Retroactive Add-Back Amendments
Just before Caprio came down, Virginia amended its add-back statute, retroactive to 2004, to narrow the subject-to-tax and conduit exceptions. See [...]